Fossil Fuel Financing and the Russia-Ukraine War

Gazprom, Russia’s largest oil and gas company, provided 45 percent of EU gas imports before Russia’s invasion of Ukraine in February 2022. As European countries seek to condemn Russia’s actions, the dissonance between policies to harm Russia’s fossil-fuel industries and an ongoing heavy dependence on Russian gas has created immense international pressure for these nations to transition to renewable energy sources. However, the financial interests of Western banks may pose a significant challenge to this transition.

While Gazprom’s contributions to EU gas imports diminished to just seven percent by April 2023—imports of Norwegian and Azerbaijani pipelines and US and North African natural gas have slowly increased—Western banks remain deeply invested in Russian fossil-fuel companies like Gazprom. In August 2022, the Leave it in the Ground Initiative found that over 400 organizations have contributed US$130 billion in investment and credit to Russian companies. The highest financing source to these fossil-fuel firms? JPMorgan Chase. The Rainforest Action Network reported that the US bank contributed about US$3.5 billion between 2016 and 2020, while the European UniCreditSpA placed second with US$2.3 billion in contributions. While investment has decreased in response to Ukraine’s calls for Western companies to divest from Russian gas, governments in countries like the United States have recently encouraged firms to preserve financial ties to Russia to avoid disrupting the global agricultural market and having to reapply for Russian banking licenses in the case of a total withdrawal from Ukraine. US banks are allowed to continue financing services for Gazprom and Russian fertilizer companies like Uralkali for non-sanctioned functions.

Given that the financing of Russian fossil-fuel projects harms Ukraine and exacerbates climate change, war and environmental concerns are temporarily aligned. The oil, gas, and coal exported or burned by Russia both finances war supplies and releases greenhouse gases that absorb the Sun’s radiation, warming the Earth. While the ephemerality of the spotlight on Russian gas risks making bans on fossil-fuel financing a tool for political gain, this hyper-attention also presents an opportunity for countries to push banks to implement more environmentally conscious financing policies.

EU Natural Gas Dependence and Renewable Alternatives

The European Union’s dependence on Russian fossil fuels is worrisome for several reasons. Russia can make the continued supply of natural gas contingent upon EU leniency regarding the invasion of Ukraine. If Russia deems EU policies hostile, it can cut off gas and oil, putting Europe in economic chaos and EU citizens without heating in the winter. In fact, Russia has repeatedly cut off Nord Stream pipeline gas exports to Europe in response to sanctions. Gazprom is especially powerful, controlling 15 percent of the world’s gas reserves. Besides holding Europe hostage, Gazprom reportedly has its security mercenaries fighting in the war.

Equally concerning is the fact that European sources may be insufficient for EU energy needs. Based on the consumption of 360 billion cubic meters (bcm) of gas in 2022, the International Energy Agency estimates that gas storages will need 65 bcm over the summer to reach 95 percent storage at the start of the 2023-2024 fall and winter heating season. Assuming that the European Union may soon stop receiving Russian gas, it cannot rely on its own gas sources to achieve energy goals. In 2023, EU gas production is expected to decrease by nine percent from the 2022 level of 3.6 bcm as the Netherlands aims to close Groningen field, the largest gas field in the European Union.

Renewable energy sources offer an alternative to fossil-fuel imports for Europe. As industrial and agricultural processes transition to clean electricity, existing solar, wind, and heat pump technologies can contribute to energy goals. Providing incentives for the private sector to invest in clean energy can mitigate its primary concern: high initial infrastructure costs. Additionally, different regions can prioritize technologies that fit their geographical capabilities. For instance, countries near the North Sea may focus on offshore wind energy, while sunny areas like Sicily can utilize solar power. While investment temporarily burdens EU taxpayers, these renewable sources are a potential way around the European Union’s geopolitical challenges.

The Bigger Picture: Fossil-Fuel Financing Worldwide

Yet, the conversation about divesting from Russian gas often overlooks the global problem of banks financing firms that produce and distribute fossil fuels. In fact, banks worldwide have been deeply invested in fossil fuels, contributing to defaults on climate agreements. Thus, the environment is also at stake. The 2022 Fossil Fuel Finance Report found that the world’s 60 largest banks have financed fossil fuels with US$4.6 trillion since the 2015 Paris Climate Accords. While US banks JPMorgan Chase, Bank of America, Citi, and Wells Fargo comprise the four highest fossil-fuel-financing banks in the world, the top 12 highest funders also include the Canadian RBC, the United Kingdom’s Barclays, and Japanese banks like MUFG. The issue of banks financing fossil fuels thus stretches far beyond the Russia-Ukraine War.

