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Executive Summary"It is quite likely that private capital will be more efficient than Soviet rule was in developing Siberia's riches. The question is, will it be more humane towards nature and human beings?" The European Bank for Reconstruction and Development (EBRD) was created in 1991--simultaneous with the breakup of the Former Soviet Union -- to open up the formerly communist countries to multinational corporations and investors. Like the World Bank Group5, and other regional development bank offshoots of the Bretton Woods institutions, the EBRD is clearly focused on a strategy of privatization, liberalization of financial and trade markets, and deregulation--the three pillars of neoliberalism. Also like the World Bank Group, the EBRD has made fossil fuels an engine of this development model. As a result, although only 6 years old, the EBRD is already proving to be a major player in promoting the rapid accumulation of greenhouse gases in the Earth's atmosphere. Since its inception in 1991 and through Dec. 31, 1996, the EBRD has approved 450 projects totaling $11.5 billion; $1.2 billion of those investments were in oil, gas, and coal projects in the former Soviet bloc. Our report outlines 23 projects totaling $1.01 billion in EBRD financing through December 1996 (and two projects with total financing of $140 million in 1997 to date). The amount of private capital leveraged by the EBRD is roughly double the amount the EBRD invests. Our study of these projects estimates that these fossil fuel projects will, over their lifetimes, release a total of 6.548 billion tons of carbon dioxide--or 1.78 billion tons of carbon--into the Earth's atmosphere. This quantity of carbon is equivalent to approximately 29 percent of all fossil fuel emissions generated by all of the world's countries in 1995.6 The World Bank Group also plays a role in financing many of these same fossil fuel projects. A previous report done by the same authors of this report extensively documented those fossil fuel investments since 19927. If World Bank-financed projects are deducted from the total number of EBRD fossil fuel projects, the amount of greenhouse gases for which the EBRD is solely responsible comes to 5.278 billion tons of carbon-dioxide--or 1.4 billion tons of carbon. This is equivalent to 22 percent of all fossil fuel emissions generated by all of the world's countries in 1995. The EBRD's operations are financed by national government contributions. The dominant investors within the EBRD are the United States, France, Germany, Italy, Japan, and the United Kingdom, which have collectively contributed 55% of the institution's capital. (See p. 20 for a list of other contributors.) These moneys are then invested in the countries of eastern Europe, the Baltics and the Commonwealth of Independent States (CIS). Fossil fuel investments -- especially in Russia's massive oil and gas fields, the fifth largest in the world-- have been a priority for the EBRD from its inception. About five percent ($554 million) of all EBRD investments have been focused on Russia. About 10 percent of the global oil supply and 30 percent of the world's production of natural gas is extracted from the Russian oil fields. Russia is also a major greenhouse gas emitter, producing nearly 10 percent of global greenhouse gases, ranking third after the U.S. and China. Nearly half of Russia's hard currency is generated by oil and gas exports--the biggest single source of revenue to the Russian state8--and a vital resource for credit and repayment of further EBRD and World Bank loans. As a consequence, as the EBRD and the World Bank have grown more heavily invested in the capitalization of Russia, big projects, like the exploitation of the massive oil and gas fields in the Arctic, in Siberia, and around Sakhalin Island, have moved to the front of EBRD's growing lineup of fossil fuel financing schemes. (See p. 14 for further information on Sakhalin.) In the first two years, these investments were delayed by bureaucratic obstacles that developed during the disintegration of the former Soviet Union. "We have come up against every hurdle you can imagine and about 30 you can't," an EBRD official told the Petroleum Economist magazine in 1993. But with the help of an army of World Bank- and EBRD-paid economists and privatization experts, the Soviet way of doing things was speedily replaced with the capitalist way. As a result, since 1993, the EBRD's fossil fuel projects have gained considerable momentum, particularly in Russia.
ModernizationIn helping to finance oil, gas and coal projects,
the EBRD has acted as an agent of Western corporations by arguing
that these powerful players bring vital expertise, modernization and
efficiency to oil, gas, and coal rehabilitation projects. The problem
of a decaying energy infrastructure, long neglected by a Soviet leadership,
and its potential for both environmental problems and economic inefficiencies,
is certainly a real and serious environmental problem; lakes of oil
lie beneath countless ruptures in oil pipelines, undetected for months,
if not years.
