On 28th September 2019, in a speech in United Nations General Assembly speech, Malaysian Prime Minister Mahathir Muhammad said that India had “invaded and occupied” Kashmir by scrapping off Article 370 of Indian Constitution. In retaliation, Indian Govt. threatened to ban, or impose high tariffs on, palm oil trade with Malaysia.
Through this paper, the researcher attempts to show how a single political statement can influence the trade relations between countries and in turn their economies.
The researcher has undertaken the research on the assumption that Indian Govt. will highly increase the import tariffs on import of palmoil from Malaysia. In this paper, researcher analyses the impact on Indian and Malaysian economy under two conditions –
-Indian traders continue to purchase from Malaysia despite an increase in palm oil tariffs.
-Indian traders shift to other countries for purchasing palm oil.
It is important to know that for the fiscal year ending 31st March 2019, Malaysia’s imported from India goods worth $6.4 billion, while exported to India goods worth $10.8 billion. Thus, Malaysia is in trade surplus with India of $4.4 billion. This is because India imports high-priced goods such as petroleum and palm oil at a large scale while India exports commodities such as sugar, wheat, rice, meat, etc.In 2018, India imported palm oil worth $5.5 billion of which $1.3 billion was imported from Malaysia. This trade between the two countries constitutes 0.05% of India’s GDP and 0.41% of Malaysia’s GDP (GDP of Malaysia is $314bn while that of India is $2.5tn.).
A major limitation of the paper is the paucity of scholarly articles on the subject since the incident in question happened in October 2019.Therefore, the researcher has primarily relied upon newspaper articles to substantiate his arguments.
Indonesia and Malaysia constitute 85% of the total palm oil production, therefore the first response of Indian buyers is to buy palm oil from Indonesia but that may be improbable. The reason being CPOPC (Council of palmoil Producing Countries) which is an organisation and both Malaysia and Indonesia are a part of this and their goal is to fight together against nations that increases tariffs on import of palm oil. This opens a possibility that Indonesia may not sell to India and Indian buyers have to buy from Malaysia for want of alternatives. In this chapter, the researcher will analyse the impact on both the countries when Indonesia refuses to sell to India, whereas in the next chapter, the researcher will look into the impact when Indonesia agrees to sell to India.
Impact On Indian Economy
Due to an increase in import tariffs, it would now be expensive for Indian buyers to buy from Malaysia.This tax would not be borne only by the buyers of palm oil from Malaysia but also by its final consumers in India. The burden of tax increase will almost be equally borne by both consumers and sellers because of in inelastic supply as well as an inelastic demand.
Inelastic supply means that the supply of palm oil is not dependant on price in short run while inelastic demand means the demand of palm oil is not determined by the prices of palm oil in the short run. The elasticity of demand and supply play a major role in determining the prices of the goods and services. For Example- The demand for medicine is inelastic the price doesn’t come in the way of purchasing medicines. Also, the supply of water is inelastic as its availability doesn’t change with the change in prices. It is the elasticity of both demand and supply that determines the price.
The supply is inelastic as the palm oil trees bear fruits after 30 months of planting and continue to do so for next 20-30 years. Therefore, it is not possible to see a change in supply when tariffs are imposed on the import of palmoil. The demand is also inelastic because of no alternate nation to get supplies from and there is lack of availability of economically viable substitutes. On one hectare of land, there is a yield of 3.7 tonnes of palmoil as against just 0.38 tonnes and 0.48 tonnes of soybean and sunflower oil respectively.Though some consider soybean oil to be a substitute, data shows otherwise.
Palm oil and soybean oil are cross-price inelastic.Their cross price elasticity at 0.103 shows that for 1% decrease in demand forpalm oil, there need to be approx. 10% reduction in the price of Soybean oil, thus Soybean oil is not a good substitute in lieu of palmoil.
