Collateral damage? The Russia-Ukraine conflict and energy transitions in Least Developed Countries

By Dr. Harry Verhoeven, Senior Research Scholar at the Centre on Global Energy Policy, Columbia University

Discussions about climate are, always, discussions about distribution- of costs, benefits and sacrifices. For years now, the grand bargain required to ward off the existential threat of human-induced global warming has been clear. Rich, developed economies need to swiftly and comprehensively decarbonise their energy and industrial systems in ways that both mitigate the intensity of climatic changes and that enable the planet’s poorest societies to follow a cleaner, more equitable growth trajectory. Doing so would generate time, resources and appropriate technologies for those currently marginalised in the global economy to respond more effectively to climatic upheaval. Understood as such, combating climatic changes should also help address those other mega-problems challenging 21st century civilisation: multidimensional poverty; yawning inequalities between and within countries; and the structural exclusion of hundreds of millions of people from access to public goods to which they are ethically and legally entitled.

As acknowledged at the Glasgow COP in November 2021, progress on both sides of that grand bargain – strengthening the adaptive capacity of the world’s poorest and putting the global economy on an irreversible path toward low-carbon growth – has been disappointing. Since then, the world has seen backsliding of the usual sort: retail giants promising to be carbon neutral by 2040 but applying that target to only 2% of all their emissions, or governments that call on emerging regions to quit coal, while approving coal mine expansions.

But there have also been less expected setbacks. The Russia-Ukraine conflict has sent international prices for energy, food and fertilizer soaring. The world’s Least Developed Countries (LDCs) have been particularly badly affected: Somalia, Benin, Laos, Sudan, Congo and Senegal are directly dependent on Russia and Ukraine for two-thirds or more of their wheat imports. The doubling of fertilizer costs in countries such as Ethiopia that are simultaneously ravaged by drought and conflict augurs badly for local efforts to bolster domestic production in the short term. Today’s geopolitical tensions also spell trouble for long-term resilience in the face of climatic shocks and further undermine the prospects, already tenuous before February 2022, for successful energy transitions in LDCs.

Building low-carbon energy systems and massively expanding affordable access to energy are expensive tasks for any government but are particularly challenging to LDCs, which are typically low-savings economies, with limited bureaucratic capacity and chronic balance of payments deficits. In that context, there are two principal mechanisms through which the Russia-Ukraine confrontation is deepening pre-existing trends and dynamics.

First, the conflict is sapping the public money available to LDCs to adapt to global warming and enhance low-carbon energy generation and consumption. On the one hand, most LDCs are net importers of fossil fuels and skyrocketing hydrocarbon prices devour scarce foreign exchange, thereby leaving little to invest in renewables or energy efficiency. Moreover, to the extent that Western sovereigns will respond to inflation threats by hiking up interest rates, borrowing is likely to become more expensive for poor countries, adding to budgetary constraints. On the other hand, official development assistance, including for energy transition projects in LDCs, is likely to be further squeezed, worsening an already considerable finance gap. This is especially stark in light of the enduring global failure to raise the USD 100 billion in climate finance for low-income countries that has been promised since 2009.

Second, it is not only public funding that may be constrained; the role of private capital is likely to change as well, catalysed by the fallout of Western disengagement from Russia. In recent years, multilateral development banks (MDBs) and some climate activists have sought to channel idle capital sitting in European and North American banks to developing countries to accelerate mitigation and adaptation efforts. Much of this falls under the rubric of Environmental and Social Governance (ESG): companies and investment funds can demonstrate progress on ESG metrics to shareholders and stakeholders by meeting their net-zero targets through, say, investment in solar energy for rural communities in East Africa or combating deforestation in Nepal. The case for external capital being vital to energy transitions in LDCs has been vociferously argued by advocates.

However, the controversy over billions of dollars in Western investments and partnerships in Russia -many of them classified as “sustainable finance”- has ignited an overdue reckoning with the ESG hype. Already back in Glasgow and at earlier COPs, debates raged over how to calculate the effectiveness of a bewildering array of instruments, projects and mechanisms that all claim, often on wobbly empirical grounds, to contribute to mitigating climatic changes. The climate finance landscape is plagued by a severe lack of transparency, with questions of comparability and additionality rarely honestly discussed – and disclosure often used as a figleaf for business as usual, allowing haute finance to dodge its climate responsibilities.

Such criticisms are now merging with the debris from the Russian debacle and leading markets to reassess ESG labels and investments outside the West and the reputational risks that they entail. Although cleaning up rampant greenwashing and occasional fraud is overdue, the net result is likely to be greater caution on the part of investors in emerging and low-income economies. This would mean that less private capital is available for transition initiatives in LDCs. Many of the latter are, by their very nature or because of the challenging institutional or security environment they operate in, exceedingly hard to monitor for compliance with more stringent ESG criteria.

While this predicament underlines the inadequacy of climate finance flows to the states least responsible for the global environmental crisis, there is perhaps a silver lining in the reassessment currently underway.  So far, the track-record of MDBs and external private capital in helping mitigate and adapt to climatic changes, while accelerating equitable energy transitions in LDCs, has been underwhelming. If one unanticipated side-effect of Russia’s aggression turns out to be a rethink of the relationships between external financing, human rights and sustainability -and the institutional conditions under which these relationships protect vested interests and further marginalise the poor-, then that would be a significant step forward. After all, discussions about climate are, always, discussions about distribution – including of power.