Washington’s Dangerous New Consensus on China
Don’t Start Another Cold War
Rapid climate change and the fallout from Moscow’s annexation of Crimea have made the Russian Arctic’s vast oil, gas, and mineral deposits an increasingly attractive development play for Moscow. President Vladimir Putin’s government is also looking to transform the country’s Arctic coastal waters into a serious commercial shipping lane—one capable of handling not only more domestic traffic but cargo vessels transiting from Asia to Europe as well. With its economy in shambles and international reputation in doubt, Russia today sees the Arctic’s potential as a rare glimmer of hope.
Russia’s evolving relationship with the High North is exemplified by two ambitious projects—the construction of the Yamal liquefied natural gas (LNG) facility and the propagation of large-scale shipping along the Northern Sea Route. If successful, these initiatives will bring in badly needed revenue and cement Moscow’s reputation as the preeminent Arctic power. Most important, they will also serve to connect Russia’s economy more closely to the Asia-Pacific region, emphasizing Putin’s much-vaunted Asian pivot. These projects do not come without challenges, however. Oil prices have not yet recovered from their disastrous slump, and Western sanctions have hampered the ability of Russian businesses to access capital markets and secure project financing. But if Russia can manage these obstacles, the Arctic holds great possibilities for its economic future.
Although the Arctic was a focal point of Soviet-era policy, Russian interest in its frozen north subsided in the early 1990s as Moscow’s attention turned to more pressing economic and political matters after the collapse of the Soviet Union. But now the Arctic is back in fashion, with opportunities for new energy partnerships, economic investments, and political alliances, particularly with Asian markets. So while the region’s vast stores of natural resources already account for about one-fifth of Russia’s GDP, this number may increase markedly in coming years if Moscow’s Arctic aspirations bear fruit.
The EU remains Russia’s leading trading partner despite its imposition of sanctions in 2014. According to International Monetary Fund figures, even after the Russian economy went into recession that same year, bilateral trade with the EU-28 still exceeded roughly $316 billion. (China is Russia’s second-largest trading partner; it accounted for slightly more than $74.8 billion in total trade in 2014.) Russia’s heavy economic dependence on Europe does not sit well with Moscow. And the development of the Arctic could change this dynamic.
Russia and China have recently agreed to integrate the Moscow-led Eurasian Economic Union with Beijing’s Silk Road initiative, the goal being to promote closer economic and trade relations. The Yamal LNG plant is one of the first major Arctic projects partially funded with Chinese money. The plant, slated for completion in 2021 at a cost of $27 billion, consists of over 200 wells that will tap into 926 billion cubic meters of natural gas. The infrastructure associated with the project includes the construction of the port of Sabetta, a modern international airport, and a planned rail extension that will connect Sabetta to the wider Russian transportation grid. In March, Evgeny Kot, Yamal LNG’s general director, reported that 96 percent of the plant’s anticipated output was already under contract, with about 86 percent of its production destined for the Asia-Pacific region.
But the Yamal facility’s future looked uncertain for a long time. The United States imposed sanctions on Russia’s largest independent gas producer, Novatek (which owns 50.1 percent of the plant) as well as its director and Putin confidant, Gennady Timchenko. This severely curtailed the project’s access to Western capital markets and caused Novatek to miss several funding deadlines. Despite receiving more than $2 billion in subventions from the Russian government, a $839 million loan from China’s Silk Road Fund last December, and a pledge of $4 billion in loans from Russia’s Sberbank and Gazprombank, the project was still struggling earlier this year to find outside sources that could cover its anticipated financing shortfall. It was only at the end of April that Yamal LNG finally secured long-awaited loan agreements totaling over $12 billion from two Chinese banks.
Yamal LNG represents an important political bellwether for Putin, who has long supported it not only as a showcase for the massive economic potential of the Arctic but also as a means to reorient Russia away from its overdependence on energy exports to Europe. The project’s timely completion in the face of Western sanctions would represent a big win for Putin domestically. Its failure, however, would prove a colossal embarrassment at home and abroad.
UP AND OVER
Another major Arctic emphasis for Russia, the Northern Sea Route, is a series of passages that hug the Russian coastline, ranging from approximately 2,200 to 2,900 nautical miles in length. The route, which was navigable for only three to five months out of the year in the past, could someday be available for year-round use if Arctic sea ice keeps disappearing at its current rate.