Recent attempts to muster renewed commitments have also failed. The International Energy Agency has stated that no new fossil-fuel projects should be financed in order to prevent global temperatures from reaching 1.5 degrees Celsius higher than pre-industrial levels. To that end, the 2021 UN Climate Change Conference (COP26) established the Glasgow Financial Alliance for Net Zero (GFANZ), which convinced 450 organizations with more than US$130 trillion in assets to pledge to achieve net zero by 2050. Despite this agreement, Reclaim Finance says that 56 of the largest banks in the net-zero banking alliance grouping still contributed “at least US$269 billion” to 102 fossil-fuel companies as of August 2022, and 58 of the largest banks in the net-zero asset managers grouping still hold US$847 billion in assets in more than 200 fossil-fuel companies, as of September 2022. Financially bound to fossil fuels, banks pose a significant obstacle to the successful implementation of climate crisis initiatives.

Politics before the Environment

The concept of divesting from fossil fuels has become highly politicized and increasingly disconnected from its basis in environmentalism. The current conversation about the geopolitical harms of fossil-fuel dependence largely fails to expand beyond the context of the Russia-Ukraine War. Greenwashing has become a sort of virtue signaling with implications for countries’ global reputations. When an EU member state continues to consume Russian gas while publicly supporting Ukraine, the European Union’s internal unity and public confidence in the EU economy suffer.

The politically charged rhetoric around divesting is evident in the way countries less dependent on Russian energy strongly criticize the refusal of the European Union to completely wean itself off of Russian pipelines. In March 2022, Prime Minister Arturs Karins of Latvia—which had become independent of Russian fossil fuels along with the other Baltic states—argued that “energy sanctions are a way to stop money flowing into Putin’s war coffers.”

Yet, in the same month, Dutch Prime Minister Mark Rutte admitted that shutting off Russian gas—which comprises 15 percent of Dutch gas imports—was “not possible because we need the supply and that is the uncomfortable truth.” As a result of these political divisions, the Eurozone business confidence score dropped from 0.5 to 0.19 points in January 2023. In fact, as of July 6 2023, EU and G7 countries still have not banned restarting Russian gas pipelines.

In addition to these public conflicts, the slow progress of countries that had promised to divest from Russian gas has further damaged European unity. Despite public promises to become energy-independent from Russia, Austria still relies on Russia for 57 percent of its gas, as of February 2023. While the Austrian government blames the delay on outdated, eastern-oriented energy infrastructure, Austrian oil giant OMV’s lucrative 2018 gas import deal with Russia extends until 2040. Given that Austria owns 31.5 percent of OMV, Austria’s focus on profits may undermine public desire for divestment and broader EU plans for total independence from Russian fossil fuels. Divestment, then, is heavily dependent on a country’s economic situation and, in the European Union, requires unanimity to be successful. Unfortunately, it is often a temporary political promise seeking to gain political trustworthiness and align with Western support of Ukraine and broader geopolitical aims. Superficial efforts and empty promises to divest from Russian fossil fuels—intended as political posturing, not formative changes—may artificially inflate EU progress.

The energy crisis caused by the war may also be used as a tool for political posturing between the United States and Russia. The United States may float the dangers of Russian gas—as it pertains to the war effort and the environment—to push European states into switching to “cleaner” US liquefied natural gas (LNG). President Biden has allowed the Department of Energy to increase LNG exports of two facilities by 15 percent. In response, Paul Bledsoe, a strategic adviser with the Progressive Policy Institute, even stated, “It’s critical for us to be able to point out that US gas is the cleanest in the world.” While these changes of fossil-fuel sources may lead to the usage of “cleaner” natural gas, LNG is still a polluting fossil fuel, and the fossil fuels used to build the new energy infrastructure required to maintain this new supply chain counteract any environmental benefits. US claims of helping the environment may thus be an excuse to gain more business for domestic gas and even oil suppliers. Moreover, heightened economic pressures on Russia may harm Russia’s own ability to switch to renewable energy sources. As the highest methane emitter in the world, Russia had been receptive to reducing methane emissions when the European Commission threatened to penalize Gazprom and Novatek, another Russian gas company, for excessively high emissions. Yet, as economic sanctions pile up, Russia’s ability to purchase emission-control technologies decreases, and idle gas may force facilities to vent emissions to avoid dangerous pressure accumulation.

