Sanctions require Congress to rethink MDB energy policy

Alexei Nikolsky, Sputnik, Kremlin Pool Photo via AP, File

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 Biden just announced further sanctions on Russian supplies of oil, gas, and minerals, and Congress reportedly is 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 make a big commitment to mining to bolster the West’s response to the crisis in Ukraine.

The first wave of sanctions from the United States and Europe have primarily targeted the Russian banking and financial sectors. But talks are underway to increase the costs for Putin’s regime by sanctioning their vital oil and gas sector, whose exports finance about 36 percent of the Russian federal budget (amounting to $120 billion). Under current arrangements, sanctioning the energy and mineral sector will lead to several outcomes, including a need to increase production from non-Russia 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 deficit in its oil, gas, and mineral supplies without investments in new meaningful alternative sources. This extension partly reflects the disruption to existing energy dependencies caused by the war and accompanying sanctions. At the same time, the carbon transition will require a significant increase in mining of all sorts of minerals such as copper and nickel, not only the so-called “strategic minerals” like lithium, to produce electric vehicles.

Sanctions, therefore, mean that the United States and its partners will need to rethink how they approach investments in energy projects. In particular, the MDBs will have to leverage all their instruments, while giving more favorable consideration to oil and gas as well as major hydro and nuclear power — in addition to the current bias towards renewables. Many MDBs have also shied away from mining projects.

Since the mid-2000s, MDBs have been steadily moving away from projects in the oil and gas sector or the mining industry in the developing world. Those trends represent a different geopolitical era and do not reconcile with present-day strategic threats and security challenges, and the shareholders of the MDBs should direct the MDBs to respond to the new geopolitical shifts in how they allocate their “people, time and money.”

This combination of shareholder de-emphasis and certain career disincentives around financing conventional energy projects has made it difficult for MDBs to push for such projects. The World Bank last funded an oil and gas project in 2019 (nearly 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 countries most likely to be impacted by new sanctions on the Russian energy sector) announced in July 2021 that it would stop investing in new fossil fuel energy projects to align with the Paris Climate accords. The only regional development banks continuing 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 holding discussions to end new financing for such projects and bring about a complete energy transition.

As Germany — a progressive nation that has advocated for a push towards alternatives for fossil fuel — rethinks its national energy policy in response to the events of the past few weeks, it is clear that it is hard to call for the cutting of Russian oil and gas exports without new investments in alternative sources of oil and gas for the short to medium term — and the MDBs have a role in making this happen.

The conventional energy and mining sectors have historically had a complicated record with indigenous communities and environmental issues. Oil, gas, and mining projects supported by MDBs would play an essential role in responding to this supply shock while bringing global standards on human rights and environmental standards. 

Leadership in these MDBs could also send a message around the shift in their culture by creating a vice presidency for “energy and minerals for the carbon transition.” Heads of MDBs might make a point of promoting capable persons who have worked on oil, gas, and mining to lead such an effort. Such signals to their bureaucracies would have a powerful impact on how the staff perceives the incentives of supporting mining and fossil fuel energy projects.

From time to time, MDBs turn to shareholders in search of financial support in the form of a capital increase or for “soft loans.” When they turn to the United States Congress, it should be an opportunity for the United States to hold these MDBs to account. Should Republicans take control of either (or both) chambers of Congress, they should make a shift in the MDB’s policy towards fossil fuel energy projects a red line for any new support. But the ongoing sanctions campaign against Russia is not a partisan effort — nor should it be.

The Biden administration should also reconsider its hostility towards energy projects around nonrenewable sources. In particular, the administration ought to revisit its current policy on “Fossil Fuel Energy Guidance for the Multilateral Development Banks,” which called on MDBs to prioritize clean energy investments consistent with the goals of the Paris Climate accord and transition away from fossil fuel projects. These policy positions were obsolete as soon as Russia — the world’s second-largest natural gas supplier and the third-largest oil supplier — attacked Ukraine and changed the nature of challenges and threats facing the world.

If the MDBs continue to eschew oil, gas, and mining projects, we will have fewer alternate fuel sources, and developing countries with fossil fuels or mineral resources will turn towards China or Russia to develop those resources.

Daniel F. Runde is a senior vice president and William A. Schreyer chair in Global Analysis at CSIS. He previously worked for the U.S. Agency for International Development, the World Bank Group, and in investment banking, with experience in Africa, Asia, Europe, Latin America and the Middle East.

Tags Asian Development Bank Energy economics Energy policy Energy transition European Bank for Reconstruction and Development Joe Biden Multilateral development banks oil and gas Russia Russian economy Russian invasion of Ukraine Russian sanctions Ukraine World Bank Group

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