[Analytics] Russia’s North Big Game step by step: Arctic’s priorities in 2021

A year of the great Arctic expectations

In 2021, Russia to take over the chairmanship on one of the most high-level international organizations involved in the Arctic – the Arctic Council. Arctic has its own significance for each of the eight member states of the Council, from the world’s economics leader US to the Iceland, a country nearly bankrupted during the crisis of 2008. Each state in Arctic has its own geopolitical priorities and economic goals. However, they all understand that the fragile and rich nature’s exploitation in Arctic is a common cause. The Arctic Council founded in 1996 helps to develop a common policy.

Arctic’s attraction in the world is growing. In early 2010s, several observer countries from the Asia Pacific Region (APR) joined the Arctic Council at once: China, India, Japan, South Korea, Singapore. Earlier, the big economics from Europe received the same status: Germany, the UK, France.

Due to the climate change and melting of the Arctic sea-ice, more energy resources and waterways are now becoming accessible. For example, the Northern Sea Route connects Europe and Asia through Russian waters. Large shelf deposits of oil, gas, rare earth metals, etc. already discovered or just waiting for their conquerors, are attracting the whole world no less than new sea routes amid growing resource shortages.

“Not so long ago, countries from France to India and Australia discussed on how to develop the Arctic at the PACE session. This is a struggle for resources. What resources are in the Arctic, no one knows. But the forecasts are staggering to everyone. All countries want to share ‘pie in the sky’ equally”, – Yuri Vazhenin, the Russian senator from Khanty-Mansi Autonomous Area, told a forum dubbed “Arctic-2020” in the country’s Chamber of Commerce and Industry.

At the same time, “pressure in the world on economic activities in the Arctic is growing, primarily under the pretext of observing environmental standards,” says Ambassador-at-Large of the Russian Ministry of Foreign Affairs, responsible for international Arctic cooperation Nikolai Korchunov. As examples, he calls the program of the US-based organization “Ocean Conservancy”, which was joined by a number of shipping companies refraining from transporting containers at high latitudes, or the decisions of investors who stop financing mining projects in the Arctic zone, as Goldman Sachs did last December.

The Arctic is 28% of the territory of Russia and only 2% of the country’s population. Nonetheless, owning around 2-3 million square km of the Arctic from a total 27 million square km, Russia is a heavyweight player in this game. But what rules of the game are set by Russia?

It’s hard to understand at the first try.

Mining, mining, transportation?

For domestic observers, the Russian govt in Arctic decided to follow the same path that in the Russian Far East was since 2013. “Three pillars” in the Arctic for Russia today are hydrocarbons, solid minerals and the Northern Sea Route. On February 26, 2019, Russian President Vladimir Putin transferred the authority to develop the Arctic zone to the Ministry for the Development of the Russian Far East. Almost exactly a year later, on February 19, 2020, Deputy Minister for Development of the Far East and Arctic Alexander Krutikov told at the “Arctic 2020” conference: the govt introduced a package of draft laws on state support for companies producing hydrocarbons, as well as for small and medium-sized businesses, in the Arctic to the parliament’s lower chamber.

“Already this summer, the entire Arctic zone of Russia will receive a special economic regime with a wide range of tax preferences. There are no such precedents in the modern tax system of Russia,” Alexander Krutikov said. He called the support of investors in the Arctic “more advanced than in the Far East.” The tax preferences for companies extracting solid minerals is not yet in the bill, the official said. But they will appear by the second reading, he promised. Already, the licensing procedure for solid mineral deposits in the Arctic is simplified.

In addition, small and medium-sized businesses in the Arctic zone from 2021 will receive the right to a 10-year exemption from income tax and a reduction in social insurance payments, if they invest at least 10 million rubles ($157 thousands). A large business that invests at least 300 million rubles ($4,7 million) will be able to receive a 20 percent subsidy from the govt for the construction of infrastructure. “The procedure for selecting projects for subsidies is simplified: you need to submit a business plan and an independent opinion on it. We will announce the selection in March 2020,” Alexander Krutikov said. VAT on icebreaking support for vessels along the Northern Sea Route will be reset, the official added.

On February 20, the State Duma approved the government’s proposed tax incentives for investors in the Arctic. According to the Ministry of Energy, new tax benefits for investors in the Arctic will favor implementation of nine major projects worth 15 trillion rubles ($235 billion). The production of hydrocarbon deposits, together with the products that producers of solid minerals will begin to extract under favorable conditions, will load the main transport project of Russia in the coming decades – the Northern Sea Route.