However, the EBRD's and the World Bank's push for modernization of oil and gas fields is not, as a rule, directed at the most egregious examples of decaying infrastructure for the petroleum industry. This is because, for the most part, the most accessible (and the most environmentally abused) oil and gas fields are still held in Russian hands--and the infrastructure servicing these fields usually remains owned by Russian industries. Rather than working with the Russian oil industry to make existing infrastructure projects more environmentally sound, the EBRD and Western investors are largely focused on gaining access to and control over heretofore untouched oil and gas fields. These fields are often in remote and pristine regions, or in regions where the risk of an environmental accident--from earthquakes, tsunamis or ship wrecks-- is dangerously high. Where the EBRD does make loans for "rehabilitation," the projects are focused primarily on increasing production by modernizing and reconditioning abandoned wells, instead of paying close attention to environmental aspects. As a result, the call for "modernization" of Russia's oil and gas fields--while genuinely needed--instead provides a convenient entree to transnational corporations who then obtain access to previously untouched fields of black gold. Rare is the fossil fuel financing scheme set up by the EBRD that does not involve at least one Western corporation.
PrivatizationOnce the EBRD, together with oil multinationals like
Amoco and Texaco, has gained entree to the former Soviet bloc countries'
energy markets by claiming a competitive edge in providing more "modern"
equipment, the EBRD, alongside other powerful quasi-governmental institutions
like the World Bank, shifts its attention to privatization. Between
1992 and 1994, 70 percent of state-owned enterprises in Russia were
privatized.9 Many of these were state-owned
energy enterprises.
One of the EBRD's first fossil fuel loans was extended to Romania in 1992. Mario Sarcinelli, EBRD's vice president in charge of development banking, said, "By giving financial support to this petroleum pilot modernization project, the European Bank will help Petrom (the Romanian national oil company) modernize its operations, save the government foreign exchange by curbing the need to import oil and, more importantly, help promote future involvement of the private sector in oil activities." 10 The importance of private sector involvement in fossil fuels, the EBRD and World Bank officials argue, is that they are more efficient and less prone to bureaucratic delays than public ones. They are also more inclined to sign procurement contracts with foreign equipment suppliers, continuing the influx of foreign ownership and capitalization of the fossil fuel industry, and export-oriented economic growth in the former Soviet bloc countries. But such procurement of foreign goods and services does not come without government resistance, in the form of taxation. In fact, much of the money approved by the EBRD and the World Bank remains undisbursed because some aid recipients complain of high Russian tariffs on imported equipment; others complain of the Bank's insistence that the rehabilitation equipment should be imported, not domestically produced. In August 1996, the U.S. embassy in Moscow reported that "the World Bank, European Bank for Reconstruction and Development and U.S. Export-Import Bank have been active in attempting to support foreign equipment sales to Russian petroleum producers, having made available loans totaling $5.5 billion through special programs for oil field workovers, oil production joint ventures and refinery modernization. However, only a tiny fraction of these funds has been disbursed to date due to high taxes imposed on the petroleum sector by the Russian government which has made utilization of foreign loans uneconomical." On the other hand, some Russians have found the EBRD's and World Bank's insistence on purchasing foreign equipment to be absurd. "World Bank rehabilitation loans routinely have open international tenders mounted for buying the equipment required and open to whatever companies from Bank member-countries," reported Russia's Segodnya magazine in 1996. "As it happens, Russian equipment has a patent edge in the event, habitually costing at least forty percent less than overseas facilities at much the same technical standards fitting Russia's requirements; its further assets are adequate repair facilities, personnel, and modest transportation expenses. Crucially, the standards and quality of such Russian equipment, essentially metal-intensive unsophisticated articles, have dramatically improved following some defense factories joining in their output as part of a drive to convert to civilian production. Going by past experience, though, such tenders are inherently a losing battle for Russian bidders; ludicrously enough, now and then the foreign winners of such tenders ultimately come to supply precisely Russian equipment for such projects." When a recently privatized Siberian oil company, Yuganskneftegaz, canceled its $190 million loan from the World Bank in March 1996, Moscow's Economic News Agency reported that, "a major factor in declining the loan was a condition that only foreign companies be allowed to tender to supply equipment, which is available from Russian producers at between a third and half the price of [Russian producers]. Tatneft and Permneft have in the past refused World Bank credits for similar reasons." Privatization, others argue, is not in itself a negative development, and could, in the some cases be positive. However, without adequate regulatory structures in place, and without democratic participation ensuring transparency and accountability, privatization is resulting in one remote, unaccountable bureaucracy being replaced by another.