The extent of the taxes borne by the sellers will reduce the profits and revenue of the businesses. The increase in cost of production will affect most of the FMCG companies, whether big or small, as they use palm oil as a raw material. This can also lead businesses to reduce the no. of workers they employ. As of now, the FMCG sector is 4th largest in our economy and provides jobs to 3 million people and 5% of the total factory employment in the country. Recent government reports have shown that unemployment rate in India is at its four-decade high. It can get aggravated by purchasing palm oil at increased tariffs.
The extent of the taxes borne by the buyers will make the goods costly for them. Palmoil is used in products like soaps, shampoo, ice-cream, detergents, lip-stick, etc and increase in price of these daily-use products will adversely affect the expenditure budget of the households. Therefore household savings will reduce. Also such an increase in price of a bundle of goods may also lead to inflation.
During FY 12 and FY 17, India’s saving rate (the percentage of GDP saved) has been constantly declining and the main reason is the reduction in household savings. During the same time, the share of the households in total investment also dropped. There is a direct correlation between the household savings rate and household investment rate.Thus, a further decrease in household savings due to increase in prices of those products manufactured using palmoil will leave people with less money to save and invest in banks, stock market, mutual funds, etc. it will decrease the investment in India to some extent which in turn leads to less infrastructural development. This will hinder the growth of small and new businesses and will lead to reduced economic growth in India.
In the current scenario, when the Indian economy is badly hit and growth rate is very low, doing something that will increase the cost of production of almost entire FMCG sector which is 4th largest sector in India’s economy will be detrimental to Indian economy.
Indian Traders Shift To Indonesia To Purchase Palm Oil
When Indian govt. increases tariffs on the import of palmoil from Malaysia, it makes such a trade with Malaysia less attractive for the buyers in India. They would thus import from Indonesia as it is the only viable option after Malaysia as both of them together produce 85% of the palmoil production. As regards the CPOPC, there is no formal agreement and there are high chances that Indonesia will sell the oil to India. In this chapter, researcher shall analyse the impact of the same.
Reduced Foreign Exchange Reserves
The impact on the Malaysian economy will be very detrimental as India buys palmoil worth $1.3 billion annually and total exports of Malaysia are only $240 billion. When this trade shifts to Indonesia, it will lead to a reduction in exports and foreign exchange reserves in Malaysia by $1.3 billion.
As of 15th Nov 2019, Foreign Exchange Reserves of Malaysia stands at $103.2 billion. And losing 1.25% of their Foreign Exchange reserves can have serious impacts on the economy in long run. These reserves are used for making payment outside the country and thus is important for payment of imports. Having sufficient reserves also help in preventing a country from external crisis. If Malaysian foreign exchange reserves were to fall, it would reduce its ability to pay for making payment for imports without incurring debt. Also, it would minimize the capacity to mitigate external shocks such as fluctuations in currency rate as selling or buying foreign exchange reserves can change their currency’s value. Foreign Exchange reserves help to maintain international confidence which may take a hit if the reserves level reduces in Malaysia.
Reduced Trade Surplus
With a reduction in exports by $1.3 billion due to India not purchasing palmoil from Malaysia, the Balance of Trade surplus will fall by 5.7% of the 2017 level. The graph in annexure 5 shows the imports and exports of Malaysia from the period between 2007 and 2017.The graphin annexure 6 shows the Balance of Trade in Malaysia. Malaysia is one of a few countries whose balance of trade runs in surplus i.e. exports exceed imports.
A trade surplus is beneficial for an economy as it provides the nation with competitive advantages. Since the country is running in ‘profits’, they produce more which leads to more employment, a reduction in unemployment and generation of more income. This increases the standard of living of the people residing in the country. Also, the country has the capacity to import more. The 5.7% reduction will not be detrimental to the Malaysian economy as it already is enjoying trade surplus but can reduce these perks of being in trade surplus.
