Russia may seem like an unlikely early mover on green taxonomies, but to Alexey Miroshnichenko, Vice Chairman of national development bank VEB.RF, it is the logical next step.
Russia ratified its commitment to the Paris Agreement less than a year ago. More recently, faced with the economic fall-out from Covid and historically low oil prices, the Deputy Minister of Economic Development Ilya Torosov stated that “the Russian Federation prioritises sustainability and resilience” and “consider[s] green finance as one of the drivers of a new investment cycle”.
To achieve its goals, the government is relying on VEB.RF, the €37bn ‘state development corporation’ led by former Deputy Prime Minister, Igor Shuvalov, with a focus on infrastructure and urban development, contributing to public policy and managing the country’s biggest pension fund.
“Russia needs a standard for green finance,” says Miroshnichenko, who oversaw the launch of a draft taxonomy before the summer, still out for public consultation. At this point, though, he explains, “the guidelines are fairly high level – we haven’t developed quantitative criteria for the areas we’ve identified as green yet”.
He points to the potential for the green bond market to support the decarbonisation of Russian companies in line with government strategy, especially if issuers can secure the ‘greenium’ seen in Europe and elsewhere. But so far, there have been just five green bonds issued in Russia.
“I wish it were 500 or 5,000, but it’s five – plus two issues overseas,” he says. “That isn’t enough, and at this stage, Russian investors aren’t looking to provide a premium for green themselves, so it’s our job – as a sort of financial hand of government – to get the market going.”
The first objective of the taxonomy, then, is to lay out the criteria bonds must meet to be eligible for VEB.RF’s support – likely to come in the form of a subsidised coupon. It’s an approach tried and tested in China, which remains one of the largest issuers in the world. VEB.RF has looked closely at China’s green catalogue for inspiration but, Miroshnichenko is quick to point out, “We are not China – there will be nothing in our taxonomy remotely close to clean coal”.
‘The demand for green financial instruments is currently greater than the supply, and we would love to fill that gap. If we make our taxonomy transparent and compatible, we believe that there could be an influx of international investors into Russia’ – Miroshnichenko
There are fossil fuels in the draft, though: projects that offer an “increase in energy and ecological efficiency and reduction in harmful emissions of thermal power plants” are expected to be eligible, and natural gas for urban transport projects.
“We realise there’s a lot of bad press about Russia,” says Miroshnichenko. “So we would really like to make sure we can’t be accused of greenwashing”.
On that basis, the taxonomy sticks closely to international best practice – the Climate Bond Initiative’s standards, the Green Bond Principles and the work being done by the European Commission’s Technical Expert Group on Sustainable Finance. “Obviously, we can’t be greener than the EU, that’s impossible,” he laughs. “But we are willing to explain the differences to anyone who wants to talk about it.”
One fundamental difference compared with the EU’s taxonomy is that Russia plans to have a project-based framework, which is simpler to create and suits the green bond market, where credible projects need to be easily identifiable. But the Russian taxonomy will be used beyond the capital markets, Miroshnichenko explains.
“There are existing government programmes that could be expanded or repurposed, like subsidies,” he tells RI. “At the moment, if you have a solar or wind project, the government will guarantee to buy your energy at a higher rate than they would pay for conventional energy.” This has contributed to a surge in renewables in Russia over the past decade, but their share of total energy output in the country remains strikingly low, with solar and wind estimated to have contributed just 0.02% in 2018.
Miroshnichenko thinks VEB.RF and its colleagues could do “way more”: “We could link more parts of the taxonomy to the subsidies,” he says, adding that conversations are currently underway with seven government ministries to develop the idea.
“We’re trying to develop a comprehensive scheme for any kind of government support linked to the greenness of financial instruments. We’re talking to the finance ministry about possible tax incentives," he says. VEB.RF is also in dialogue with Russia’s central bank about “regulatory options like risk weightings”, he admits, but keeps his cards close to his chest when it comes to details.
First and foremost, the best thing VEB.RF can do is “lead by example”, he continues, so it will kick things off by providing discounts to its own clients if they comply with the green taxonomy.
In the bank’s own credit policy, there are specific ‘do no significant harm’ criteria (“so if you’re building something that emits less CO2, but in doing so you’re going to ruin a river or something, then you obviously can’t do it”), as well as social safeguards for infrastructure; but for the taxonomy as a standalone framework, those considerations are not yet integrated.
“One thing that’s important to note,” Miroshnichenko concludes, “is that this version of the taxonomy that is out for public comment, is not complete yet – it is still in development. A more substantial discussion on the differences between what the Russians are doing and what the rest of the world is doing could be had when the quantitative criteria are published”.
“We know the demand for green financial instruments is currently greater than the supply, and we would love to fill that gap. If we make our taxonomy transparent and compatible, we believe that there could be an influx of international investors into Russia.”