Foreign InvestmentThe goal of the EBRD's initial energy operations policy11
was to: focus on repair and rehabilitation of existing supply facilities;
promote "'liberalization' of supply; and inject foreign capital."
It has certainly succeeded, by any measure, in the latter goal. By
positioning foreign agents of modernization to develop oil and gas
fields; ushering in privatization which allows transnational corporations
to own and export the goods, and even gain tax breaks from the host
country in the process of bargaining loans; and providing political
and other forms of risk insurance for investors; the EBRD and the
World Bank have made investment in the former Soviet bloc countries
a very attractive investment opportunity. As a result, a growing supply
of foreign, mostly private, capital is flowing into the region. Net
flows into the region have surged over the past two years and are
expected to top $55 billion in 1997.12
Fossil Fuel Infrastructure SupportIn other Eastern European countries, where oil and
gas reserves are depleted, the EBRD is providing loans for the energy
sector "downstream" from actual fossil fuel recovery; for example,
the EBRD is providing support to refineries, pipelines, and terminals,
many of which will be tied into EBRD-financed, TNC-invested oil and
gas field developments.
*PipelinesThe EBRD is eyeing Azerbaijan's and Kazakhstan's considerable
oil, coal and gas reserves as potential future investments13,
and has expressed interest in financing an oil pipeline from--and
perhaps under-- the Caspian Sea to Eastern Europe. The EBRD is also
considering financing a planned pipeline for Azeri, Kazakh and Russian
crude from the Caspian Sea, via the Black Sea port of Bourgas, Bulgaria,
to the Mediterranean port of Vlore, Albania.14
Western transnationals are heavy investors in the booming Caspian
Sea oil fields.
*Power PlantsAnother fossil fuel sector in which the EBRD is very
active--albeit downstream from actual mining--is power production.
The EBRD has claimed that it is focusing on rehabilitating existing
power plants, rather than building new plants, because, according
to Eastern European Energy Report, "existing power generating plants
can produce more power than the region needs
currently." 15 As with primary oil and gas production, however, the promotion of energy efficiency by the EBRD is not viewed as an end in itself, but instead appears to set the stage for privatization and expansion of access to fossil fuel reserves. The EBRD has joined forces with the World Bank to encourage power sector privatization in several Eastern European countries, and is reportedly poised to lend considerable funds to some new fossil fuel power projects in countries like Poland and Romania.16 Rehabilitation loans appear to be the EBRD's first wave of entree into these countries' power sectors, with the development of Western corporation-owned, -supplied, and -built fossil fuel power plants the ultimate and final wave of investment.
An Upward TrendNow that privatization has firmly taken hold in the
former Eastern Bloc, and foreign direct investment is on a steady
upward trend, the EBRD is poised to fund many more large-scale fossil
fuel projects. Pending loans include:
* A $116 million loan to develop the 140-million-metric-ton Piltun-Astokskoye oil field off Sakhalin Island, Russia. The targeted project is run by a joint venture of Shell (U.K./Netherlands), Marathon Oil (U.S.), and Mitsui and Mitsubishi (Japan). 17 * A $300 to $400 million loan for development of Romania's oil fields, slated for private investment. *$175 million in annual investments in Russian gas company GazProm's export-oriented ventures. 18 With over $600 million dollars in pending fossil fuel loans, the EBRD will apparently continue its trend of increasing fossil fuel investments over time. In 1992, its fossil fuel investments totaled $79 million. By 1996, the EBRD financed fossil fuels to the tune of $391 million, bringing its total fossil fuel lending past the $1.15 billion mark, and increasing its annual investment in fossil fuels by almost 500 percent.
The ConsequencesWhat are the consequences of this economic and political
restructuring led by the multilateral development banks? If you happen
to be one of the 10 million people in the former Soviet bloc countries
dependent on the fossil fuel industry as a source of livelihood, things
are not looking bad; for example, the average salary in the oil and
gas industry is three times higher than in most other sectors of the
Russian economy.