The analysis by the researcher shows how a political statement can influence the trade relations among countries and also their economies. In the given case when India threatened Malaysia, it is analysed that the Indian economy will suffer if India purchases from Malaysia due to increase in cost of production and decrease in household savings but if India purchases from Indonesia, it will prove to be detrimental to Malaysian economy due to reduction in foreign exchange reserves and trade surplus.
This is not the first time there has been international trade affected by politics. The government’s intervention in trade is not uncommon despite the growing trends of globalisation. In fact, political factors have a huge impact on such trades. After Pulwama attacks took place, India imposed 200% custom duty on all imports and took off the status of Most Favoured Nation (MFN) from Pakistan. Ideally, India should not have taken that step considering the stance it took in 1991 to open up the economy to the world and imposing such harsh import conditions on one nation is a blatant violation of the same. But considering the history of Indo- Pakistan relationship and to improve your political standing as a daring country, India took that step. It shows us how much international trade is intertwined by politics that is seems almost impossible to be able to separate them.
Biden’s shift from neo-liberal economic model
Mercantilism; which was the ‘Hall of Fame’ from 15th-18th Century had emerged from the decaying of feudal economic system in Europe. It was initially started from the Mediterranean trade in bullion on the cities like Venice, Genoa and Pisa. In the course of history, this idea was challenged by the writings of John Lock’s Second Treatise of Government and A Letter Concerning Toleration with larger than life of Adam Smith’s, The Wealth of Nations of 1776—gave rise to Classical Liberalism. This idea also even started shaking during the 1930s followed by the Great Depression. The Keynesian economic model came to escape the consequences of this Great economic shortfall till 1970s. Afterwards, Neo-liberalism was the ‘lifeline of the global economy’. Soon, this also diminished from the rapid financialization and globalization process of 1990s. The financialization, which was the ‘Heart of the Town’ till 2008; devastated by the 2008 financial crisis. The US government rescued this crisis via Dodd-Frank Act and greater stimulus package to economy. And, lastly current COVID-19 pandemic crisis is much more powerful than that of 1930’s Great Depression or any other crisis in observable history. To cope of with this crisis, Biden administration is rescuing the economy with comprehensive stimulus package by challenging the internationally accepted fundamental economic model.
Today, Keynesian economic model is taking shape in the US. The central theme of Keynesian theory —measured as the sum of the spending by households, business, and the government; which Biden is doing so by $640 billion housing plans over 10 years to provide affordable, safe housing for all individuals, by increasing tax for corporations and high-income filers by $3.3 trillion. In addition to this, he is creating massive government spending ($2trillion) on infrastructure for job creation, spending on public goods( health care, education, job, security, child care), and less interested in fiscal deficits and his more critical view on an unregulated market controlled by big corporations. These steps of Biden correlated with that of the Keynesian economic model (the model which remained ‘talk of the town’ from WWII to the 1970s). Following this, new Washington Consensus is born against the low levels of government spending, minimizing fiscal deficits, nonintervention, and deregulation in the market, and liberations of trade and foreign investment. All these ‘values’ are undermined by the current Biden administration.
The world economy is in the same historical place as that of WWII followed by the great depression comparing today of the COVID-19 pandemic. So, whenever there is an unprecedented shock on capitalism; it has always transformed itself within. From the Mercantilism(16th-18th Century), Classical liberalism, Keynesian/ neoliberalism, and financialization–capitalism has survived astonishingly. This new ‘Bidenomics’ will behave as an influential replica in the other parts of the world as the land, labor, capital, and productivity is impacted immensely by the COVID-19 pandemic. This succeeding market intervention by the US government could replicate in other international liberalism followers nations of the world. The era of government-led intervention in the market started.
Covid-19 and Liberal World Order
The liberal international order (sometimes referred to as the rules-based international order or the US-led liberal international order) involves international cooperation through multilateral institutions like the UN and World Trade Organization (WTO), and is constituted by human equality (freedom, human rights and rule of law), open markets, security cooperation and promotion of liberal democracy. The US military and economic might was the custodian of the liberal world order, a network of alliances across Europe and Asia and nuclear weapons, which helped to deter the aggression of the illiberal states like the Union of Soviet Socialist Republic (USSR).