The Russian government is now pushing domestic and foreign vessels to use the route, and with good reason: in 2013, a Chinese vessel traveled from Dalian, China, to Rotterdam, Netherlands, via the Northern Sea Route in just 35 days, trimming an estimated 2,400 nautical miles and 13 days off a similar voyage through the Suez Canal. Sailing from Asia to Europe along the top of the world not only shaves time and distance off of transiting the congested Suez, it also lowers fuel usage and bypasses piracy concerns along the Horn of Africa. Russian officials are also eager to integrate the Northern Sea Route into a transport corridor of railways and rivers that would move raw materials from the country’s sprawling interior to Arctic ports for shipment elsewhere. If this comes to pass, Russia will benefit from financial and geopolitical advantages that could help restore its economy—and its strategic importance.
In recent years, Russian officials have worked toward the goal of making the Northern Sea Route a globally significant shipping hub. In 2013, the Northern Sea Route Administration was created and tasked with issuing permits, ensuring navigational safety, assisting search-and-rescue operations, and monitoring environmental conditions along the waterway. In June 2015, Russian Deputy Prime Minister Arkady Dvorkovich stated that the route will have the potential to handle more than 80 million tons of cargo annually by 2030, and a widely referenced Chinese estimate claims that anywhere from five to 15 percent of Beijing’s international trade could move along the Northern Sea Route by 2020.
Efforts to promote Arctic shipping have yielded inconsistent results so far, however. The Northern Sea Route’s use grew dramatically in the early 2010s, only to dip in more recent years. Only four transits along the route took place in 2010, but official statistics show that 71 crossings occurred in 2013, representing a cargo volume of nearly 1.36 million tons. These figures peaked in 2012–13, however. Only 18 transits took place in 2015 (representing just 39,600 tons of cargo) as lower fuel prices and Russia’s political isolation made the Suez more appealing to foreign shippers. At the same time, the total volume of cargo transported via any given portion of the NSR has risen steadily, owing in large part to construction initiatives like the Yamal LNG project. Roughly 5.43 million tons of cargo traveled through a part of the Northern Sea Route in 2015, a sizable increase from the 3.98 million tons that did so in 2014.
Russia should temper its outlook for Arctic shipping. The Northern Sea Route will not become a major international cargo thoroughfare anytime soon, as it poses multiple challenges for shipping companies. These include unpredictable weather delays, higher insurance premiums, restrictions on vessel size, a lack of sufficient repair and emergency response facilities, and outdated (or absent) communication and navigation systems. And although the route does not require the use of icebreaker ships under ideal conditions, these services could end up costing hundreds of thousands of dollars when necessary. Political risk is also a consideration, as Russia and other countries—notably the United States—do not agree on whether the waterway is part of Russia’s internal waters and thus governed by domestic laws that can be enforced against foreign vessels capriciously. In other words, Russia has a long way to go, and lots of investments to make, before its dreams of transforming the Northern Sea Route into a world-class shipping lane become reality.
FROZEN IN ITS TRACKS
Moscow’s northward turn faces considerable external challenges. Sanctions have not only hurt the Russian economy and restricted the flow of foreign financing, they have also made it more difficult for Moscow to access the Western technological know-how and equipment necessary to undertake demanding Arctic projects, especially offshore. And although Russia has looked to China as a political and economic partner, Chinese banks and firms remain nervous about bankrolling Russian projects for fear of political retaliation. For China, estranging its Western trading partners may ultimately not prove worth it, as the Russian market accounted for only 1.53 percent of Chinese exports in 2015.
Moreover, China may be the world’s largest hydrocarbon importer, but its economy is slowing down and may not need as much Russian energy as before. In turn, Russia does not want to be perceived as China’s natural resource vassal. Russian businesses are also nervous about borrowing from Chinese lenders, not only because the cost of these loans tends to be higher but also because borrowing from Beijing provides China with more leverage in negotiating commodity prices down the road.
Last, the collapse of oil and gas prices has made many previously planned Arctic projects economically unfeasible, at least for the time being. Thus, while the future of the Russian economy may depend heavily on the Arctic, its ability to successfully exploit the region’s resources hinges on factors that are often beyond Moscow’s control. What the development of the Arctic will mean for the global economy, and for Russia’s place within it, therefore remains uncertain. But for Putin, the punishment for inaction outweighs the risk of failure.