Arctic Shipping and the Northern Sea Route

Research professor Arild Moe from the Fridtjof Nansen Institute joins us to discuss Russia's Arctic ambitions and the Northern Sea Route. How realistic are Russia's development plans? And what role is China really playing?

The Northern Sea Route is many things for Russia: the shortest distance between its eastern and western borders, a way to access the coast of Siberia and its vast natural resources, and a potential shortcut between the Atlantic and the Pacific. For the Kremlin, it has been high on the political agenda for decades and is considered a cornerstone of Russia's economic future.

But the finances tell a more complicated story. The development model was built on a combination of federal budget revenues and contributions from the Arctic's hydrocarbon producers, whose projects were entirely dependent on the route. The war in Ukraine has put serious pressure on both sides of that equation. Arctic LNG projects have been delayed, sanctions have complicated investment, and the cargo base for the route is not looking as good as it did just a few years ago.

Arild also addresses some of the misconceptions around Arctic shipping. Reports of record transit numbers require closer reading. Much of the recent increase reflects trade between Asia and Russian ports, or sanctioned Russian oil taking a longer route to Chinese markets. There has not been a surge in real international transits between the Pacific and the Atlantic.

And then there is China. Russia has grown more willing to bring China in, particularly since the war shifted the balance of power between them. But Chinese investors are looking carefully at the commercial aspects, and being interested in the long term is not the same as being ready to invest at this stage.

Transcript

SPEAKER_00 0:00

Today we will be covering Russia in the Arctic and particularly we will be covering the Northern Sea route, Russia's Arctic economic ambitions and its relationship to China. And to do that, we have research professor Aril Mu from Friedrich Nansen Institute to help us understand this. Aril, welcome.

SPEAKER_01 0:23

Thank you.

SPEAKER_00 0:24

It's great to have you. So when we talk about the northern sea route for Russia, what does it mean for Russia? What is its role?

SPEAKER_01 0:34

First of all, let's be clear what is the northern sea route? The northern sea route is defined as the area between the Nova Zemlya Island in the west and the Bering Strait in the east. So this is an ocean area where Russia has established specific rules for navigation. It is not the same as the Northeast Passage, it's a section of the Northeast Passage. The Northeast Passage is the name used for the whole distance between the Atlantic and the Pacific, just to make this clear. And you asked about what the Northern Sea route is for Russia. It is many things. It is the shortest distance between the eastern and the western borders of Russia. If you look at the globe, it's obvious. But importantly, it is also a way to access the coast of Siberia and the huge river systems in Siberia. And as we all know, these areas are vast and they have potentially very big natural resources. So it is an important shipping lane or shipping route for resource development. It also is offers the possibility of transiting cargo from the Atlantic to the Pacific, or maybe more importantly, from the Pacific to the to the Atlantic. A shorter way than going through the southern routes, through Suez or around Africa, for instance.

SPEAKER_00 2:04

And what role does this have for Russian policy at large? How does Kremlin view the Northern Sea route? Is it important? Do they care about it?

SPEAKER_01 2:13

Yes, very much. And it has been, I would say, very high in the political agenda over the last uh twenty-twenty-five years. And it is an integral part of Russian Arctic development. It's it's you cannot really separate the Arctic from the Northern the Northern Sea route. It's considered a key for development of the Russian Arctic, and the Russian Arctic is considered a sort of cornerstone in Russia's future economic terms.

SPEAKER_00 2:41

Russia is very ambitious, and they have been since the Soviet Union, even about the Northern Sea route and the developments on it. But it is also costly at the same time as it is viewed as this project for major economic development or economic modernization, you could say. And from where I sit here, it almost looks like a discrepancy, where at one point it's costly to develop, for example, new icebreakers. It costs a lot of money and costs a lot of resources. And the ambitions on the Northern Sea route, they always mention that the money will come, the investors will come. So how does Russia manage these economic ambitions? What are their core and how realistic are they really?

