Climate vs. Sanctions: A Common Challenge Could Forge a New Eurasian Dialogue

The neoliberal globalization model is giving way to a new setup of the world economy, which will be based on several macro regions, opposed to each other. Nonetheless, the common challenges, first of all currently the climate change, need to be combatted jointly. The 2020 pandemic has pushed the climate issue to the top of the domestic and foreign policy agenda of all the leading countries in the world, including those that did not prioritize it before, like Russia. For the present, however, Russia is facing not only growing climate risks, but also regulatory costs like the upcoming "carbon tax" to be introduced by the European Union on imports. In this context, it is extremely important not to ideologize climate issues, but to treat them as a common challenge, which should be dealt with by joint efforts of Russia, China and the European Union within a framework of a new Eurasian dialogue, says Dr. Fares Kilzie, Chairman of the board of directors of the CREON Group and member of the Russian International Affairs Council (RIAC). Furthermore, the “carbon tax” should be assessed not as a source of risks, but of the opportunities.

As tensions between Russia and the Western countries grow, some experts speculate that Russian companies can easily switch from the European market to the Asian market, which would allegedly force the West to reconsider its trade policy towards Russia. How realistic is this scenario in the new global economy? Is it a sound opinion, that the Russian business with its strong export orientation can abandon European buyers of Russian goods (and it’s not only feedstock) in favor of Asian ones?

I will give an ordinary example for a specific, and rather narrow market niche of polycarbonate sheets. During the pandemic these sheets were widely used as protective shields separating sellers from buyers. Until recently, these Russian-made sheets were sought-after in the EU. European companies were ready to buy them at a very good price due to the shortage of domestic production capacities. But at some point it turned out that the Russian exporters who delivered these products to Europe simply couldn’t satisfy European orders, since Russian producers of feedstock polycarbonate had completely reoriented their supply to China.

Exactly the same might happen to any other Russian export product. Thus for Russia, Asia might not only replace the European Union, but it will also require more capacities from Russia to meet its needs due to mere demography. The capacity of the European and the Asian markets is in fact incomparable: the population of the European Union is about 550 million people, while in Asia it is at least three billion.

However, you must also take into account the side effects of Russia's large-scale pivot to the East. If Russia consistently redirects the volumes of its energy resources, goods and services from the West to the East, this could lead to enormous inflation in the West. And the inflation tide is about to be supported by the Carbon Border Adjustment Mechanism (CBAM), better known as the "carbon tax", which will be approved by the EU soon. The price for carbon emission permit in the EU already exceeds 50 Euro per ton of CO2. After CBAM is introduced, it may rise to 150 Euro per ton. This will affect not only Russian companies subject to “carbon tax”, but will also hit European consumers by higher prices.

Such risks are very serious and should be considered by all parties. The reorientation of Russian business towards Asia will only lead to a growing confrontation with the European Union and the United States. This point is already well understood in some EU countries, for example, in Germany.

Recently, several EU climate officials presented a report stating that the CBAM can really harm European industry and worsen EU’s relations with “carbon taxed” countries at the same time. Will such far-reaching decisions still be made by taking into account the interests of all parties, or will the EU consistently fence off its economy from Russia, China and other trading partners?

Undoubtedly, after what has happened in the past ten years, the tone of relations between Russia and the European Union will remain very cool; the old warmth has gone away. However, this is not a fundamental obstacle to set up an absolutely clear and transparent partnership based on, I would say, ice-cold calculation. The CBAM can become one of the cornerstones for a new pragmatic and non-ideological dialogue.

On the one hand, it is crystal clear that the EU will continue to promote the cross-border carbon regulation, which was initially outlined back in 2005, when the first international greenhouse gas emission trading system (EU ETS) was launched. On the other hand, the ​​"carbon tax" idea has evolved for a good reason: the mechanism is considered to be a key tool to limit negative impact on the environment and to prevent climate change. These challenges are global in nature, so the efforts of the EU alone will not be enough. And this is the point of intersection of common interests.

Because of the CBAM, Russian business will undoubtedly face high risks and costs. In this situation, the most sensible idea for Russia is to share risks with its close trading partners: members of the Eurasian Union, the Shanghai Cooperation Organization and the EU, of course. This can be achieved through import and export tariffication based on the "One for all and all for one" principle.

Such an approach will open up the opportunity to transform the European Green Deal into a Eurasian Green Deal. At the same time, it will demonstrate the readiness of all parties to fight a common enemy, which is climate change. Therefore, Russia has every opportunity to get involved in this process on an equal footing and expand the "green deal" together with European partners, primarily with Germany.

It should also be noted that the cross-border carbon regulation has its opportunities, not only risks. It encourages manufacturers and exporters of carbon-intensive products to look for new market niches for low carbon footprint products, e. g. hydrogen, which Russia can supply to the European Union, Asia and entire Eurasia.

What are other international challenges on top of agenda that may provide a basis for a new dialogue on the Eurasian scale?

As a member of the RIAC, I am very worried about the situation in countries like Ukraine or Afghanistan, where the Taliban have stepped up: these are potential war zones. But if we stick to the energy, the sector that I belong to, then there are three main challenges.

The first one is the global climate change and overcoming its consequences, which we have already discussed. The second one is the exploration of resources in the Arctic, fraught with serious confrontation between the parties involved in this process. The third challenge is the climate change-driven migration in the post-COVID age.

All the three issues are interconnected, they pose serious risks over the next five years, if you look no further. However, the most important point really is that these challenges are relevant not only for Russia, but also for the West and many other regions. This circumstance opens up serious prospects for Russia's interaction with all interested parties who understand the danger of these challenges. It is impossible to solve these problems without a consistent non-ideological dialogue, a dialogue which may become an example of mutually beneficial cooperation beyond reciprocal sanctions and accusations.

