Russian equities performance vs broader emerging market equities on the path to a net zero CO2 emissions world in 2050

The consensus scenario for oil demand between 2021 and 2050

Many large countries have announced plans[1] to achieve net zero CO2 emissions, in most cases by 2050.

In that context, projections of global oil demand levels over the next 30 years are rather conservative.

Table 1. Projections of global oil demand: peak year and demand level in millions of barrels/day in 2050

Experts Peak year Oil demand in 2050 (Mb/d)
BP Already past 30-95
Bloomberg NEF 2035 97* – 2018 level
Institute of Energy Economics, Japan 2040 102
OPEC 2035** 102-109

* from BP data
** for 102 Mb/d by 2050 scenario

Sources: BP, Energy Industry Review, IEEJ, OPEC, TKB Investment Partners February 2021

How might Russian equities perform should the projections for oil demand in 2050 prove to be accurate?

Let us assume that by 2050, the decline in oil demand to below the level in 2019 actually happens. At first glance, the likely consequences seem to be that Russian GDP growth will be systematically worse than that of broader EM on average, and that oil prices will drop. Let us say the oil price drops by 30%. To make the picture even more gloomy, let us assume that there will be new US and EU sanctions against Russia in each of the intervening years. Would this mean that Russian equities would systematically underperform broader EM over the next 30 years? History tells us that it can be otherwise.

Let us believe for a moment that we have travelled back in time into the end of 2010 and that we are trying to estimate whether or not the Russian equity market can outperform EM during the next nine years (we stop prior to 2020 due to the huge impact of the “black swan” – coronavirus). Let us assume that, at the end of 2010, we were 100% correct in our predictions that the following developments would occur:

  • The oil price drops by 30% in US dollar terms over the period[2]
  • Russian GDP grows by less than EM each year, with overall GDP growth of 21% for Russia vs 64% for EM over the period[3]
  • For the first time in its modern history, Russia is sanctioned by the US and the EU each year starting from 2014 (a total of 55+ sanctions against Russia).

This perfect forecast could suggest that the Russian market would systematically underperform EM over the period 2011-2019. However, the reality is that this conclusion would have been completely wrong.

In fact, the Russian market rose by 35% vs 25% rise for EM on average[4], and outperformed EM in five of the nine years. Valuations, dividend yields, economic policies, changes in various metals prices and other factors helped the Russian market to perform far better than we may have projected at the end of 2010 only on the base of a perfect forecast of oil prices, GDP and sanctions.

Diagram 1. Russian equities vs. EM performance during 2011-2019 based on ‘perfect’ predictions of oil price, GDP and sanctions – and what really happened

Moreover, we believe it is possible that oil prices in 2050 will be higher than they are now.

Oil price in 2050

At the start of the previous section, we assumed that lower demand for oil by 2050 implies lower oil prices. This logic would also assume that higher demand implies higher prices. We believe this is too simple an assumption for our complex world. Oil consumption rose by 25% over the period 1981-2000[5]. Yet oil prices dropped by 23% in nominal USD terms during that period. Oil supply and other factors also matter.

The US EIA believes that the price of Brent crude will be USD 95 per barrel in 2020 USD terms[6] in the base case scenario. This implies that in 2050 dollars terms, the oil price could well be USD 172/bbl if we assume 2% average annual inflation in the US over the next 30 years.

Table 2. Brent oil price 2050 (USD per barrel)

Scenarios In 2020 prices

(real terms)

In 2050 prices

(nominal terms)

High oil price 173 313
Reference 95 172
Low oil price 48 87

Note: figures in nominal terms are estimates of TKB Investment Partners on the base of US EIA estimates of oil price in real terms and assumption of 2% average annual inflation in the US during 2021-2050.

Sources: US EIA, TKB Investment Partners, February 2021

Rystad Energy’s view supports the scenario that oil prices in 2050 will be higher than today in real and nominal terms. The company sees a risk that oil producers will not be able to match even lower demand by 2050[7]. Oil flow from any oil well will naturally decline due to the drop of underground pressure as you pump oil from the ground. This is why oil companies need to drill more wells all the time even if they want just to keep production flat. Rystad Energy experts have estimated that the industry will need to discover 313 billion barrels of oil during the next 30 years to match the cumulative expected demand over the period. It will need 80 years to do this at the 4 billion barrels per year discovery rate seen during last 10 years. It is hard to believe that there will be a material acceleration in this discovery rate when we see the news that BP has cut its exploration team to less than 100 people now from 700 several years ago[8]. In such a situation, the cumulative supply deficit over 2021-2050 could be around 190 billion barrels.

