Ukraine crisis must force development finance world to rethink energy and mining

Development finance institutions (DFIs), including the United States Development Finance Corporation (DFC), need to revisit their energy and mining policies for a multitude of reasons, the most immediately prominent being the Russian invasion of Ukraine.

DFI is an umbrella term for the alphabet soup of somewhat obscure organizations that include among others: the International Finance Corporation (IFC), European Bank for Reconstruction and Development, the Development Finance CorporationCDC GroupPROPARCOFMO, and KfW that share financial risk, provide loans, take minority equity investments, support emerging market investment funds and provide advice to both companies and government in the developing world.

DFIs are often not well known nor well understood by policymakers in their respective capitals — but DFIs can be essential for financial backing and risk insurance for energy projects due to the vast amounts of initial investment required by these types of projects and the difficult governance and political environments in which they often operated.

DFIs have significant potential to respond to the impact of Russia’s invasion of Ukraine in other parts of the world, with estimates in 2017 indicating that the global DFI system committed $87 billion in non-sovereign, private-sector development financing. It is likely that the level of DFI commitments for later years such as 2019 or 2020 are going to be higher than that.

The Russian invasion of Ukraine is going to cause a major disruption in global energy markets. The Biden administration already announced a ban on Russian oil imports, and oil prices have reached a 14-year high since the conflict started. Given this significant cessation of supplies, there will be a global race to find new or expand existing sources of oil and gas. The Biden administration has already taken steps to access additional oil supplies, including planning a possible visit to engage with Saudi Arabia, as well as forging new controversial relationships with Venezuela. However, the administration could also work with many developing countries that do not require major geopolitical relationship shifts to create long-term energy solutions. There are many countries where the DFC and other DFIs already operate that also have oil and gas reserves. The DFC and other DFIs could play an important role in this new energy landscape — as long as some of the emission caps they are under are reconsidered.

The Bush administration placed an emissions cap on what is now known as the DFC (formerly OPIC) in 2007, and now it has committed to net-zero emissions in its investment portfolio by 2040. Similarly, EDFI, the European association of DFIs, has also committed to net-zero emissions by the year 2050. The IFC, the World Bank’s DFI, also has implemented emission restrictions on its projects. Given all of the changes in the world, it is time to reconsider these emission caps given the U.S. ban on Russian oil imports and the coming reductions of gas that Europe buys from Russia.

Developing gas fields in Africa or other parts of the developing world will not alone solve the short-term disruptions from Russia; however, given the spike in gas prices and expanding need for production, it would be a mistake not to utilize every tool, including DFIs, to create longer term access to gas, minerals, and oil supplies.

In addition to finding new sources of gas, policymakers should also consider DFIs investing in nuclear energy as an alternative form of “clean energy.” Nuclear power produces no emissions, has new technologies for delivering power with smaller amounts of nuclear waste and is thus often considered a relatively clean source of energy.

Amidst the global energy crises driven by the Russian invasion, German leadership is discussing whether to extend the lifespan of its nuclear energy plants to secure the country’s energy supplies amidst uncertainty. Currently, Germany and other European countries are dangerously dependent on Russian energy imports, so European Development Finance Institutions (EDFIs), the association that convenes most of the world’s DFIs and the DFC should start supporting nuclear power projects in emerging markets. Supporting nuclear projects has the added benefit of crowding out Russia, a major nuclear energy exporter and source of expertise in developing countries.

The DFC, and other DFIs, have a similarly critical role to play when it comes to the disruption of short-and-medium-term mineral development.

The EU has already placed a ban on Russian imports of minerals including iron and steel. Russia is one of the top three exporters in the world of mineral commodities, including iron. The U.S. and its European allies can no longer rely on Russia for these mineral resources. Additionally, mineral reserves will also be inaccessible coming out of Ukraine, which has 5 percent of the world’s mineral sources. Compounding the issues caused by reduction of supplies is the increase in demand for minerals, given how critical they are to developing renewable energy sources and technology.

China has already taken steps to ensure its access to these critical minerals and is the dominant supplier of 21 of the 23 minerals the U.S. has deemed as critical. This, coupled with the need to implement government, labor, and human rights standards when it comes to mining, makes it even more critical for the United States to develop additional sources of supply. However, most DFI’s, including the DFC, are largely not in the mining business. The OECD government shareholders of DFIs need quickly to update these policies.

All of the above proposals are in the context of a very strong increase in resistance to using DFIs for projects that create carbon or support the extraction of minerals. In the last decade, emission caps have been placed on most of the DFIs, making it almost impossible for DFIs to work on any oil and gas projects.

Countries in the West are going to need alternate sources of gas and minerals to account for resource losses resulting from the Russian invasion. Simultaneously, the transition to renewable energy also requires an increase in extraction of mineral resources. During the transition to renewable energy, countries will also need viable sources of oil and minerals to fully recover from COVID-19 restrictions. DFIs could play an integral role.

Now is the time for Congress and the Biden administration rethink the DFCs energy and mineral policies.

Originally published on on March 15, 2022.

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