“The purpose of the bill is to create a resource base that ensures an increase in freight traffic along the Northern Sea Route in the amount of at least 50 million tons by 2030 with a growth potential of up to 100 million tons by 2050,” Deputy Minister of Finance of Russia Alexey Sazanov explained to deputies introducing the bill on benefits in the Arctic.

Arctic’s tactics & practices issues

It would seem that everything is logical in the Russia’s govt actions in the Arctic. All “three pillars” will be strengthen. Business will receive benefits to produce more and more hydrocarbons and other resources, which are in high demand in Europe and Asia. The Northern Sea Route will help to deliver valuable cargo to both parts of the world. The govt will receive both direct benefits, as it’s a shareholder of the largest mining companies, and indirect benefits due to the taxes from new industries, which should be launched by private investors.

However, not everyone in Russia is satisfied with the Arctic’s state course. “There will be preferences. Wonderful. But questions arise. First question: why are benefits not related to the whole business? It turns out that enterprises of different types of activity find themselves in unequal conditions. What is the emphasis on providing benefits? A very profitable business: hydrocarbons’ production, production of liquefied natural gas, gas chemistry. Where is the rest of the business?” – says Yuri Vazhenin.

Russia buys 50-90% of the consumption of some rare earth metals necessary for the development of modern industries. Metal mining is also underway in the Arctic. “If we are talking about independence from imports, let’s be at least independent in terms of raw materials. Serious preferences are needed in this sphere as well,” the senator believes.

“Yes, Novatek has begun developing deposits in the Arctic. We showed the whole world how we could work here. So, are we ready to produce resources in the Arctic using only domestic technologies and equipment? We don’t. In 2017, the Russian government adopted a decree on the development of the Arctic. Three stages were fixed there: first – the development of port zones, second – the development of the Northern Sea Route, and only the third – the creation of new technologies necessary for the development of subsoil use and mechanical engineering in the Arctic. It is unacceptable! If we won’t invest in our science, we feed someone else’s,” Yuri Vazhenin said.

According to him, the development of technology for the Arctic should also receive tax benefits. “Is it time to change the vector of tax benefits? Now we are stimulating those who are at the end of the product creation chain – developing deposits. The first should be the R&D. The second is engineering. The third is service. Then the subsoil users will benefit,” the senator believes.

New management technologies – old mining technologies

Of course, the development of Russian hydrocarbon production technologies is a sore spot and a tough call.

Genady Shmal, a veteran of the industry, the president of the Union of oil and gas producers of Russia, said at the “Arctic-2020” conference: the current oil recovery factor of 29-30% is “a shame”. “Shame on our science, shame on our technology. More than 40% is extracted in the US, and the USSR’s extraction coefficient was 0.45 in 1980s. In the US oil recovery factor is growing, in our country it is decreasing, since we don’t spend serious money on the R&D. For example, Gazprom’s spends on R&D is a trifling expense: 9 billion rubles a year. Company’s spends for charity – 35 billion rubles a year,” he cites depressing figures.

Elena Zlenko, Russian senator from Yamal-Nenets Autonomous Area, criticizes the government for another technology – on management in the Arctic: “I didn’t see the role of regions in the proposed Arctic management system. When the structures of the federal govt decide to grant for business the status of a resident of the Arctic zone, to provide tax benefits, I would like at least the executive branch of the regions to participate in the decision”.

“We already have two decisions’ centres in the Arctic: the federal authorities and the apparatus of the plenipotentiary of the president in the federal district. And now there is a third subject of governance: the govt’s Arctic Commission and the management company headed by your Ministry,” – Elena Zlenko said, referring to Deputy Minister Alexander Krutikov. “Tell me, how to build relationships and to coordinate interests with three decision centres at once? What effective management can we talk about?” the senator asks.

“To rethink the policies fairly radically”

However, even more fundamental questions on Russia’s course in the Arctic are asked, as expected, by scientists. Professor of Moscow State University Yuri Ampilov draws attention to several factors. World prices for hydrocarbons over the past few years have decreased “catastrophically” – in 2-5 times: for example, the cost of a barrel of oil has fallen from $140 to $50.

“The second factor is the discovery of powerful deposits in favorable conditions of the southern seas and land. The third is a technological lag and sanctions regarding the supply of equipment. An import substitution program was announced long ago, but there are too many problems on the path of introducing of even very good designs. Not a single mining platform in Russia has them. Finally, the hydrocarbon market is oversaturated. At the same time, Russian companies are actively competing with each other, launching projects to liquefy gas. But there is only one end user, and it’s crowded in the markets of Europe and Asia. The current market is the market of buyers, not sellers,” he lists.

