Wednesday, May 29, 2024
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May 2023 marked 15 months since Russia launched military action against Ukraine. Not only does the confrontation have devastating impacts on the battleground, it has also hurt many developing countries economically. The turmoil in international energy markets, including through the effect of economic sanctions imposed on Russia, has challenged energy and decarbonisation policies around the world.

Since February 2022, 21 developed countries have hit Russia with 180 trade-related sanctions, 155 financial institution-related sanctions and 173 sanctions on Russian individuals. These extensive economic sanctions have hurt but not deterred Russia militarily. Indonesia’s ‘free and active’ foreign policy draws the line at condemning violations of international humanitarian law, providing humanitarian assistance to affected communities and attempting to mediate peace talks between the warring parties. This stance has helped Indonesia navigate some of the undesirable ramifications of the conflict and its geopolitical elements.

What has been the effect on Indonesia?

Unlike disruptions to the decarbonisation agenda in Europe, there has been no similar experience in Indonesia, as there is no direct energy linkage in Russia–Indonesia relations. In-person meetings between Indonesian President Joko Widodo and Russian President Vladimir Putin in 2016, 2018 and 2022 did not seek to build that relationship. Nor was climate change on the agenda as leaders focused on Indonesia’s palm oil products, tourism, food supply chains and counterterrorism.

The closest link between Russia and Indonesia’s attempts to reduce greenhouse gas emissions came about through their nuclear cooperation with the signing of two agreements. One in 2015, between Indonesia’s National Nuclear Energy Agency and Russia’s Rosatom, sought capacity building and research. The other in 2017, between Indonesia’s Nuclear Energy Regulatory Agency and Russia’s Rostekhnadzor, involved regulatory development.

This bilateral nuclear cooperation has had little practical effect on Indonesia’s decarbonisation efforts. Russia provides neither funding nor technology for nuclear-fired power plants in Indonesia. On the Indonesian side, the government has decided that it will not blend nuclear into its energy mix before 2032.

The indirect effects of global energy market turmoil are more consequential. Despite attempts to shift the world’s energy systems away from fossil fuels, the demand for non-Russian fuel is expected to reach a new high.

In January 2022 Jakarta, surprisingly, executed a full ban on coal exports. But when international coal prices fell to US$220 per ton in February the ban was quickly reversed. Between May and December 2022 coal prices had skyrocketed above US$420 per ton. As a result, Indonesia’s coal production increased to 685.6 million tons in 2022–12 per cent higher than in 2021 and the highest since 2014. Indonesia’s coal export volumes also rose in 2022, with 360.3 million tons of coal exports generating a total export revenue of US$46.7 billion.

International oil prices also increased sharply, hitting their highest level since 2014 at US$125 per barrel in April 2022, with global oil subsidies rising around 85 per cent as a result. Because Indonesia’s economy relies heavily on commodity export markets — especially oil and coal — the disruption played into Indonesia’s decarbonisation agenda.

Following international oil price increases, Indonesia raised the retail price of subsidised fuels. Subsidised fuel prices increased 20 per cent on average in September 2022. This could be considered the positive side of the war induced oil price hike as it created momentum for Indonesia to reduce the fuel subsidy burden and encourage the use of cleaner energy alternatives, however indirect or minimal.

With rising commodity prices, Indonesia has reaped windfall revenues from commodity exports. The windfall revenues can be used to offset the impact of international price fluctuations on the government’s budget or invest in public goods, such as infrastructure development, social welfare programs and healthcare.

But Indonesia needs to exercise caution when it comes to disbursing windfall revenues even though it may provide a short-term boost to the economy. The new revenue stream may not be sustainable in the long run due to fluctuating international coal prices and the global transition towards clean energy.

More recently, prices of most commodities have been steadily declining, with oil prices coming down to US$76 per barrel and coal falling below US$170 per ton, as of May 2023. The government needs to manage these funds responsibly and effectively. This includes proper allocation and investment in programs that promote sustainable growth, as well as ensuring transparency and accountability in the use of funds.

In short, the negative impact of Russian economic sanctions on global decarbonisation appears limited to certain regions. Indonesia’s geopolitical non-alignment and its limited energy relationship with Russia limit the effects on its decarbonisation trajectory.

In the longer term, anticipating the future impacts of Russia’s economic decline and how Indonesia’s economy will have to rely less on fossil fuels or carbon-intensive resource-based products and exports are strategic priorities. As are cultivating high-value-added clean technology and setting an international standard for low carbon-intensive products so that Indonesia can position itself for success in the transition to a green economy.

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