SPEAKER_01 3:27

Well, I think these are in fact the key uh uh key questions. Seen from outside or seen in the longer perspective, I think you could say that for Russia the Northern Sea route is a long-term investment in development of the Arctic. They consider functioning Northern Sea route as a prerequisite for development of the Arctic. But it is a long-term investment. And uh the problem is how do you finance this development in the short term? And uh there has been uh quite a lot of documents uh planning development of the sea route, notably a big plan that was produced early in 2021, which laid out uh I think eighteen hundred items that should be considered. But notably infrastructure development, icebreakers, ports, uh dredging, hydrography, many other things. And with with a budget. And the idea was that this plan, which was very ambitious, would be uh financed by a combination of federal budget uh revenues, budget uh allocations, and and contributions from the users of the sea route. And who are the users? The users are the main producers of uh hydrocarbons in the Arctic: oil, natural gas, and coal. So they were dependent on the sea route for development of their project, but also totally dependent on the sea route for having their products sent out to market, to export markets. So they would their development were integrated with the with the Sea route, and they would then assume to be covering a big part of the of the of the Sea Root uh development costs, but also the federal budget. And as we know, the the Russian federal budget has exports of hydrocarbons as a major uh revenue source. So, how does this look today? That is the question. There are problems in the federal revenues because of the war and also reduced income, and there are issues with the development of the oil and gas projects in the Arctic because of the war and the sanctions. So, this whole model for development of the Arctic and the Northern Sea route is in big trouble as I see it.

SPEAKER_00 5:39

Does that mean that the economic plans for what Russia and the companies will gain are not really worth the same anymore? Is operating will it operate mainly at a loss? Like how catastrophic are these?

SPEAKER_01 5:53

These things are so so so so integrated. I think a very important uh point to start is the outlook for the oil and gas projects in the Arctic. Uh yeah. There were there were quite, I would say, plans for a rapid build-up of uh liquefied natural gas from the Russian Arctic. The first project, the Jamal LNG project, was successfully implemented from 2017, and there were was there is a huge resource base and concrete plans for further development. This has all now been delayed or postponed because of uh the war. And also the big oil development further east has become more uncertain. So this means that the cargo base for the Northern Sea route is is is not looking so as good as it did just a few years ago. But that translates also into uh financial uh contributions from the cargo producers to the development of the NSR. So uh and uh and with the problems in the of the federal um budget side uh I see that uh it's very difficult to to expect that the development of the sea route will go as as rapidly as thought. But you may also ask: is it necessary if there is not going to be that big a volume of uh of uh cargo coming out of the Northern Sea route, maybe the need for icebreakers will be not be as high as uh as assumed in the in the plans.

SPEAKER_00 7:21

Are there any myths or misconceptions going around about the Northern Sea route that people talk about that you want to correct?

SPEAKER_01 7:29

Well now I I I talked about uh what I think are the main issues. But if you if you look at what is being reported about Arctic shipping internationally, the focus is on international transit of goods between the Pacific and and um and the Atlantic. And uh a lot of um reports have been coming out, notably that there is a record uh level of uh cargo transportation in the last few years. Yes, it's it's both true and untrue. Uh first of all, uh when it's talked about transit, many people think that means transit between non-Russian countries in the Pacific and the Air Europe. Transit according to Russian definition, only means that the ship has been crossing the boundaries of the Northern Sea Route in the east and in the west. So, what has happened in the last few years is that there has been some increase in traffic uh between uh Asia and Russian ports in the West, notably Arkhangelsk, even also to to St. Petersburg, and not to to to western countries. This trade has been developed by some Chinese uh companies which have seen a niche for bringing products to Russia. Also, some of this increase is in fact oil that is being shipped out from terminals in the Baltic Sea and sent via the Arctic to China. And the reason they use this very long and costly route is because of the sanctions which are denied access for Russian oil to European markets. So this is a sort of special conditions uh right now. There has not been any surge in real international transits between the Pacific and the Atlantic. Only one journey, this last October, took place, uh which was interesting, from a Chinese port near Shanghai over to Britain without stopping in Russia. And they have announced this company that they will pursue this route with more sailings in the coming years. We'll see about that. But in terms of the Northern Sea route, the main issues which we discussed briefly about financing infrastructure, these transits which have been reported don't mean very much. Russia doesn't earn very much. It's clear that the ships using the Northern Sea route for transit pay very little. They pay for some icebreaker assistance when they that's needed, but they are not really part of the investment in the Northern Sea route. So it doesn't solve the problems which I see in financing the Northern Sea route. A lot is made out of this because it it looks good, looks like there is an interest from outside, but it doesn't really solve the the problems of of building and investing in the Northern Sea route.

SPEAKER_00 10:15

It sounds like something that many problems with the Arctic are susceptible to as well, is this making something very, very into a very, very big deal, when in reality it's a little bit more more stable.