However, for those not employed by the oil and gas industry, things are less than rosy. Income disparities and poverty have increased throughout the region in the 1990s. According to the EBRD's recent publication, Transition Report 1997:
Social policies in central Europe have mitigated [the growth of income disparities] to some extent, but in the CIS, inequality and poverty have risen very sharply. Related social indicators, particularly life expectancy, have also deteriorated in many countries. Some point to the positive aspects of new "production sharing agreements" as a sign of good things to come for people in the oil- and gas-bearing regions. These agreements in countries like Russia may result in as much as 60% of tax revenues from oil and gas allegedly returning to local governments. However, corruption is rife in the region, and is not adequately challenged by the EBRD nor by the World Bank.19 Hence, a large portion of benefits ostensibly intended for local communities will likely end up lining the pockets of local politicians instead. Because economic and energy self-sufficiency for local communities has not been a priority in most petroleum-rich regions, most people living in oil- and gas-rich regions like Sakhalin will remain poor, without access to affordable electricity. With oil spills likely, their current reliance on fisheries as a source of revenue is threatened. Furthermore, despite the former Soviet bloc's abundant supply of fossil fuels, consumers are finding oil less available in certain regions, more expensive, and regional shortages more commonplace, making long, cold winters even more unbearable. Meanwhile, Russian oil exports have increased by over 50 percent--from 60 million tons per year to 90 million tons.20 The target market is primarily western Europe and Japan. The growing expansion of export markets will have predictable consequences for these highly polluting countries: It will keep energy prices lower than they otherwise might be; it will continue to make renewable forms of energy less competitive, with predictably less private capital investment in renewable forms of energy; and it will decrease motivation for further reductions in fossil fuel consumption. Future investments from the EBRD and Western investors in expansion of a trans-European pipeline will lift the only existing constraint on Russian oil exports.
A Fraying Social FabricIn addition to poverty and a diminished access to
fossil fuels, social consequences at the mining or drilling site are
proving serious. The high salaries paid to workers in the fossil fuel
industry has attracted questionable characters--some with criminal
records--to remote regions. These high-paid laborers are slowly outnumbering
the original indigenous inhabitants of the region. Because of this
and other political changes at the local level, indigenous peoples
lack any meaningful representation or participation in the political
decision-making process. As a result, the rights and traditional,
subsistence ways of life of the indigenous peoples--the Komi, Khanty,
Mansy, Evenki and other smaller tribes--have been severely disrupted
and destroyed.
For generations, these tribes have herded reindeer, and fished and hunted caribou and other animals. Today, migration routes for the caribou are being disrupted by oil and gas pipelines and industrial development. Poaching, introduced by the roads that have penetrated these once pristine regions, is now commonplace. And environmental pollution and degradation has reduced or destroyed fish, bird, and other animal populations around oil and gas fields.
Environmental DegradationThe final consequence of the EBRD's and the World
Bank's investments in fossil fuel as an engine of growth in the FSU
is the impact it has on the regional and global environment. Once
virtually untouched, the vast expanse of the Russian taiga forest
and other wild lands and marine areas are now at risk from the fossil
fuel industry. The exploitation of fossil fuels is particularly rapid
in the central and northern taiga in Siberia and the Far East; there,
roads built by the oil and gas industries in wilderness areas means
tens of millions of hectares of once pristine forest and lowland areas
are now open to logging or other forms of exploitation.
The EBRD and the World Bank Group are playing a pivotal role in getting countries to turn their "black gold" into cash--helping them get fossil fuels out of the ground as fast as possible so that loan repayment schedules can be met. In doing so, they are creating a cycle of dependency on a natural resource whose future is dim. According to some estimates, Russian oil reserves will be exhausted in 20 years at the present rate of extraction.
The World Bank's Global Carbon InitiativeOne obvious mitigation strategy in dealing with the
threat climate change poses for present and future generations is
for Annex 1 countries to stop providing countless government subsidies--hidden
and unhidden--to the fossil fuel industry, and instead to start funding
energy efficiency and truly sustainable, renewable and safe energy
options. Instead, publicly funded development lending institutions--like
the EBRD and the World Bank--and other multilateral and bilateral
development finance and export credit agencies are doing just the
opposite. Furthermore, the World Bank now proposes that they couple
their massive fossil fuel financing with an emissions trading scheme,
wherein industries in, say, the U.S. could continue to emit high quantities
of greenhouse gases by purchasing emissions credits from former Soviet
bloc countries FSU (whose collective emissions are currently below
1990 levels). The World Bank proposes (via its newly minted "Global
Carbon Initiative") that it act as a "middleman" in this financial
transaction--thus playing the role of the world's largest public financier
of fossil fuels, and the buyer and seller of emissions credits to
make these projects (and others) slightly less polluting. Should this
prove successful, the Bank proposes that it eventually be extended
to other developing countries.