Even when governments implement changes to reach net-zero financing, private banks can ignore these regulations, exacerbating carbon emissions. As part of COP26, Italy pledged to regulate fossil-fuel financing, and the government also classified all fossil-fuel production and consumption subsidies as “inefficient,” controlling the government’s contributions to financing fossil-fuel projects. Despite these measures, Italy’s largest bank, Intesa Sanpaolo, has increased fossil-fuel financing from a relatively low US$1.596 billion in 2019 back to US$3.695 billion in 2021. Another COP26 signee, Belgium, made its state-backed export credit agency Credendo cease new fossil-fuel financing in July 2022. Yet, this policy still allows existing fossil-fuel projects to receive financing. Worse yet, BNP Paribas Fortis, Belgium’s largest bank, still provided US$18 billion in financing for fossil fuels in 2022. Private banks thus operate with significant autonomy, allowing them to avoid federal regulations and preventing countries from adhering to international agreements like COP26.

Fighting Fossil-Fuel Financing in the War Moment

Considering the potential downsides to focusing solely on Russian fossil fuels, how can countries and international organizations capitalize on this unique moment to permanently switch to renewable energy sources? Despite political jockeying and the risk of not fulfilling promises to reduce fossil-fuel financing, organizations like the United Nations can still emphasize the real benefits of divesting for Ukrainian soldiers and for the environment. While total independence from Russian gas may not be possible immediately for the European Union, less-dependent countries like the United States can advance their economic sanctions by requiring banks to cease financing for additional fossil-fuel projects and stop contributing to existing projects. These actions would encourage other allies to do the same. Reducing economic support also hinders the efficacy of the Russian military-industrial complex and directly weakens Gazprom’s mercenary forces. In fact, there is recent precedence for banks making this kind of policy. La Banque Postale, a French bank with about US$901.7 billion in assets, established a policy to cease financing for new fossil-fuel projects worldwide immediately and end all fossil-fuel financing by 2030. The Japan Bank for International Cooperation has similarly suspended a loan to Russia’s Arctic LNG 2 project. Banks involved in such projects should follow these examples to work towards total divestment from Russian fossil fuels.

Litigation has also become increasingly viable as a way to hold banks accountable. France again leads this movement to utilize the courts and international judicial systems to pressure countries to tighten regulations on banks. Three French activist groups have sued BNP Paribas—the 10th largest fossil-fuel-financing bank in the world and the largest in mainland Europe—for violating the French Duty of Vigilance Law, which requires a general vigilance regarding the health of the environment. Given that BNP Paribas has pledged to reach net-zero emissions by 2050, using the courts to define the applications of existing but unused environmental protections can ensure that banks do not hinder federal governments from fulfilling their promises.
The use of these strategies could be normalized while the Western war efforts and climate agendas are still aligned, as this mutual interest offers the best chance of pushing the banking system away from fossil-fuel projects. In fact, the international pressure to become independent from Russian oil and gas has produced promising signs of a worldwide, longer-term commitment to renewable energy. Germany, for example, relied on Russia for more than 33 percent of its oil and has not only switched oil imports from Russia to Qatar, but has also proposed making renewable energy sources 100 percent of the power sector by 2035. Germany therefore exemplifies a manageable pathway: divesting from Russian fossil fuels now with the intent to divest from all fossil fuels in the near future. Veronika Grimm of the Leopoldina German National Academy of Sciences points out that temporarily high renewable energy costs would promote investment and innovations in energy efficiency, leading to lower clean energy prices in the long run. Even though many of the countries who are less dependent on Russian gas have not made plans for such a shift, political and economic circumstances have clearly prompted more open conversations about renewable energy. World leaders can capitalize on the opening provided by the Russia-Ukraine War to promote the transition to a greener economy. Bank regulations in the private sector can reduce fossil-fuel financing and move nations one step closer to climate-friendly goals.