Bank of Russia delivers new climate warnings

The Bank of Russia (BoR) has issued its starkest warnings yet about the threat posed by climate change to the country’s financial stability, and to its own ability to implement effective monetary policy in the future.

Its latest financial stability review says global investors will be increasingly reluctant to finance Russia’s largest polluting firms, leaving the portfolios of domestic banks heavily concentrated in high-carbon sectors. At the same time, those businesses will see their revenues hit by falling exports – particularly to the EU – as other countries accelerate their moves to decarbonise.

The Kremlin has announced plans to cut Russia’s carbon emissions by 79% by 2050. This is expected to cost 1-2% of its GDP, and the BoR says the country’s banks and investors will be heavily relied upon to finance the transition.

The report says Russia’s banks are currently sufficiently well-capitalised, but hindered by a lack of transparency about firms’ emissions, limited target-setting on emissions reduction, and the considerably lower rate of environmental expenditure by companies in the nation’s oil and gas, energy and transport sectors relative to their foreign peers.

“The degree of [Russian companies’] integration into the global climate agenda remains low: only some of the largest representatives of carbon-intensive sectors of the economy have a well-developed strategy to reduce environmental impact with quantitative goals for the medium and long term, while other companies do not set specific goals or have no climate policy at all. This situation needs to be changed, otherwise the financial sector will face high risks in the medium term,” says the report.

Earlier this month, the BoR announced plans to introduce a range of measures aimed at improving climate governance and risk management, including regular climate stress tests and new prudential rules. Regulators will begin requiring the largest companies to publish emissions data from the start of next year, and the BoR is working with other state institutions on developing a carbon trading scheme.

Meanwhile, a set of monetary policy guidelines published by the BoR warns of the growing challenges presented by climate change to maintaining price stability. It discusses the difficulties in accounting for physical risks such as a potential thaw in the country’s permafrost, and transition risks including a permanent decline in the global demand for coal, oil and gas, which account for roughly half of Russian exports.

According to the paper, these risks “make it more difficult for the central bank to find correct answers to the following questions: at what stage of the cycle the economy is at a given moment, what the main reason for the shocks is and how persistent they are, and how these shocks have affected the level and rate of potential economic growth”.

The BoR says it will enhance its modeling of climate impacts on monetary policy, and take further steps to integrate climate factors into its macroeconomic forecasting.

But although it acknowledges that monetary policy can be used in support of action to address climate change, there is no indication it intends to follow those of its G20 counterparts that have taken steps in this direction. The Bank of England, Bank of Japan and People’s Bank of China are among the institutions that have marshalled new or existing monetary policy operations in support of the green transition.