The liberal international order is the product of centuries and unrelenting innovations. It is highly integrated, developed, organized, institutionalized and deeply rooted in the societies and economies of both western and non-western countries. It is the product of two phases of history: (1) the Westphalian project dating back to 1648, (2) the construction of liberal order led by the United Kingdom and later by the United States. The Westphalian system enunciated the principles of state sovereignty and norms of great-power conduct. While the construction of liberal-order-building project has been possible only, just after the relations of the great powers became stabilized.
After the Second World War, the United Nations (UN) along with the bipolar system were the defining features of the world order. At the end of the Cold War with the disintegration of (USSR), the U.S. was the indispensable power in the global order.
All mainstream theories of International Relations (IR) concur that the age of the liberal world order is over, a rare moment of consensus in the field of IR. Though liberal world order was already in decay, Covid-19 accelerates the process and profoundly reshapes the geoeconomics and geopolitical configuration of the world.
The Liberal world order is in a state of disrepair. There appear several reasons why this is happening. Since the global financial crisis of 2008, talk of order has given way to talk of disruption: the end of unipolar world; rising nationalism in the heart of the West; lack of proper handling of Syrian crisis among P5in the UN Security Council, rising protectionism, depleting credibility of democracy and fragmented response of UN bodies like WHO in the Covid-19 crisis.
America’s reluctance to abide by the liberal rules it has nurtured in the global system for more than seven decades thus marks a turning point. The present transition to the new world order has some differentiating characteristics compared to the liberal world order. One of the most important factors is the attitude of the US. Under President Donald Trump, the US backtracked against joining the Trans Pacific Partnership (TPP) and to withdraw from the Paris Climate Agreement. The US also quitted the Iran nuclear deal signed by the major powers and threatened to leave the North America Free Trade Agreement (NAFTA). It has unilaterally introduced the trade tariffs repugnant to the liberal economic system and introduced the policy of “America First” incompatible to the liberal world ideals.
The rise of China will certainly be the greatest phenomenon of the twenty -first century. China’s extraordinary economic expansion and vigorous diplomacy are transforming the dynamics of the international politics. Propelled by the rapid economic growth, China is extending its political influence as well as military capabilities and reach. Despite its engagement with the liberal world order, China is concerned about this order’s ability to protect its national interests.
But what are the long-term impacts of Covid-19 on liberal world order? The emerging world order, in the context of decaying liberal order, looks very different. First, a more fragmented world order in which “great power competition” will be intense and pervasive. Escalating tensions between the United States and China are the hallmark of this emerging world order.
Second, the emergence of new geopolitical environment indicates that there will be multi poles in the international politics. No single country can dictate the world in the direction of its will. Third, the economic effects of Covid-19 will certainly reduce the defense budgets, more spending on health care, infrastructure development and people-oriented government spending. Fourth, the credibility of the world governance system is strongly depleting in the context of very weak response to the Covid-19 crisis. Five, China’s successful response to Covid-19 raises the questions on the credibility and efficiency of the democratic system of government.
With the shifting economic power from west to east, the liberal world order faces multiple challenges. Already in the process of decay, Covid-19 has also some special meanings for the liberal world order. In the words of Dr Kissinger, “the coronavirus pandemic will forever alter the world order”. With the passage of time after Covid-19 pandemic, the emerging geopolitical and geoeconomics realities of the world are testimony to this changing world order.
The European Green Deal: Risks and Opportunities for the EU and Russia
The European Green Deal approved by the EU in 2019 is an economic development strategy for decoupling and for carbon neutrality by 2050 . The plan is to reduce greenhouse gas emissions by at least 55% by 2030. In pursuit of this policy, the EU is setting the goals of increasing resource use efficiency and of advancing toward a circular economy, restoring biodiversity and curbing pollution.
