Sanctions force Congress to rethink MDB energy policy
As Russia continues to wage a barbaric war in Ukraine, destroying millions of lives and livelihoods, it has galvanized the West to respond with crippling economic sanctions. President BidenJoe Biden ‘Batman’ scene slammed for depicting subway attack on Asian man GAO says 114 Capitol police officers reported injuries Jan. 6 Trump calls Barr a ‘Bushie’ who went to the other side MORE just announced new sanctions on Russian oil, gas and mineral supplies, and Congress is reportedly considering its own. These sanctions create an inconvenient truth: we will need the Multilateral Development Banks (MDBs) to re-engage in the oil and gas sector and strongly engage in mining to bolster the West’s response to the crisis in Ukraine.
The first wave of sanctions from the United States and Europe mainly targeted the Russian banking and financial sectors. But talks are underway to increase costs for Putin’s regime by sanctioning its vital oil and gas sector, whose exports finance around 36% of Russia’s federal budget (amounting to $120 billion). Under current agreements, sanctioning the energy and minerals sector will lead to several outcomes, including the need to increase production from non-Russian sources, and the timeline for a carbon transition may need to be extended .
Cutting off Russian oil, gas and minerals will cause the West to have a significant shortfall in its oil, gas and mineral supplies without investments in new significant alternative sources. This expansion partly reflects the disruption of existing energy dependencies caused by the war and accompanying sanctions. At the same time, the carbon transition will require a significant increase in the extraction of all kinds of minerals like copper and nickel, and not just so-called “strategic” minerals like lithium, to produce electric vehicles.
The sanctions therefore mean that the United States and its partners will have to rethink their approach to investing in energy projects. In particular, MDBs will need to leverage all of their instruments, while giving more favorable consideration to oil and gas as well as large hydro and nuclear power plants, in addition to the current bias in favor of renewables. Many MDBs have also avoided mining projects.
Since the mid-2000s, MDBs have gradually moved away from projects in the oil and gas sector or the mining industry in developing countries. These trends represent a different geopolitical era and do not square with current strategic threats and security challenges, and MDB shareholders should direct MDBs to respond to new geopolitical shifts in how they allocate their “staff, time and their money. ”
This combination of shareholder disemphasis and certain career disincentives around financing conventional energy projects has made it difficult for MDBs to push for such projects. The World Bank last financed an oil and gas project in 2019 (almost three years ago). In May 2021, the Asian Development Bank announced its decision not to finance any new coal mining or oil and gas exploration projects. Even the European Bank for Reconstruction and Development (which serves the countries most likely to be affected by new sanctions against the Russian energy sector) announced in July 2021 that it would stop investing in new energy projects. fossil fuel to align with the Paris climate agreements. The only regional development banks that continue to invest in coal, oil and natural gas projects are the Inter-American Development Bank and the African Development Bank, and even their shareholders are in talks to end new financing for such projects and put in place a comprehensive energy policy. transition.
As Germany – a progressive nation that has advocated for a push towards alternatives to fossil fuels – rethinks its national energy policy in response to the events of recent weeks, it is clear that it is difficult to call for the cut Russian oil and gas exports without new investment in alternative sources of oil and gas in the short to medium term – and the MDBs have a role to play in making this happen.
The conventional energy and mining sectors have historically had a complicated record with Indigenous communities and environmental issues. MDB-supported oil, gas and mining projects would play a critical role in responding to this supply shock while bringing global human rights and environmental standards.
The management of these MDBs could also send a message about changing their culture by creating a vice-presidency for “energy and minerals for the carbon transition”. MDB officials could make it a point to promote competent people who have worked in the oil, gas and mining sector to lead such an effort. Such signals to their bureaucracies would have a powerful impact on how staff perceive incentives to support mining and fossil fuel projects.
From time to time, MDBs turn to shareholders for financial support in the form of a capital increase or “soft loans”. When they turn to the US Congress, this should be an opportunity for the US to hold these MDBs to account. If the Republicans took control of either (or both) houses of Congress, they would have to make a shift in MDB policy towards fossil fuel projects a red line for any new support. But the ongoing sanctions campaign against Russia is not a partisan effort – and should not be.
The Biden administration should also reconsider its hostility to energy projects around non-renewable sources. In particular, the administration should revise its current policy on “Fossil Fuel Guidance for Multilateral Development Banks,” which called on MDBs to prioritize clean energy investments in line with Paris Agreement goals. on the climate and move away from fossil fuel projects. These political positions became obsolete as soon as Russia – the world’s second largest supplier of natural gas and third largest supplier of oil – attacked Ukraine and changed the nature of the challenges and threats facing the world.
If MDBs continue to avoid oil, gas and mining projects, we will have fewer alternative fuel sources, and developing countries with fossil fuels or mineral resources will look to China or Russia to develop these resources.
Daniel F.Runde is Senior Vice President and William A. Schreyer Chair in Global Analysis at CSIS. He previously worked for the US Agency for International Development, the World Bank Group and in investment banking, with experience in Africa, Asia, Europe, Latin America and the Middle East.