Russia’s Arctic Dreams Remain on Ice

By rino hamanishi

Commentary

As climate change intensifies, the Arctic is seeing more attention than ever– the melting of icecaps and the resulting expansion of the ocean has uncovered the Arctic's immense economic potential in land, natural gas, and trade routes. The new arctic routes are revolutionary for the shipping industry; by traveling through the Arctic, the journey from Asia to Europe will take just 19 days, in contrast to the 48 days through the Suez Canal. This significantly reduces fuel consumption and carbon emissions. Russia, by geographical good fortune, is an Arctic great power. 60 percent of the world's Arctic coast is Russian, and within the Russian Arctic lies 70 percent of the world's undiscovered natural gas. Given this, Russia has had a head start on exploring the Arctic's potential; Russia has already begun a 29 billion USD development plan to make the Northern Sea Route (NSR) an immense asset to Russia's economy. 

The Tip of the Iceberg

Russia's plan to develop the NSR shipping lane involves more than just building new ports. It would also create infrastructure such as highways, two airports, 15 villages, several power plants, and housing for 4M workers. Russia aims to deliver 25 million tons of oil worldwide by 2025 and 100 million tons by 2030– to do so, it has been modernizing ports, expanding railways, and constructing a 12,650 km long subsea cable along Russia's Arctic coastline, serving the 2.5M people who live in Russia's far north. This is roughly half the population of the entire Arctic. The Russian government claims that such development would result in an estimated 2% yearly increase in the Russian GDP. 

Unfortunately, whether Russia's plan will be realized is uncertain. The war in Ukraine, economic sanctions, and generally strained relations with the West may render the project unfeasible. The United States has cautioned Russia that the NSR is not exclusively under its control, although the majority of the route does fall within Russia's exclusive economic zone, according to the UN. Some shipping companies have silently refrained from the use of NSR because of the threat of instability in transit fees. Russia is also dependent on foreign investment to fund these new developments, relying on other countries like China, which would greatly benefit from an alternative to the Suez Canal. While Putin’s vision of prosperous Arctic settlements is promising on paper, previous efforts to develop Arctic towns like Tiksi in northern Siberia were abandoned after the disintegration of the USSR and the subsequent decrease in the government's use of the NSR. Many of the Russian government's promises to invest in the Arctic settlements have been slow to materialize, as Putin's efforts to boost the country's geopolitical power on other fronts have diverted money that could have been spent developing the Arctic. 

Hitting the Roadblock: Prices

The overall growth of the NSR in the past decade is notable; from 2013 to 2019 the number of single vessels increased from 1298 to 1628 ships. However, a closer look reveals that actual growth in transit traffic along the NSR has been very modest. According to CHNL data, in 2012, traffic rose to a high of 71 voyages but collapsed to 18 in 2014. From then, it gradually recovered back to 37 in 2019 and 64 in 2020. This growth is inconsistent compared to the increase in direct traffic (ships going to the Arctic, stopping there to perform an economic task, and then sailing back) along the NSR and transit traffic along major waterways like the Malacca Strait, the Suez Canal, or the Panama Canal. 

This is partly due to low oil prices– fuel accounts for 70 percent of a vessel's voyage cost, and thus any fluctuation in oil prices directly impacts overall operating expenses and, ultimately, profit margins. For example, when oil prices peaked in June 2014 at around $115 per barrel, they significantly reduced anticipated profit margins. This rise in oil prices was paralleled by an increase in the number of transit permits Russia approved in 2014. Conversely, a 55 percent decrease in the oil prices between July 2014 and January 2015 led to a significant decline in the number of vessels actually completing NSR transits, despite over 600 permits issued at the beginning of 2014. From this, we can infer that in the short term, the decline in oil and fuel prices makes NSR less attractive for shipping companies because of a reduced incentive to adopt cost-saving measures. Nevertheless, in reality, oil prices are not static, and prices have spiked since the Ukraine war. However, due to Western sanctions, in 2022 transits collapsed as international shipping companies contributed significantly less to the traffic numbers. 

The disparity between total traffic and transit traffic reveals that the NSR is currently only favored by direct traffic, which primarily serves natural resource extraction. The total costs of transit are still high compared to the Suez Canal because of icebreaker fees, which could be overcome through economies of scale if traffic increases substantially. To attract more foreign cargo, Russia will have to spend more on infrastructure. But the revenue that Russia needs to subsidize this spending will have to come from fees collected from the shipping industry, which, realistically, are too high to compete with the other shipping lanes at the moment.

Unprecedented Times
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Despite these obstacles, the increase in Russian traffic on the NSR demonstrates that, in the event of an economic driver, the route may potentially attain great significance. Increasing direct transit is perhaps the most viable driver of the NSR, given current oil prices. Although, as of 2023, the Ukraine conflict has drawn most of Russia’s manpower and weapons away from Arctic bases, leaving reduced crews and halting growth. Experts suggest that Russia's recent setback may present an unprecedented opportunity for the US to catch up and take leadership in Arctic technologies, such as drones. One thing is certain: whichever country seizes the NSR will have the capability to choose who can get from the Atlantic to the Pacific faster. This is a matter of deciding which economies can succeed and which will fail — this competition has primed the Arctic for a new Cold War.

Rino Hamanishi is a writer for the Economics & Business team and currently a second-year undergraduate at the University of Washington​ College of Arts & Sciences.