While obviously having an impact on the EU economy, the implementation of the Deal will also concern the economies and foreign commerce of its trading partners through the anticipated re-structuring of energy markets and reduced carbon-intensive imports. In the next decade, the European Green Deal will mostly affect coal imports, possibly followed by oil and gas imports after 2030. By 2030, coal imports are expected to reduce by 71–77% of the 2015 level, coupled with a 23–25% decrease for oil imports and a 13–19% decrease for imports natural gas. Post-2030 plans envision a virtually complete abandonment of coal and significant reductions in the EU’s oil and gas imports—by 78–79% and 58–67% of the 2015 level, respectively.
The border carbon tax (BCT) is one of the mechanisms envisioned by the European Green Deal with a view to covering the expenses of European manufacturers in their commitment to reduce emissions. The tax will be based on the carbon-intensity of a particular product and its foreign trade share in EU market sales.
Why does the EU want The European Green Deal?
The EU and Russia offer quite different reasoning for the European Green Deal and the ВСT.
European regulators believe the European Green Deal and the ВСТ will help “force” the nations (primarily the EU’s partners) trying not hard enough to reduce their emissions and to mount a stronger climate policy. The EU has declared its historical responsibility for the accumulation of greenhouse gases in the atmosphere, while believing that it will not be able to resolve the issue of global climate changes on its own.
Along with enhancing supply security by making the EU less dependent on imports of a vast number of raw materials from one single country, other arguments suggest boosting the efficiency of resource use and curbing pollution. The EU is largely dependent on the deliveries of several natural resources, since it imports 87% of the oil it consumes and 74% of the natural gas. Proponents also note greater dependence on deliveries from a limited number of countries, including Russia. In 2019 and the first half of 2020, Russia’s share in the value of natural gas supplies to the EU was 44.7% and 39.3%, respectively. Norway, the second biggest supplier, had a share of some 20%, or about half of Russia’s. In reality, the degree of dependence is even greater, since long-term contracts are commonplace in this field and no allowances for delivery route flexibility are made as shipments are transported by pipeline. In 2019 and the first half of 2020, dependence on oil imports from Russia was less pronounced and amounted to 28% and 26.4%, while still being way higher than the share of the second biggest supplier, the U.S. (9.2%).
COVID-19 and the subsequent 6.2% contraction of the EU’s economy were additional factors weighing with the European Green Deal. Economic recovery has come to be considered in connection with achieving carbon neutrality. The 2020 global economic meltdown has become a driver for stepping up the environmental—and climate, in particular—ingredient in the aid packages offered by many developed and a number of developing countries.
From Russia’s perspective, the new deal is intended primarily for preemptively boosting competitiveness on global markets through advancing new technological sectors, which is mainly justified as a solution to the climate problem. Moreover, Russia believes that the deal is driven by political considerations that, among other things, have to do with reducing the EU’s dependence on imported raw materials. The environmental sector in the EU economy is already a global leader. According to Eurostat, the environmental goods and services sector grew by 2.3% already in 2017, while its gross added value amounted to $287bn, or 2.2% of the EU-27’s GDP.
Another proof that the task of making Europe-made goods more competitive is high on the agenda lies in the fact that the ВСТ will be based on the foreign trade share of carbon-intensive products, which will help stimulate sales of Europe-made goods. At the same time, European officials acknowledge that no significant carbon leakages have so far occurred; however, they cannot be ruled out in the future. Russia believes that exporters from other countries will hardly be able to compete once the tax is introduced.
Like the EU, Russia presumes that the BCT is an additional source of revenue for the European treasury amid the crisis brought about by the pandemic as well as a way to cover the significant expenses involved in implementing the new deal.
From Russia’s standpoint, one of the “unfair” aspects of levying such a tax is the fact that the EU’s policy-makers are playing up the advantage of the Union’s higher level of economic and technological development, making particular use of the historically broad resource base and the accumulated volume of greenhouse gas emissions. The EU-28’s Accumulated Emissions for 1751–2017 were estimated at 22% of global emissions, which makes the EU the next to largest emitter after the US (25%), while Russia accounts for only 6%.