Graph 1. Total volume of oil reserves needed vs. likely to be discovered during 2021-2050

Sources: Rystad Energy, December 2020

Finally, there could be some upside surprises for oil demand due to potential innovations. We are reasonably sure that over the next 30 years there will be more innovations than in the past:

  • There are substantially more scientists now than 20 years ago – i.e. number of people with PhD in the US has more than doubled since 2000 from 2 million to 4.5 million[9]
  • Global R&D investment has increased more than three-fold since 2000, from USD 676 billion to USD 2 trillion in 2018[10]
  • Patent activity has been on the rise for decades. The number of patent applications globally rose from 1.7 million in 2005 to 3.2 million in 2019[11]. The annual number of US patents granted more than doubled between 2000 and 2019, from 176 000 to 391 000[12]. Some of this innovation could be favourable for both oil demand and for the climate.

In 2019, a research group from École Polytechnique Fédérale de Lausanne (EPFL) patented a CO2 capture technology for trucks which reduces CO2 emissions by 90%[13,14,15]. Existing trucks can be retrofitted to use this technology. The equipment – a capsule – is located on the truck’s roof and enables CO2 to be extracted from the exhaust gasses and stored in liquid form in a tank.

Development of products with CO2 can accelerate the development of CO2 capture technologies. The best product in terms of relative climate impact is CO2-cured concrete, according to the International Energy Agency[18]. This product is already commercially available and several companies use it to produce concrete at more than 100 plants[16]. CO2-cured concrete is stronger than traditional concrete, needs less cement for its production and can even be cheaper to produce[17]. Global annual production of concrete before the pandemic was around 4.5 billion tonnes[18], which equates to 33 billion metric tonnes of CO2 emissions in 2019[19].

Almost 80% of companies in the Russian equity market operate outside the oil industry

Oil producers’ share in the MSCI Russia 10/40 is 22%. The rest of the index is comprised of other commodities producers and services companies with exposure to different long-term growth trends. It is likely that these trends will help efficient companies increase their value to shareholders.

Table 3. Non-oil industry companies in the MSCI Russia 10/40 index: Exposure to long-term growth trends

Commodities – exposure to global trends
Sector Weight Exposure to long term growth trends
Gas 13.7% Coal to gas energy transition, potentially demand growth for hydrogen
Gold 8.7% Middle class growth
Steel 7.6% Middle class growth, infrastructure improvements
Nickels, platinum, copper 4.9% Growth of demand for electric cars and other products with batteries, CO2 emissions reduction
Diamonds 3.7% Middle class growth
Fertilisers 2.2% Population growth
Total 40.9%
Services – exposure to Russian trends
Sector Weight Exposure to long term growth trends
High-tech 10.9% Digitalisation
Retail chain 8.5% Middle class growth
Bank 7.5% Middle class growth
Mobile operators 4.3% Middle class growth
Stock exchange 3.1% Middle class growth and growth of financial assets in savings
Power utilities 2.8% Rise of demand for electricity
Total 37.1%

Sources: MSCI, BNP Paribas AM, TKB Investment Partners, February 2021


In our view, Russian equities look set to perform well over the next 30 years even in the face of the flat or declining demand for oil predicted by many experts:

  • Oil prices could actually rise in nominal and even real terms by 2050 as supply could decline more strongly than demand. The overall supply shortage could be around 190 billion barrels between 2021 and 2050 due to low exploration activity, according to Rystad Energy. In the base case scenario of US EIA, oil prices in 2050 should reach USD 95/bbl in 2020 prices (real terms), which is USD 172/bbl in 2050 prices (nominal terms)
  • Around 80% of the Russian equity market are non-oil industry companies that have exposure to various growth trends: middle class and population growth, digitalisation, infrastructure improvement, energy transition and rising electric car production.


Authors: Egor Kiselev PhD, Head of International Business & Investment Marketing; Gennady Sukhanov, Deputy Head of Equities & Head of Research

[1] In the form of laws, proposed laws of policies
[2] For Brent oil price in USD terms
[3] We took figure for EM and developing economies. EM dominates in this group so we think it is a good proxy.
[4] For MSCI indices in USD terms; total return; for the period from end 2010 to end 2019
[5] US Census Bureau data
[6] Based on BP data
[7] Annual Energy Outlook 2021
[8] The world will not have enough oil to meet demand through 2050 unless exploration accelerates
[9] BP in oil exploration team cuts as climate change-driven reorganisation continues
[10] Global Research and Development Expenditures: Fact Sheet
[11] World Intellectual Property Indicators
[12] US Patent Statistics Chart
[13] This System Could Capture CO2 Straight From Vehicle Exhaust
[14] Capturing CO2 Directly From Truck Exhaust and Reducing Emissions 90%
[15] Carbon Dioxide Capture From Internal Combustion Engine Exhaust Using Temperature Swing Adsorption
[16] CarbonCure case studies.
[17] Laying the foundation for zero-carbon cement
[18] Concrete production produces eight percent of the world’s carbon dioxide emissions
[19] ‘Grounds for Optimism.’ Global CO2 Emissions Plateaued in 2019, Defying Expectations, Says Report

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