An even more serious threat to Russian energy exports in long terms is the growth of the world renewable energy market. “We believe that this trend does not concern us. In the domestic market, yes, it is possible. The total capacity of Germany’s wind energy already exceeds the total capacity of all Russian nuclear power plants. It isn’t a joke, and for me, when I found out, it was a shock. In 2020, China’s wind power should exceed the entire generation capacity of Russia,” Yuri Ampilov said.

The only way for the Russian hydrocarbon export industry in the long term, the scientist suggested, is to “grow the domestic consumer of hydrocarbons, that is, to develop industry.” He advises to continue to engage in the development of the Arctic. “This has both defense and economic significance. But the policies must be rethink fairly radically,” he says.

So, Russia continues to actively exploit the resources of the North. Doing it as formerly is already silly. But how it should be done is not clear yet.

What Russia will present the international arena during the years of its chairmanship (2021-2022) in the Arctic Council?

Outside priorities: green agenda

In the current international atmosphere the Arctic “becomes a territory of dialogue for Russia, or if we don’t move towards a dialogue, a territory of even greater confrontation”, Rustam Romanenkov, the state secretary of the NGO Center “Arctic Initiatives” said (this organization was founded and is headed by Andrey Patrushev, a son of the Secretary of the Security Council of Russia, former Russian domestic intelligence service FSB chief Nikolai Patrushev).

“Much depends on how Russia to specify its international agenda in the Arctic Council since 2021. It seems that it shouldn’t be something about: “We have 28 projects in the Arctic zone, for us it is a strategic region in terms of defense and security, now, dear friends, we ask you to love and favor us.” Probably we need something else. We need to come and say: dear friends, here, in the Arctic, we can cooperate perfectly, primarily within transport corridors, but also in the tourism and the harvesting, and your participation, neighbors, is very important to us. It is important to start the dialogue,” the NGO’s representative said.

“We can no longer enter the international Arctic space with a raw material approach, with a consumption and development approach. This time has passed – for everyone, including for us. We must go with a “green”, correct agenda, and appropriate tools within the country for this are being formed,” he added.

Russia already has a “green” proposal for the Arctic. The Moscow Institute of Physics and Technology (MIPT, the leading Russian engineering institute) has initiated a project called “Arctic Hydrogen Energy Applications and Demonstrations” (AHEAD) in the Arctic Council’s Sustainable Development Working Group (SDWG), Institute’s top scientist Yuri Vasiliev said.

AHEAD project is an entirely new type of international Arctic diesel-free research station that does not use any type of carbon fuel. “The project has passed the initial review. At the end of March at a session in Iceland, it should be approved. It will be one of the Russian key initiatives during the chairmanship of the Arctic Council. We are laying the platform for studying the problems of energy, telemedicine, robotics, artificial intelligence, telecommunications. It will be possible to test solutions in all these areas at the station,” Yuri Vasiliev said.

On the one hand, Russia’s proposal to build a station with zero carbon emissions where 80% of Russian gas and a huge amount of oil is produced sounds strange, the representative of MIPT admitted. On the other hand, when the project was presented at the international forum in Troms about two weeks ago, it aroused great interest of the observer countries in the Arctic Council: France, Germany, Japan, Korea, China and Singapore. “It is due to the fact that hydrogen energy is now one of the most popular topics in the world,” the scientist believes.

A few days later MIPT has announced that a fully autonomous International Arctic Station (IAS) near the indigenous settlement Land of Hope, in the foothills of the Polar Urals, dubbed Snowflake, will be year-round. It to begin to operate in 2022. “The station will have a modular structure and rely on renewable energy sources and hydrogen fuel, without burning diesel. The autonomy of the station will be provided by the energy of the sun and wind, and hydrogen obtained in the cleanest way,” MIPT said. The total cost of the project is about 10-12 million euros.

Arctic’s indigenous people speak louder

Meanwhile, the largest ethnic Arctic group in Russia, the Yakuts, can offer to the country they own Arctic agenda. Republic of the Sakha (Yakutia) is one of the Arctic regions of Russia. 1.6 million square kilometres, or more than half of the territory of Yakutia, are part of the Arctic zone.