Nevertheless, there are no plans to lift the sanctions against Russia, since the EU recently extended them for another year. Will their negative effect decrease as Asian markets open up for Russia?

Sanctions cannot be expected to lose their effect as Russia expands its presence in Asia. No doubt, sanctions hit hard on both sides, holding back progress. Without the sanctions factor, Russian economy could have grown three times faster during the past ten years. At the same time, you should mind the informal and financial sanctions beyond sectoral sanctions, which often have a limited impact. The effect of informal and financial measures is much worse, since they hinder long-term money from the EU and US into big Russian projects.

Therefore, lifting the sanctions would still be an extremely relevant measure, and, in my opinion, the only right way in this direction is to search for and demonstrate real alternatives. When those who are promoting sanctions against Russia see that the country, due to restrictions, has found opportunities to cooperate with other partners, they will realize their miscalculation. At that moment, Russia should immediately start a dialogue.

What could these alternatives be, and most importantly, who should frame them: the business, the government or the society?

At the moment, the elaboration on Russian alternatives to sanctions is primarily done on the political level, but it is essential to add the economic component. It seems that the role of the Russian Ministry of Foreign Affairs (MFA), which has already proved its ability to protect Russian economic interests, may become decisive in this process. Just recall MFA’s consistent position towards Nord Stream 2. The MFA has done a tremendous and conscientious work in order to convey Russia's position to all Western partners: this project is purely economic and has no political overtones. As a result, the Nord Stream 2 dispute was actually resolved between two powers, the United States and Germany, while Russia found itself in a favorable situation above the battle. We at CREON have said more than once that this scenario would be optimal for Russia.

Judging by the fact that the Russian Minister of Foreign Affairs Sergei Lavrov has been listed as a candidate of the ruling United Russia party for the parliamentary elections, the MFA is also becoming a leading force in domestic affairs. Can this be considered one of the main achievements of the "Lavrov era"?

Paradoxically, the main recent successes in Russia’s foreign policy really took place on the domestic front. This point is not yet obvious for everyone, but it is fundamental. Over the past five years, Mr. Lavrov has managed to seize back the key mechanisms of foreign policy decisions to the MFA. That was not the case before, as the MFA was usually responsible for foreign economic decisions.

Since 2015 and as it stands, it has been the MFA to oversee the most important issues of Russia’s foreign policy. An advisory and decision-making mechanism has been set up with participation of the diplomats.

The return of MFA’s role as the main foreign policy power is very important. You can see that, for example, on the progress of relations between Russia and Ukraine. After everything that had happened in 2014, Russian diplomacy made it possible to rectify the situation through the Minsk agreements. In such circumstances, it’s the institutional mechanisms that are important, providing for collegial rather than personal decisions.

What will the new rules of the game in the economy of Eurasia look like, which alternatives will have to be sought? Are there any rules to speak of at all, after all the recent trade and sanctions wars?

To understand what alternatives the Russian business currently has, you should first of all look at the changing structure of the global economy. It clearly showed a tendency towards an increase in protectionism, which became very clear in the last decade. In the period after the pandemic this tendency will lead to a final “divorce” between different macro regions in the world.

Among such new economic ecosystems of the Old World, you can already name the European Union, the Eurasian Economic Union and China, together with the ASEAN countries. In the latter case, we are talking not about a separate macro-region, but about the setup of an economic mega-alliance with all Asian countries. The countries of the Balkan Peninsula, Central and Eastern Europe will also form an ecosystem in the new global economy configuration. The Balkans/CEE is very important because it is located between Russia and the EU. A pragmatic dialogue would increase opportunities for joint investments in this region.

The main challenge for the Russian business in these new conditions, which, by the way, imply a radical revision of all WTO mechanisms, is the changing access to markets. On the one hand, some traditional markets will be completely closed for Russian producers. On the other hand, new markets will emerge that have yet to be explored. In the first case, we are obviously talking about Western Europe, in the second - about ASEAN, including China, and India in future, which is now entering the forefront. And vice versa: markets that will no longer be traditional, will demand new products. In the case of the EU, for example, a solution could be the export of hydrogen based on natural gas synthesis.

In any case, Russian business will have to adapt to such changes, although the context of the transformations may be different. In some areas it will be determined by the climate agenda, and in others by the military and political developments. This will not mean that globalization is almost over: regional ecosystems have yet to find a common language among themselves and to form new economic ties, to which Russian and the entire Eurasian business will also have to adapt.

Even after the 2008 crisis, it was said that globalization could follow the regionalization scenario. How successfully did we manage to prepare for it over the past decade?

The main thing is that the Russian state was getting ready for this together with us, the entrepreneurs. Over the past two decades, we have all done a tremendous job in shaping new logistics and new economic geography. The creation of new industries and infrastructure corridors – ports, logistics hubs, railway routes and highways – provides access to new markets, which can now be quickly entered by the Russian businesses. The state perfectly understood this priority task and has solved it ahead of schedule. I think, it has now become obvious to everyone.

Now, when many of the previous infrastructural restrictions have been or are being removed, as in the case of the expansion of the BAM railway and the Northern Sea Route, a new task for the state is coming to the fore – building political and economic relations in those markets where Russian business is striving to enter.

Actually, here the MFA may come to the forefront and set up a close political and economic dialogue with China and India, as well as Malaysia, Vietnam and South Korea. In other words, diplomats must pave the way to the new markets. The RIAC can play a significant role as a think tank by showing the way where and how to go to. One of the key areas of this work at the moment may be the preparation of an exclusive Russian-Chinese trade deal aimed at increasing mutual trade turnover. If such a "contract of the century" between Russia and China is concluded, other countries in the Asia-Pacific region would follow.