VTB’s First Deputy Chairman names three challenges for Russian economy

Yuri Soloviev, First Deputy President and Chairman of the Management Board of VTB, in his RBC column focused on post-COVID challenges for Russia. These challenges may be addressed by improved living standards, productivity growth and technology development

Even though the global and Russian economies managed to get back to the pre-COVID levels of business activity and employment over the latest year, it is obvious that COVID-19 has not put aside other challenges. Just the opposite, the virus has accelerated the key transformation processes, especially in such areas as combatting climate change, digitalization and stabilization of the global price growth, primarily in the commodities segment.

The Russian economic history views the notion of “transformation” in a highly negative context — the first several recommended pages in the academic economy database under “transformational growth” query focus on ... transformational recession — the experience of transition from the centrally planned economy to a market economy. This fact objectively reflects the need for fine and cautious adjustment of the speed of transition. However, under the new post-COVID reality Russia has a great opportunity to improve living standards, productivity growth and technology development.

How can Russia do this? By addressing the three challenges.

The first challenge is posed at the climate track.

At the Climate Forum in Glasgow Russia declared its commitment to achieve carbon neutrality by 2060. A closer look at the law on decarbonization of the economy shows that these processes will concern all of the critical sectors — from agriculture to construction.

Lately the “green” transition discussion focused on consideration of risks — from loss of traditional export sources to climate-related protectionism. It seems likely that today it would be proper to use this swelling wave of climate and technology transformation in the best interests of people, business and states.

According to the latest forecasts (International Emissions Trading Association and the University of Maryland), the global voluntary carbon trading market, which is under development, by 2030 could amount to $300 bn, and by 2050 — up to a trillion USD. Russia, which will be cardinally upgrading its technologies under the economy decarbonization efforts, may well become a major player at this market.

This tool should be used to raise international financing for “green” projects and breakthrough technology solutions for implementation of such projects. Renewable energy, “green” construction, solid waste disposal, reduction of methane emissions during production and transportation, forestry projects — these are some of the projects that could be licensed under voluntary carbon units and then monetized. Moreover, such projects will also reduce overall country load for required expenses for adaptation to climate change. VTB is among the first in Russia to launch a carbon desk for the full spectrum of carbon market services to Russian companies.

From November 30 to December 1 RBC will broadcast key sessions and report on major events at the “Russia Calling!” annual investment forum, organized by VTB Capital.

The second opportunity lies in the area of the commodities market, the energy market and in the development of stable pricing conditions within the country. The “green” transition provides Russia with opportunities to get into new global market niches. If developed country consumers increasingly focus on improved environmental features of products, then the Russian economy has something to offer. A significant share of carbon-free power (about 40% of the total output), reasonable tariff regime for natural monopoly services (Russian power, natural gas, railway transport prices are among the most competitive across the world), attractive domestic market and a strategic position between consumption centers both in Europe and Asia, quite developed transport infrastructure — these features should help Russia promote itself as a production site for products of the future.

One of the greatest success cases is the significant demand for data centers in the territory of Russia — from Bratsk to modular pilot solutions at nuclear power plants; or new facilities for manufacturing of wind and solar power equipment by major global players, a great interest in “green” and “blue” hydrogen projects in the country. The continuing global energy crunch has shown competitiveness of Russian power, the exports of which in all directions — to the EU, China and kazakhstan — have reached historic highs. Positioning the country as a center for production of high added-value environmentally friendly products and services could bring in new technologies and help create high-tech and high-income jobs for our citizens.

The third opportunity presents itself in the area of digital transformation. Technology transformation, including improvement of energy efficiency and greener economy, may lead to additional effects in the Russian economy.

These processes will result in higher automation and digitalization levels, the “green” transition may release significant amounts of labor force; for example, maintenance of a cutting-edge Russian gas turbine requires 20-30 times fewer personnel than the previous technology. Currently the coal-mining, oil and gas, power industries directly employ about 2,5 million workers, and related industries employ up to 10 million workers.

Ourr goal is to use investment into education and development of new industrial clusters, such as hydrogen production, RES, modern natural gas technologies, “green” construction and agriculture to provide our people with opportunities to improve their living standards during this transition. Mobility of the population will also play an important role in this process, and it will require major investments into regional infrastructure, support to small businesses in order to improve service market quality, a significant modernization of regional education to enable people to obtain skills, relevant to “green” challenges, and finally, social infrastructure to retain all these professionals. Obviously, regional demand for social investment will be a major trend of the “green” transition, considering distributed nature of the economy of the future and lower geographical dependence on natural resources.

Climate and digital agenda growth opportunities are much broader. This list is far from exhaustive and may be expanded with attribution of digital rights to citizens with subsequent monetization opportunities and increased interest of the new generation, which will be much more environmentally friendly in its aspirations, to stock markets, and other trends that we observe today.

Yuri Soloviev, First Deputy President and Chairman of the Management Board of VTB