Economic Crisis and Russia: Boom or Bust for JI?
Anna Korppoo & Arild Moe
Joint Implementation Quarterly
Joint Implementation was expected to provide a significant financial flow to Russia, since the potential for projects improving the environmental performance in industry as well as the housing and communal sector was seen as very large. This was the prevalent opinion after Kyoto outside Russia, but also inside the country there were many optimists.
With 93 projects in the Track 2 pipeline and almost two years after establishing the domestic framework for project approval, the Russian government is yet to sign off a single project. This has led to a lot of frustration amongst project developers and hosts. What can be the main reasons for this paradoxical situation – so much potential and so little realisation?
Several factors can help explain the seemingly lack of interest in JI in Russia, as well as Russian reluctance to get the papers signed for the projects that have actually been developed. An important issue, which has been difficult to understand outside Russia, is that even though it can be documented that many potential JI projects are profitable by themselves, the size of the potential JI funding flows are small compared to the huge energy export revenues, and large investment projects considered by major Russian corporations over the last decade.
Combined with the centralization of decision-making in the big companies, this means that JI have had a big problem getting the necessary attention of top management. Significant, we believe, is also the mismatch of the level of actors involved in JI: the government should take an initiative to approve projects which provide funding for the private sector. Also some types of JI projects and the uncertainties around them may have spurred reluctance in the bureaucracy to take personal responsibility for approving projects that may turn out later to be questionable. What JI certainly has been lacking in Russia is high level attention vital to such decision-making processes. Thus, the relevant officials continue to wait for a signal from the high political level.
The global economic crisis reached Russia towards the end of 2008, and has already had a huge impact on the manufacturing industry. A significant share of the capacity is now either operated on partial capacity or has been halted altogether. One might think that the economic crisis could have a positive impact on the chances of JI approvals in Russia, though. Now that the government is struggling with the crisis and the low price of oil, the revenue from JI, however insignificant it may have seemed when the oil revenues were flooding in, could regain some attractiveness. Also some of the important large companies, such as Gazprom, may find JI a useful mechanism to gain savings from their energy costs to ease the burden put to the business by the crisis.
Pointing in the opposite direction is the fact that some potential JI investments are part of broader investment projects carried out by the project host. Besides, due to the economic crisis investment across the board is being slashed. This means that the JI ‘portion’ can also be negatively affected. Moreover, one of the main forces behind JI in Russia, foreign project developers, may start giving up and focusing on the more functional sources of ERUs and CERs.
Even if one should conclude that on balance the financial crisis is positive for JI in Russia, the new situation will not solve all the current problems holding JI back. Even though the revenues may become more attractive for the high-level policy-makers, the bureaucracy of the approval process remains and may provide counter-incentives. Also the fact that the government is not going to receive any of the revenues directly remains and does not give a strong incentive to prioritize the JI approval process.
The results of JI in Russia as of today are indeed poor, and the whole story with development of a framework and procedures looks fruitless and almost embarrassing. Seeing this, the Russian government may want to approve some projects before the end of the first commitment period. However, should the foreign project developers give up on Russia due to the general financial hazards, the Russian government could really lose its momentum with JI. If a ‘time trigger’ mechanism exists, hopefully it will not work too late for the project developers who have to face the additional uncertainties caused by the present economic downturn.
1 The Finnish Institute of International Affairs, e-mail: email@example.com
2 The Fridtjof Nansen Institute, e-mail: firstname.lastname@example.org