War in Ukraine Transforms Russia’s Hydrogen Strategy Into Illusion

The Kremlin’s unprovoked war of aggression against Ukraine and ensuing international economic sanctions targeting the Russian Federation have already damaged Russia’s non-renewable energy export capabilities, hitting both the oil and natural gas sectors (The Moscow Times—Russian service, June 28). Now, those economic measures are taking their toll (see EDM, April 11), and it is uncertain how long Moscow can count on its main Indo-Pacific region customers, India and China, to continue buying Russian hydrocarbons (shunned by the West but presently highly discounted). As such, it appears the time has come for Russia to start considering alternative means for filling the state’s coffers.

Even prior to the outbreak of full-scale hostilities in Ukraine (launched by President Vladimir Putin on February 24, 2022), certain segments of Russia’s economic and business elite had claimed that the production and export of hydrogen could become a way for the country to gradually move away from oil and gas as its main export commodities. Indeed, the year 2021 marked a spike in interest in hydrogen development. According to the Ministry of Energy (Minenergo), by 2050 Russia was supposed to become one of the largest exporters of hydrogen, occupying up to 20 percent of the global market (Kommersant, December 24, 2021). Importantly, “green energy” (and hydrogen in particular)—as a key tool of Russia’s economic transformation—became one of the main topics of discussion at the Sixth Eastern Economic Forum 2021 (EEF-2021), held in Vladivostok (see EDM, September 14, 2021).

Interestingly, topics related to Russia’s hydrogen export potential were once again stressed on the eve of the re-invasion of Ukraine. Specifically, Russian Deputy Prime Minister Alexander Novak, during a meeting with Prime Minister Mikhail Mishustin, reiterated the government’s strategic goal of turning Russia into a major global exporter of hydrogen. This would be achieved by inter alia implementing an economic-industrial cluster approach and placing key production facilities in Sakhalin and the Kola Peninsula (1prime.ru, February 11). The issue was also stressed by Anatoly Chubais (at that time a special envoy of the Russian president for relations with international organizations, who would later flee Russia): he said that by 2030, Russia’s hydrogen sales could reach $40 billion (RIA Novosti, January 13).

Indeed, Russia has several undeniable competitive advantages in terms of production of both “green” (produced from water by electrolysis using renewable energy sources) and “blue” (produced from natural gas using extra heated steam and a catalyst) hydrogen (Rossiyskaya Gazeta, June 1). Yet converting this potential into practical gains currently seems quite unrealistic. And the main debilitating factor is Russia’s aggression against Ukraine and growing international (economic) isolation.

At the beginning of June, Minenergo essentially confirmed the above suppositions by admitting that the previously drawn up ambitious plans for hydrogen production and export will need to be completely revised. According to even the most optimistic scenario, by 2030, Russia will be able to export no more than half of the hydrogen that had originally been envisioned. The ministry’s experts noted that the obstacles are both international sanctions and the unwillingness of the world’s largest economies to collaborate with Russia. Moreover, they argued Russia will require more than $21 billion in net investments to launch the key planned hydrogen-producing projects and maintain their full operation. Those are to be located in Sakhalin (a Rosatom-managed project that envisages maritime transportation of blue hydrogen to China); Sakha/Yakutia (the transportation of blue hydrogen to China via railway connection); Yamal peninsula (a Novatek-managed project for maritime transportation of hydrogen to Germany); East Siberia (railway transportation of green hydrogen to China); and northwestern Russia (green hydrogen production to be managed by Rosatom, Rosnano and H2 Clean Energy). Moreover, according to Minenergo’s estimates, the above-mentioned projects would have to be given a ten-year comprehensive government-support plan, which would cost an additional $7.6 billion (Kommersant, June 2).

Of course, considering the experience of other Russian strategic construction and energy infrastructure projects, the final costs for establishing a future hydrogen sector of the economy might be much higher. These inauspicious forecasts were reiterated by the head of Minenergo, Nikolai Shulginov, who said that while hydrogen remains a strategic priority, the strategy itself will have to undergo a dramatic change. In effect, he revealed that initially, Russia saw the European Union as its key export target market; however, due to “the most recent geopolitical events,” this is unlikely to be workable going forward. Minister Shulginov added that Russia now faces two options: either to try to stimulate internal demand or to rely on exports to the Indo-Pacific (Rossiyskaya Gazeta, June 26). But while the entire macro-region could be viewed as a target market, realistically speaking—given Russia’s aggravated relations with Japan and South Korea (whose import potential had been estimated at 3.7 million tons per year)—only China may actually be interested in importing Russian hydrogen. Yet even this assumption may prove shaky.

Besides Russia, China has also expressed interest in purchasing hydrogen from the United Arab Emirates, Saudi Arabia and Australia; and Beijing has made domestic production of hydrogen one of the key goals for diversifying its energy mix. On March 23, the National Development and Reform Commission of the People’s Republic of China (NDRC) issued a comprehensive strategic plan on the development of hydrogen until 2035. Among other things, the document declares that by 2025, more than 50,000 vehicles (operating on hydrogen fuel) will be put into operation. According to the Alliance of Chinese Producers of Hydrogen, China is now entering a “hydrogen revolution,” and both the demand and consumption of this energy source will grow dramatically. Sensing this trend, the Chinese government has de facto charged China Petroleum and Chemical Corporation (Sinopec) with implementing China’s hydrogen strategy (Kommersant, March 27). Importantly, China will be relying on domestically produced, ecologically friendly green hydrogen, which does not warrant using coal or natural gas to create it (Kommersant, March 24).

Russia’s transformation into a pariah state since February 2022 poses a wide range of serious challenges to its nascent “green” industrial base and to the broader domestic economy. Its collaboration with a limited number of foreign partners—within the scope of some already existing conventional energy projects and under certain circumstances, such as providing generous discounts—will undoubtedly continue. However, projects in new areas, especially when necessitating an influx of foreign capital, are unlikely to take off in the near-to-medium term.