Global Corporations and Economy
The Geopolitics of the Energy Transition: Essential Issues and Implications for the EU and Russia

The energy transition is likely to have significant geopolitical consequences. It will cause a shift of power away from fossil fuel producers. Moreover, the new geopolitics of energy will be increasingly determined by issues such as access to green technologies, rare earth materials, power lines and storage capacity. International cooperation, including between the EU and Russia, can lead to mutually advantageous outcomes and help tackle the climate crisis, writes Marco Siddi, Montalcini Assistant Professor, University of Cagliari and Associate Senior Research Fellow, Finnish Institute of International Affairs, participant at the 18th Annual meeting of the Valdai Discussion Club.

The increasingly evident climate crisis and the international agreements that aim to address it, most notably the Paris climate agreement, are leading most of the Global North to embark on an ‘energy transition’. The energy transition can be defined as the shift of the energy sector from fossil fuel-based systems of energy production and consumption to renewable sources, such as wind and solar, and storage systems based on lithium-ion batteries. The energy transition will be characterized by the growing penetration of renewables into the energy supply mix, electrification and improvements in energy storage. Thanks to renewables, energy production will become more decentralized. At the same time, ‘smart grids’ using digital technologies will have to be built to quickly react to local changes in renewable energy production and usage. As governments pursue the energy transition, new regulatory frameworks will be formulated to govern the sector and considerable investments are expected.

It is generally assumed that the energy transition will cause serious economic losses to fossil fuel producers such as Saudi Arabia, Venezuela, Algeria, Nigeria, Russia and Norway, and weaken their geopolitical influence. While this appears self-evident, it is important to note that the size of the losses will depend on the speed of the transition and the capability of these countries to adapt to the new global energy structures.

Moreover, the list of potential losers is actually much longer than some analyses suggest, and also includes the large hydrocarbon sector in the United States and China.

Countries that benefit economically and geopolitically from the strategic transit of fossil fuels on their territory, such as Ukraine and Georgia, can also be counted among the losers. Conversely, large importers of fossil fuels – such as the European Union and Japan – will benefit from the energy transition, particularly if they develop the technology and secure access to the resources that are necessary for it.

The geopolitics of renewable energy will feature a new type of competition concerning sources and technologies. Access to critical minerals and rare earths for the production of high-tech and renewable energy (wind turbines, solar panels, efficiency lighting) applications will be essential. Rare earths include 17 elements of the periodic table, most of which are found in high geographic concentration. China is in a dominant position in both the production and processing of rare earths, and controls a substantial share of relevant global supply chains. The disruptions caused by the Covid-19 pandemic, Donald Trump’s attempts to impose tariffs on rare earths and China’s boycott of rare earth exports to Japan between 2010 and 2015 highlight that these supply chains are exposed to international crises and tensions. While rare earths are also found outside China’s territory, the economic viability and toxicity of extraction and processing make it difficult to develop alternative supply chains.

In addition to rare earths, lithium and cobalt are chemical elements of essential importance in the energy transition. Lithium is used in lithium-ion batteries of electric cars, as well as in portable electronic devices and grid storage appliances. It is found in high concentration especially in the “lithium triangle” of Argentina, Bolivia and Chile, as well as in Australia (now the main producer) and in China (which currently controls processing and supply). Lithium extraction is problematic, as it causes environmental degradation, water stress and requires high energy use. It also exacerbates inequalities and undermines the livelihood of local communities, as highlighted by recent protests near the Atacama mine in Chile.

As for cobalt – which is used in batteries, smartphones, laptops, electric cars – 60 % of the current production and the largest reserves are located in the Democratic Republic of Congo (DRC). Chinese companies largely control the production chain. China is also the main consumer of cobalt and the main supplier to the United States. Currently, cobalt extraction is most controversial. In 2016, Amnesty International reported that over a 100,000 artisanal miners, including numerous children, dug out cobalt without any safety precautions in the DRC. Therefore, cobalt enters the supply chain of multinational companies through a highly exploitative process and gross human rights abuses.

As the energy transition unfolds, demand for rare earths, lithium and cobalt is predicted to increase. While China is now in a preeminent position with regard to both production and control of the supply chain, other major international actors are trying to catch up and secure access to resources. Russia has considerable potential in this respect, and could become an alternative supplier for the European Union’s growing demand.

Russia has substantial rare earth resources, and its government is offering reduced mining taxes and cheaper loans to investors in 11 projects that are designed to increase the country’s share of global rare earths output to 10% by 2030 (from 1.3% now). This would make Russia the second-largest producer after China. According to these plans, Russia would become nearly self-sufficient for its rare earths consumption by 2025 and start exports in 2026.

When regard to cobalt production, Russia currently comes a distant second to the DRC, with over 6,000 metric tons (MT) of yearly production (compared to 95,000 in the DRC). However, Russia possesses reserves that are estimated at around 250,000 MT, mostly concentrated in the Altai Republic. Russian mining company Norilsk Nickel is among the world’s top five producers of cobalt. Furthermore, Russia has its own lithium deposits in eastern Siberia and Yakutia. The major Russian actor in the field of lithium – state corporation Rosatom, which has its main business in the nuclear sector – has prioritized ownership of lithium resources abroad, particularly in Latin America and Africa. Nonetheless, in 2020 Rosatom officials declared that Russia could achieve domestic lithium production equivalent to 3.5% of the world's output by 2025.

Therefore, the production and processing of rare earths and critical minerals constitutes a potential area of cooperation between Russia and the EU. EU companies could provide investments to develop and access alternative supplies of these minerals in Russia, thereby alleviating dependence on China. Within the context of the energy transition, cooperation in this area could thus complement plans in the renewable sector and for EU-Russia hydrogen trade. Russia has numerous resources that are capable of producing hydrogen, as well as a number of related R&D activities. Russia could produce hydrogen from both hydrocarbons (for instance, grey and blue hydrogen) and renewable sources (green hydrogen). Here, the different preferences of the EU and Russia would need to be reconciled – the EU prefers green hydrogen, despite the currently higher cost of producing it. Moreover, the Russian government has proposed using some of the existing gas pipelines for hydrogen exports to Europe.

Cooperation in the hydrogen economy, as well as in the production and processing of rare earths and critical minerals, would be important ‘building blocks’ for the transformation of the EU-Russia energy partnership and its adaptation to the global energy transition

Global Corporations and Economy
The European Green Deal and Future Prospects for EU-Russia Energy Cooperation
Marco Siddi
The European Union has launched a Green Deal to promote the energy transition and a climate-friendly economic recovery after the Covid-19 pandemic. The Green Deal poses a challenge to Russia, which is a key exporter of fossil fuels and energy intensive products to the EU. On the other hand, Russia has enormous potential in areas such as renewable energy and hydrogen production.
Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.