Andrei Fedotov, Permanent Representative of the Republic of Sakha (Yakutia) to the President of Russia, says: “We feel that attention to the Arctic is increasing. So many people who want to work and live in the Arctic! Lots of wealth attract everyone who would like to stake a place with us. Consequently, criticism begins at the international sites. From Yakutia, some activists come to the UN and tell how hard they live in Yakutia. This is all a lie!”

“We have a good practice of developing culture, supporting everyone who lives in these difficult conditions. In the years of Russia’s chairmanship of the Arctic Council, I think, we need to talk more about the humanitarian issues: what has been done to preserve indigenous peoples. Yakutia is ready to offer its experience and adequately represent Russia at the international level,” the regional official said.

The “large Arctic center of ethnic groups” to be create in Yakutia, he recalled. “This center, as we planned, to become a center for the development of culture throughout the Arctic, and we need the federal govt’s support,” Andrei Fedotov said.

In December 2019, the head of Yakutia, Aisen Nikolaev, said that the unique Arctic Сenter for Epic and Art to be built in Yakutia by 2022. “This international project highlights Russia’s cultural dominance in the Arctic. We talked a lot about this issue with the country’s leaders and scientists. Today, Russia has a unique chance to show to the world that the culture of the peoples inhabiting the Arctic area for millennia – Russians, Yakuts – has been preserved and developed, unlike the culture of, for example, the Indians of North America,” Aisen Nikolaev said.

Neighbors’ influence

Russian sovereignty over the Northern Sea Route, indisputable both from a historical and a geopolitical point of view, gives the country another trump card in a big Arctic game. The transit corridor is suitable not only for delivering Russian resources to the west, to Europe, or to the East, to the APR countries. It is also a bait for some large Asian economies: China, Japan, South Korea and Singapore, – interested in increasing trade with Europe.

This states, as was said earlier, received the status of observer countries in the Arctic Council. The leader in this group is, of course, China, the second, and perhaps already the first economy in the world. China’s preparations for soft expansion to the Arctic began back in 1999, when the country conducted its first Arctic research expedition, and then in 2004 built the first scientific station in Norway.

The rules of the Arctic Council dictate, in particular, that the observer country agrees to “recognize the Arctic states’ sovereignty, sovereign rights and jurisdiction in the Arctic”. This contradicts the position that Chinese researchers and officials have repeatedly expressed: the Arctic is the common heritage of the whole world.

A vivid expression of this position is the statement made by Cheng Baozhi, an assistant research fellow at the Shanghai Institute for International Studies, in the Beijing Review in 2011: “It is unimaginable that non-Arctic states will remain users of Arctic shipping routes and consumers of Arctic energy without playing a role in the decision-making processes, and at present it is necessary to put an end to the monopoly of the Arctic states on Arctic issues.”

True, far from naive people live in China. Cheng Baozhi admits that the process of non-Arctic states’ admitting to the Arctic can proceed only gradually: “Although the Arctic states are unlikely to share their leadership and decision-making power with other countries in the foreseeable future, the need to work together with non-Arctic states will grow.” It is also clear for the China’s officials. With true Eastern wisdom, they abandoned a head-on attack, offering the Arctic world an exciting alternative: the Polar Silk Road, a naval addition to the Belt and Road Initiative, announced by Chinese leader Xi Jinping in 2013.

In January 2018, China released its first official Arctic policy white paper. The country said it would encourage enterprises to build infrastructure and conduct commercial trial voyages, paving the way for Arctic shipping routes that would form a “Polar Silk Road”. “China hopes to work with all parties to build a ‘Polar Silk Road’ through developing the Arctic shipping routes,” the paper, issued by the State Council Information Office, said.

It is interesting that few people remember: originally introduced as the “Silk Road on Ice,” the concept of the Polar Silk Road was first proposed in 2011 by Mr. Sergey Shoygu, then Russian Minister of Emergency Management, at a themed conference called “The Arctic: the Territory of Dialogue.” The authors of the monograph “The Polar Silk Road: China’s New Frontier of International Cooperation” remind of this.

However, now it doesn’t matter where the author of the idea is located – in Russia or in China. It is important that both countries agree to mutually beneficial cooperation in the Arctic. The increasing participation of Chinese capital in Russian Arctic LNG projects, the recently put into operation “Power of Siberia” pipeline, which supplies China with Arctic gas, are direct evidence of this.

So, the big Arctic game to continue.

Dmitrii Shcherbakov is the Russian journalist since 2006, he is also a Pan Pacific Agency’s managing partner. Russian version of this article is available here.

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