Both parties concur that the main goal of the European Green Deal is to maintain the EU’s competitiveness amid the radical restructuring of the global economy. It is claimed that the ВСТ could prompt a shift of manufacturing into the countries with less stringent carbon emission standards (“carbon leakage”) due to the fact that outlays on de-carbonizing businesses in several carbon-intensive sectors will significantly increase.
For the EU and Russia, the European Green Deal carries both risks and rewards
The main risks for the EU lie in the high costs of making the European Green Deal a reality as well as in the fact that some manufacturers being tipped into unfavorable conditions, all of which is coupled with a price hike for consumers, retaliatory measures to be undertaken by other countries and energy security risks. Apart from some technological difficulties in introducing the BCT, other challenges include the tax’s ineffectiveness in resolving the climate change problem, since the BCT is non-existent in other countries.
The European Commission estimates the additional annual investment required to achieve these goals by 2030 at €260bn. Yet the unprecedented funding envisioned by the new deal for the purpose is not enough to achieve these goals. The roadmap entails allocating at least €1 trillion for “sustainable” investment. Besides, the Next Generation EU fund, established to boost the recovery of the European economy after COVID-19, earmarks another €750bn for this purpose. A staggering €600bn shall be provided for climate action funding alone, as stipulated by the Green Deal and the pertinent part of the recovery plan. Additional investment is expected to come from companies, households and national governments.
Ultimately, the ВСТ will have a negative impact on the competitive edge of all European manufacturers, concerning, above all, those sectors where imported raw materials with a high carbon footprint account for a significant chunk of the costs.
Transitioning to new power sources will require higher carbon prices, which might ultimately result in a hike in consumer prices and a drop in the quality of life across the EU.
The European Green Deal might result in new threats to the EU’s energy security, since a significant import expansion of metals and minerals—used in manufacturing solar panels, wind turbines, ion-lithium batteries, fuel cells and electric cars—is needed for a large-scale de-carbonization of the economy. As of now, no substitutes for these raw materials are to be found.
Should the ВСТ be introduced, the EU’s trade partners may well, contingent on specific policies, initiate trade disputes. The European Commission has to ensure that the BCT is compliant with the WTO’s rules, which, however, does not eliminate the risk of retaliation on the part of other countries, which may take the shape of their mounting resistance to the adoption of the tax. In 2012, the plans to introduce the ВСТ for foreign air transport companies encountered particular pushback from other states, such as the US, China, India, Japan or Russia, which forced the EU to abandon the idea.
Several experts point out that this tax is ineffective in resolving the global climate change issue, since it does not exist in other countries.
There are also technical difficulties in introducing the tax. These have to do, in particular, with calculating the carbon component in imported goods in consideration of greenhouse gas emissions along the entire value chain of the product.
At the same time, the European Green Deal could benefit the European companies that bear the high costs in de-carbonizing their manufacturing. The tax will allow production to be expanded in energy-intensive sectors as well as in sectors with high-intensity trade, as about 20% of the drop in manufacturing will be offset by payments for CO2 emissions.
Russia, in turn, may face the dire prospect of losing its energy and carbon-intensive markets as well as encounter challenged posed by the BCT. Most of the profound consequences will stem from a gradual loss of oil and gas markets following a drop in demand and prices, which may additionally be exacerbated by the carbon tax. Oil and gas revenues play a key role in the Russian budget, with their share being in the ballpark of a third and a half of it. In 2018 and 2019, the figures stood at 46% and 39% respectively. In 2020, they fell to 28% owing to the slumping demand and prices amid the pandemic and OPEC agreements.
