A global financial crisis and the subsequent economic slowdown in Russia have dampened Russian companies’ investment and plans to invest in the biofuel business.  Unlike in the West, Russia is not pushing to get on the biofuels bandwagon.  Yet, despite the many existing constraints on the development of the country’s infant biofuel sector, opportunities to develop this sector do exist.  In this series of posts, we examine the factors constraining a Russian biofuels industry, and the possibilities for overcoming those obstacles and developing a nascent market. In this first post, we examine the production and policy constraints on the industry.

Supply & Demand

On the supply side, Russian agriculture, as well as the forestry and the chemical industry could provide necessary inputs and labor under favorable conditions (such as subsidies in the form of production and blending tax credits).  The potential of the country’s idle distilleries could also be utilized. Grain-based ethanol (which can be produced from non-food grade grain), cellulosic ethanol (using wood waste, straw, etc.), or biobutanol (often called “a second-generation fuel” produced from the same feedstocks as ethanol) can be mixed with conventional gasoline. 

A 10-percent biofuel additive would work for most new cars.  Russian experts’ proposals have ranged from a 5 percent to 10-percent blend of ethanol.  The issue of how much biofuel should be blended with conventional gasoline has caused a debate even in the United States. In 2008, about 9 billion gallons of bioethanol were blended into U.S. transportation fuels in compliance with EPA’s mandated volume/RFS requirement. The output of about 90 billion gallons of E10 is about 70% of all gasoline sold in the United States in 2008.

There is currently no commercial, large-scale production of bioethanol or biodiesel for transportation purposes in Russia.  One of the main obstacles is production cost.  Factors that influence production cost include the choice of input and technology, the location of production facilities, and climatic factors.  A second important obstacle is an existing excise tax on ethanol makes production of a bioethanol additive for domestic transportation purposes cost prohibitive.  Third, Russian energy companies, which own the oil refineries and gas stations, see biofuel as a prospective additive to gasoline sometime in the future, but they are not eager to invest now in biofuel R&D projects.  Oil companies cite a number of impediments to the development of the biofuel business, such as biofuel production costs, the amount of arable land required, and the Russian climate. 

On the demand side, private individuals and businesses may see the benefits to the environment (in terms of GHG emissions on a full fuel cycle basis), but they are unlikely to push for more expensive biofuel blended fuel. 

Domestic Concerns and Challenges

In addition to the many commercial and business issues that have not yet been addressed, there are policy and legislative reasons why the biofuel sector has not developed. 

First, it will be challenging to develop a subsidy policy that would encourage both the use of non-food grade grain and bio-waste for biofuel production (thus benefiting farmers and chemists) and the use of a biofuel additive by oil refineries and fuel blenders (thus creating positive incentives for these businesses).  Over time, large-scale projects will have to become less dependent on subsidies and justified on the basis of economic efficiency and technological advances.  R&D funding is particularly needed to develop more cost-effective technologies for producing advanced biofuels.  Such technologies and equipment, however, can be acquired abroad and applied domestically.  The Russian federal government classifies “technologies for production of fuel and power from organic raw material” as “critical.”  The government considers these technologies “important from the socio-economic standpoint or for the defense of the country and state security,” but funding to develop them is still lacking.  The use of government subsidies is also being debated.  As the state begins to bail out faltering private businesses, critics are complaining that the last thing Russia needs is another heavily subsidized sector—one where the government, rather than business, chooses where investment should go, and favors certain recipients with financial incentives. 

Second, it will be necessary to remove the currently prohibitive excise tax on bioethanol used as a gasoline additive. 

Third, the traditional inertia against producing something new will have to be overcome.  Regulation and production standards for fuel bioethanol and biodiesel will have to be put in place.  Russian consumers continue to complain about poor quality gasoline, and even the best quality bio additive will perform poorly if mixed with low quality fuel.

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