Russia-Ukraine War: A Surprising Catalyst for Investments in Renewable Energy

International Relations/Politics/Investment Trends

The world was knocked off balance when Russia invaded Ukraine in late February 2022. Not only were many lives lost and disrupted, but the invasion threw global energy markets into turmoil. Russia’s status as a major petroleum exporter meant that countries had to weigh their political stance against energy demands. Interestingly, though, “green” markets were barely disrupted. In fact, markets for renewable energy and other ESG-rooted initiatives strengthened following the invasion. Why was this so?

Before the invasion, Russia supplied over 40% of Europe’s oil and natural gas [1]. However, the invasion compelled EU members to levy strict sanctions and tariffs on Russian oil imports as an economic protest of their belligerence [2]. For instance, the British government enacted a total ban on Russian oil imports in 2023 [3] and Germany froze the Nord Stream 2 Baltic Sea gas pipeline project with Russia [4]. As a result of such policies, global petroleum markets became very volatile, encouraging private investors to divest from Russian oil companies. Additionally, investors faced increasing public pressure to consider the social ramifications of supporting Russian companies.

In accordance with responsible ESG considerations, Western European investors agreed to place their money elsewhere. Boycotts of Russian oil presented the need for self-sufficient energy production within the EU, thus creating novel investment opportunities in sustainable energy initiatives [5]. In particular, solar panel companies in Germany and wind turbine manufacturers in Denmark benefited from significant increases in foreign investment from 2022 onwards [6]. This has paved the way for major milestones in sustainable electricity production within the EU. Notably, solar and hydroelectric energy generation has risen by 55% compared to 2023, while wind energy now accounts for a larger share of electricity production than natural gas [7]. Additionally, reliance on petroleum for electricity has dropped by 19% since February 2023 [8].

The conflict has also impacted energy consumption and green investments outside of Europe, particularly in China. Given their historic political and economic alliance, it is no surprise that China did not restrict oil imports from Russia in response to the invasion. On the contrary, a record 107.02 million tons of crude oil was imported from Russia in 2023 – a 24% increase from 2022 [9]. Russia has since become China’s largest crude oil supplier, surpassing Saudi Arabia. However, Chinese leaders observed oil market scares in the West and recognised the risks associated with overreliance on Russian petroleum [10]. Thus, China too invested in renewable energy, namely in the hydroelectric and solar sectors [11].

Research by economist Wei Jiang and her colleagues at Qingdao University revealed that transmission returns of spillovers between renewable energy sectors, green financial instruments (i.e. green bonds), and ESG initiatives in China increased from 19.36% in 2021 to 30% in 2023 [12]. This suggests that, following the invasion, investment returns in renewable energy, green finance, and ESG in China have become more closely aligned, highlighting a newfound emphasis on energy security [13]. Jiang also noted that the inverse correlation between “traditional” energy markets (fossil fuels, nuclear) and sustainable energy markets increased in strength following the invasion [14]. This meant holding a portfolio of green energy investments became more attractive for those seeking to diversify and hedge against slumps in fossil fuel markets [15].

Other ESG initiatives in China

• Introduction of voluntary ESG disclosure guidelines in 2022 by the China Enterprise Reform and Development Society

• Shanghai, Shenzhen, and Beijing stock exchanges introduced new ESG disclosure requirements in 2024

The invasion of Ukraine serves as a reminder of the vulnerability and volatility of global energy markets. While the conflict has caused turmoil in traditional energy sectors, it has unexpectedly catalysed growth in renewable energy markets. The shift away from Russian petroleum due to political and economic pressures created fertile ground for green investments, particularly in Europe and China. As nations seek to reduce their reliance on fossil fuels and improve energy security, ESG-focused initiatives have gained traction, leading to significant advances in sustainable energy production. This unexpected trend highlights how geopolitical events, such as warfare, can have unique potential in creating new markets, albeit under specific conditions.

Research Analyst: Zak Vilanilam

Research Editor: Victoria Lim

References:

[1] Pearce, J.M. (13 March 2024). “Green Energy Investments to Expedite Due to War”. Greenmatch.

[2][5] Jiang, W., Dong, L., and Chen, Y. (2023). “Time-frequency connectedness among traditional/new energy, green finance, and ESG in pre- and post-Russia-Ukraine war periods”. Journal of Resources Policy.

[3] Gov.uk. (2023). “UK ban on Russian oil and oil products”. GOV.uk.

[4] Marsh, S., & Chambers, M. (2022, February 22). Germany freezes Nord Stream 2 gas project as Ukraine crisis deepens | Reuters. Germany freezes Nord Stream 2 gas project as Ukraine crisis deepens.

[6] Parmova, D.S. et. al. (2023). “Mitigating CO2 emissions : the synergy of foreign direct investment and renewable energy in Europe and Central Asia”. International Journal of Energy Economics and Policy.

[7][8] Brown, S. and Jones, D. (7 February 2024). “European Electricity Review 2024”. Ember Energy.

9] He, L. (22 January 2024). “China’s largest oil supplier in 2023 was Russia”. CNN News.

[10][11] Tan, Y. and Zhu, Z. (2022). “The effect of ESG rating events on corporate green innovation in China: The mediating role of financial constraints and managers' environmental awareness”. Technology in Society.

[12][13][14] Jiang, W., Dong, L., and Chen, Y. (2023). “Time-frequency connectedness among traditional/new energy, green finance, and ESG in pre- and post-Russia-Ukraine war periods”. Journal of Resources Policy.

[15] Brown, S. and Jones, D. (7 February 2024). “European Electricity Review 2024”. Ember Energy.