No significant drop in oil and gas imports is expected before 2030. However, in the longer run, the EU aspires to significantly reduce its supplies from Russia. In the meantime, 45% of Russia’s fossil fuel exports go to the EU. Russia might lose a significant chunk of the EU market to European manufacturers or foreign competitors whose oil production has a smaller carbon footprint: take Saudi Arabia, for instance.
The ВСТ will be conducive to the EU’s demand for Russia’s finished products falling as well, primarily when it comes to a number of steels manufactured with carbon-intensive technologies. The BCG company estimates Russian exporters’ losses, once the tax is introduced, to be some $3–5 bn annually; KPMG’s estimates are somewhat higher.
De-carbonization practices in other countries will also inform the demand for Russian fuels and carbons. Many countries have set the goal of radically reducing greenhouse gas emissions. Some countries plan to introduce a ВСТ, while the US, China and the EU are now discussing possible cooperation in this field. It is worth noting that the global pace of de-carbonization and ВСТ introduction is hard to predict, but this should not justify a setback in Russia pursuing a more active climate policy.
At the same time, Russia could stand to benefit from the European Green Deal. Before 2030, a significant reduction of emissions will demand that the use of coal be rapidly phased out, which will result in an increased demand for natural gas, as the latter is seen as a “transition fuel” on the way to a low-carbon economy. This will allow Russia to expand its short-term and medium-term gas exports.
Technological restructuring of the economy and export diversification might emerge as the main potentially positive outcomes for Russia. The point at issue has ultimately to do with transforming the energy industry towards greater use of renewable energy sources (RES), whose cost tends to gradually decrease, as well as towards enhanced reliance on the new types of energy, such as hydrogen, which may, at the very least, partially replace fossil fuels and be exported to foreign markets.
Timely introduction of climate regulations will allow Russia to avoid having the ВСТ applied to its products. It remains unclear what kind of regulations could help resolve this matter, though.
Russian companies, now transitioning to low- and zero-carbon technologies, will be able to benefit from the price to be put on carbon and avoid paying the special tax, much as able to engage in trading quotas, depending on the instrument to be potentially used at the state level. They will likely be required to monitor greenhouse gas emissions along the entire product value chain.
The European Green Deal and the pertinent part of the EU’s economic post-pandemic recovery plan earmark about 10% of the climate action funding for “internationalizing” the Deal, which effectively means providing aid to trade partners in the form of grants, loans and guarantees for transitioning to “sustainable” energy industries and restructuring their economies and exports. Therefore, there is a theoretical possibility that some of the investment will be channeled into joint “green” projects.
The ‘green’ avenues for fostering EU–Russia bilateral relations
The European Green Deal affords opportunities for the parties to cooperate. This should not be limited to climate issues alone, although restructuring the energy sector remains a priority. Such cooperation should also include addressing the whole set of measures needed to transition to a “green economy”, with circular economy being one of its ingredients. The latter’s share in the global economy is estimated at some 9%.
Investment cooperation might become a key area, primarily encompassing investment in research, manufacturing and infrastructure, since restructuring the economy means taking it to a new technological level. Amid falling oil and gas revenues, Russia needs to explore new areas. Legally, there are no sanctions-related restrictions in climate matters.
The world already possesses a large number of the technologies to facilitate transitioning to a zero-carbon development track. Above all, these are the RES, “green” hydrogen and state-of-the-art bioenergy. Combining these sources will help implement this development track. Additional academic assessments are required to identify the efficiency and environmental acceptability of specific technologies to be used in joint projects, while taking the entire value chain into account.
Investment in hydrogen energy might become an important cooperation avenue, since its global market share is pegged at $2.28 trillion already by 2027. The International Renewable Energy Agency (IRENA) predicts that hydrogen will account for 12% of global energy consumption by 2050. Other experts put hydrogen’s share in global final energy consumption at 18%.