While this may be the most "economically efficient" response to climate change for a handful of industries, it is certainly not the most environmentally nor socially viable response to the global threat climate change poses to all of the world's peoples, particularly the poorest. Nor does it do anything to remedy the growing gap between the energy-rich and the energy-poor peoples of the world.
Who benefits from this scheme?1) Large oil, gas and coal companies--and energy
intensive industries--who might face costly emissions restrictions
in the future in their home countries, but now have easy access to
credits.
2) Government officials, many of them corrupt, in the former Soviet bloc, who willingly receive payment from the World Bank for these pollution credits. 3) The World Bank, who carves out a new niche for itself as the repository for JI funds. By 2005, the World Bank estimates the market for greenhouse gas offsets could be in the range of $3 billion to $16 billion. It also begins to generate additional revenue for fossil fuel projects in the pipeline, making these projects less expensive for the client countries and, therefore, potentially even more attractive.
Who loses?We all lose with the promotion of a scheme that is
a "shell game"--moving emissions from one bank account to another,
rather than making truly significant cuts as is urgently required
for climate stabilization. But the biggest losers are the poorest
communities, often indigenous or tribal peoples or other equally marginalized
populations, who are devastated by fossil fuels from cradle to grave--from
mining to refining to burning. It is these people who will continue
to pay the highest price for this shell game.
ConclusionIf the EBRD wants to achieve truly sustainable development,
it should assist the former Soviet bloc countries in making a truly
sustainable transition, with a particular focus on providing resources
for energy efficiency--for the future of their people, for the future
stability of their economy, and for their environment--and not continue
to encourage the region to rebuild its economy with fossil fuels--a
house of cards that will certainly collapse as it burns.
Sakhalin: An Exxon Valdez in the Making?Sakhalin Island is located in a very seismically active
environment on the Pacific Rim. On May 28, 1995, an earthquake estimated
to be as high as 8 on the Richter Scale struck the Sakhalin oil town
of Neftegorsk, destroying the town, reportedly killing 2000 of its
3000 residents, and rupturing oil pipelines in over 50 places. At
least 100 tons of oil spilled into several rivers. The Sakhalin region
is rich in marine biodiversity, and harbors one of the richest fisheries
on the Pacific Rim. Several endangered species of dolphin and whale
migrate through these waters.
The area is also rich in oil and gas, and has attracted interest from investors, including the EBRD, the US Overseas Private Investment Corporation, and the Japanese Export-Import Bank. Drilling platforms would be placed in the frigid waters of the Sea of Japan, where they and cargo tankers would be exposed to high winds, tsunamis, ice sheers, and other wind and wave action that could result in a catastrophic spill that would be difficult--if not impossible--to contain. Activists and others who suffered through the aftermath of the Exxon Valdez oil spill say that one lesson learned from this experience is that public oversight is perhaps the single most important factor in assuring the protection of the environment. In a recent letter to Neftegorsk Governor Farkhutdinov, written by oil spill mitigation and prevention expert Rick Steiner of Valdez, Alaska, Steiner suggested that a Sakhalin Regional Citizens Advisory Council (RCAC) be established to empower and finance the public to ensure adequate oversight of oil industry operations on Sakhalin. "I feel that the establishment of a Sakhalin RCAC is so critical that it should be required by the international lending institutions as a condition of their financial support, and/or by the government as a condition of permitting the project," Steiner wrote. No such RCAC is in place in Sakhalin. A thorough environmental risk analysis had not been conducted. No requirements were placed on oil and gas companies that they provide for the energy needs of the local population--and protect them from economic ruin in the event of a catastrophic spill. Nevertheless, the EBRD was prepared to approve a loan for $116 million to finance the first phase of new oil and gas development in the region. A letter of protest, led by the Pacific Environment Resource Center21 , slowed down the process by several months. Nevertheless, the project--one of many new oil and gas projects pushed by the EBRD throughout the region--is moving forward.
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