SPEAKER_01 10:28

Yeah, I think that's uh it's that I think I think that's accurate. And in the and in the this case, our reports are one sailing from China to to Britain and it's being sort of enlarged into something very, very big. But I I don't see this as the start of a huge wave of international transits. I mean for many reasons, but even before the war we saw that uh the big container companies were not so interested. They're not interested in the northern sea route for several reasons. Size, lack of markets underway, lack of predictability, unclear conditions, many reasons why they did not want to invest in special ice uh strength and tonnage to use the northern sea route. And I don't think those conditions have been changed. But on top of that, we have the uncertainty created by uh Russia's development policies and the war, which means that the risk of some sort of sanctions in the future now looks more probable than before. Such things are affecting companies that have to invest for the long term. And if you were going to use the Northern Sea route big time, you would need to invest in in specially built ships, which are quite expensive, and then you need to have uh certainty. So I I think yes, the Chinese may enlarge that bilateral trade uh in the part of the year where there is a little ice, there that probably could increase, but that it doesn't change the the sort of the the the big picture.

SPEAKER_00 11:58

But going back a little bit to the big picture, you mentioned the Istanbul Bridge and that this is mostly a lot of this international at least is Chinese money. And then I want to ask you from an overarching perspective, maybe a state uh perspective, how restrictive is Russia and how eager is China?

SPEAKER_01 12:20

It's a bit exaggerated. Traditionally, Russia has been quite restrictive with regard to access to the Arctic. That has changed gradually over the years, and especially since the 2013-14. Uh Russia has been much more willing to and interested in giving access to China. In 2017, they launched this idea of a polar silk road. It was a bit unclear what it really meant, but uh but it was a vision of of uh of uh increased trade via the Arctic using also the northern sea route. The Russians were still apprehensive about really having China into its Arctic affairs and having a sort of a sort of decisive role. But we saw that uh that also changed. In the course of the war against Ukraine, uh the sort of the balance of power between Russia and China has shifted in in China's favor. And uh by 2023, Russia was willing to form some sort of a joint commission to jointly develop the Northern Sea. They did that exactly. What this has meant in in practice, don't know really. But but there's clearly a tendency in that Russia wants to bring Chinese uh China closer in. They have always been eager to have Chinese investments, but but China has not been interested in in pouring investments into Russia in any case, uh, without having uh a say or really control about how the money is being used. Now the question is, is China ready for or interested in in in under new terms to really invest uh um big time? I I I really don't know. I I I think that uh Chinese investors are sort of evaluating options in Russia, but they are critical and look at the commercial aspects and and they may not be very, very convincing at the time. So China is is a favored partner, and uh Chinese companies are, as we don't know, the main foreign companies using the Northern Sea route, but it still is on a fairly limited level. That is clear. I mean if you talk about world trade, the Arctic is a very, very small story. But China is I I think is in there for the long term and use the possibility of using the Northern Sea route as an important option, but but that doesn't mean they're ready to pour money into it uh at this stage. They have a good position that they want to do that.

SPEAKER_00 14:53

Now, Russia is at a very critical point in time when it comes to development of their policies in general after the full-scale war against Ukraine, getting economic profit to the country has been center stage for Russian policy in many ways. As you mentioned, the Northern Sea route is supposed to be this economic project. So, my question for you is then based on the future outlook, because again, this has been a hope, symbolic, ambitious project since the times of the Soviet Union. They still have a lot of ambitions for the route, but what can you see?

SPEAKER_01 15:37

Well, I I I think that developments in the Russian Arctic will be much slower than it was thought before the war, for the risk I mentioned. The uncertainty about Russia means that the outlook in the oil and gas sector, which is the crucial sectors here, is is very different. One thing is the immediate consequences of sanctions and the risk of sanctions, technology sanctions, financial sanctions. But I think also if you look at it, even without sanctions, the risk investing long-term in Russia has increased because of Russia's own policies. So outside investors, and that also includes uh Chinese investors, will uh will look at the possibilities of investing, for instance, in oil and gas in the Russian Arctic with uh with some skepticism. They may still consider that as interesting, but they will demand the terms to cover that risk, which means that this will be less profitable for Russia than it would have been in the under more normal circumstances. So, all in all, I think this could mean that the development will be much slower. Additionally, and especially with regard to liquefied natural gas, it's clear that the market outlook for Russian LNG from the Arctic is not as good as it looked some years ago. At that time, it was considered also officially by Russia that if Russia could get a series of new projects on stream, they would take up very big international market niches. Now, because of the war, a lot of new LNG projects uh around the world is being developed. So the market or the competition in the market will be much harder. The price will be lower, which sort of affects the profitability of Russian LNG to the extent that it is being developed. So all in all, I I think the Arctic is a place where you need the long-term stability because the the investments are also so so long term. And this is something that uh has been readily acknowledged even by Putin, because he used more or less the same words uh some years ago. But but right now, this kind of predictability is is not the same as it was, and that will uh hurt development in in the Arctic.

SPEAKER_00 17:48

Thank you so much, Arin. It's been great to have you. Thank you. And thank you for listening.