Hydrogen energy is seen as an important element in achieving the EU’s carbon neutrality, as the hydrogen’s share in Europe’s energy balance might reach 14% by 2050. Gazprom estimates Europe’s hydrogen market at $153bn as of 2050, while the Ministry of Energy suggests it will amount to $32–164bn. The Hydrogen Strategy approved by the European Commission in 2020 as part of the European Green Deal encourages the development of hydrogen energy. In Russia, it may be driven by the Strategy for Hydrogen Energy Development, which is currently being drafted. This strategy provides for collaboration with other states, including the EU. Plans for 2021 include presenting incentive measures for hydrogen exporters and consumers.
Supplies of “blue” and “turquoise” hydrogen could be a promising cooperation area. This hydrogen is produced from natural gas and it might be a particularly viable option, since this is generally perceived as being profitable economically and having the smallest negative environmental impact. Another prospective area is to encourage “green” hydrogen projects . Hydrogen cooperation is of interest to both Russian and European companies, including Gazprom, Rosatom and NOVATEK. Rosnano and Enel Russia plan to jointly produce “green” hydrogen at the Enel Russia wind power plant, which is currently under construction in the Murmansk Region, and subsequently export the hydrogen of some $55m worth to the EU. Besides, NOVATEK signals its intentions to commence production of “blue” and “green” hydrogen together with Germany’s Uniper.
Another potentially conducive to cooperation factor is that, as far as the EU is concerned, Russia has a competitive edge in its geographical proximity, large gas deposits, production facilities and robust infrastructure. Small-scale pilot projects may become the first step to determine their benefits and costs for both parties. Building business partnerships may be another prospective path.
Cooperation is also promising in the areas of increasing energy efficiency, reducing methane leaks, supplying electricity, adapting to climate change, preserving biodiversity as well as in the fields of waste management, sustainable agriculture and forestry, electric car manufacturing, introduction of trading quotas, etc. The big take-off of digital technologies makes it possible to create databases in order to transparently select the most promising projects, boost their efficiency and achieve positive outcomes, and improve management systems.
Predicted development of EU-Russia economic and political relations amid Europe’s increasingly stringent environmental standards
The BCT tax will clearly have a negative impact on the bilateral relations and, most importantly, serve to breed deeper distrust between the parties, triggering a further re-orientation toward enhancing economic links with Asian nations, primarily China, for whom Russia, along with Saudi Arabia, is one of the biggest suppliers of oil and where Russia is stepping up its natural gas exports.
To avoid a deterioration in relations, it would be preferable for the parties to engage in constructive cooperation in their mutual interests, especially since the framework for this is already in place. In 2021, Russia intends to adopt its own Climate Strategy as well as a number of environmental laws in other areas. In order to facilitate Sakhalin’s path to carbon neutrality, there has been proposed a bill introducing a mechanism for selling greenhouse gases emission quotas on the island. Russia’s leading energy companies have already embarked on climate-related plans, with some companies devising climate strategies of their own.
In fact, the European Green Deal is an issue where Russia and the EU have common approaches as much as differences of opinion. At the same time, divergent opinions are no crucial obstacle to environmental cooperation between the parties.
The implementation of the European Green Deal is fraught with major risks for both parties, the principal ones for the EU being the high costs of the strategy and retaliatory steps to be undertaken by other countries. Russia faces the dire prospect of losing markets and lagging behind in re-structuring the energy industry, its key economic sector. At the same time, new opportunities are opening up, such as bolstering the parties’ global competitiveness by entering new markets.
Environmental cooperation between the two parties could be mutually beneficial to become one of the principal areas for negotiation and implementation. In order to fulfil this potential, dialogue—based on an open and balanced approach to assessing areas for collaboration and possible rapprochement—is needed. As a first step, the EU and Russia could develop a roadmap outlining every step of such cooperation and the parties’ commitments as well as specifying the market segments where projects could be carried out.
- Breaking down the proportionate relations between development and resource consumption.
- Produced by using RES to power water electrolysis.
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On April 14, the United States of America announced that it would withdraw all its troops stationed in Afghanistan from...
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