The Arctic is the First Stop in the United States Reset with Russia
Much work is needed to find ways to accommodate Russian fears of NATO encirclement and its concerns that the heavily ethnic Russian populations in Eastern Ukraine and Crimea have political and social protections.
In the nearly two years since the United States occupied the Chair of the Arctic Council, the Administration published a few glossy publications talking about the rate of climate change in the Arctic and the need to protect the fragile economy and rights of indigenous people. The U.S. also brokered a memorandum of agreement on oil spill response that essentially was an exchange of contract information if the s- - - hit the fan. All of these actions were good; but they were anemic in the big scheme of things. It was understandable that the United States would not launch a program to encourage offshore oil and gas development or mining in the U.S. Arctic given the political dynamics in the U.S.; however, denying that such development would be occurring in other states bordering the Arctic Sea created a opening for China to make strategic investments in mines and hydrocarbon projects that will use standards that would come close to those that Shell Oil or Exxon Mobil would be using if they were heading these projects.
What About the China Angle?
The recent book by the Council on Foreign Relations Scholar Elizabeth Economy in By All Means Necessary: How China’s Resource Question is Changing the World chronicles China’s worldwide quest for resources and discusses the implications of those activities. China’s dependence on foreign oil imports, for instance, has increased nine times in the past 10 years such that now China is the world’s largest oil importer. China is quite transparent about its aspirations in the Arctic. In a 2014 Strategic Assessment by the PLA’s Defense Policy Research Center concluded that he Arctic could be China’s “new middle east” and its economic “lifeline” for trade and sources of raw materials.
China has already made major investments in Canada, Norway, the United States, the Russian Federation, and is especially eyeing Greenland because of recent laws that it has passed to encourage foreign investment to help it with its chronic unemployment. For example, in 2012 China’s National Offshore Oil Corporation acquired Canada’s Nexen corporation for $15.1 Billion to conduct drilling in the Yukon Territory. China’s Jiangxi Union Mining has acquired rights in Greenland to mine for uranium and rare earth minerals (further exacerbating their worldwide monopoly) and potentially to import thousands of Chinese workers. China has invested over well over $10 billion in many oil and gas projects in Russia; including a major production and refining plant in Russia’s Yamal Peninsula that will be the origin point for LNG ship movements from Yamal to sites in China. But for low oil and commodities prices, it is likely that the number of oil and gas projects would have been much greater; however, low prices will not last for long and China always takes a long-term view when it comes to securing sources for its raw materials.
There is nothing wrong with Chinese passive investment in these large projects so long as standards are not compromised and the investments do not have political strings attached. But, according to Ms. Economy, China had an extensive track record in Africa and South America of using its economic clout to get local officials to look the other way when it came labor and environmental standards since many of these cash starved localities – especially in Greenland and parts of Canada - are desperate for outside investment and employment. Often times, promises of local employment were not realized because Chinese firms much preferred to import Chinese workers who are accustomed to substandard wages and working conditions and don’t complain. This can be a major political factor with the many new – and labor intensive – mining operations that are now in the works particularly if the laborers decide to take up residence and exercise their political rights in the very sparsely populated communities bordering the Arctic Ocean. This can also, of course, set the stage for major industrial accidents because the remoteness of the Arctic means that there will likely be very little monitoring and oversight of what is taking place.
What Should the President Elect Do?
The United States has no right to tell other countries that they can’t develop their resources but it can work cooperatively with other countries to develop reciprocal regional development and shipping standards to ensure that outside Chinese money doesn’t gravitate to states like Greenland where standards either don’t exist or aren’t likely to be enforced because they simply lack the capacity to enforce them.
While Russia is probably willing to sacrifice some standards in the short term in order to obtain Chinese capital that isn’t sanction constrained, Russia has made no secret of the fact that it does not want to become beholden to China as a source of capital and technology. In the short term, the crippling sanctions provide Russia little choice to cozy up to China’s largest oil companies (CNPC, CNOOC, and SINSOPEC) to exploit resources in Kara Sea and Yamal Peninsula. Many analysts believe that this marriage of convenience is viewed by skepticism by Russian officials since they fully expect that China will demand a majority stake in these projects and be “more assertive” in regional affairs. Russia, which has been a strong adherent to UNCLOS, also has good reason to distrust Chinese intentions given China’s unlawful behavior in the South China Sea.
It is probably too late the put the genie back in the bottle when it comes to the recent oil and gas deals between Russia and China. But, it would be mutually beneficial for both countries to ensure that China is not emboldened to use its economic leverage to reorder the legal and political landscape in the Arctic.
Since the source of China’s power is money, President Elect Trump should first propose to President Putin that the U.S. and Russia, in collaboration with Norway, Greenland/Denmark, and Iceland, establish an Arctic Development Bank to provide an alternative to Chinese money to finance large projects. Second, as suggested by the author three years ago, the United States should help Russia to get its important Northern Sea Route internationally recognized by the International Maritime Organization as a recognized international route for shipping through the Arctic. For various reasons, this will provide Russia with a source of capital to improve its icebreaker fleet and to improve the navigation aids along the route and, in doing so, greatly improve the safety of shipping. Third, the President elect should work with Moscow to find a way to ease the crippling sanctions that are preventing firms like Exxon Mobil from operating in Russian waters. This is both a way to benefit U.S. business but, much more importantly, it is important that first class drilling technology and financially solvent companies are the ones that are being licensed to operate in the harsh arctic environment. The licensing of others that have second-class technologies and questionable financial bandwidth, is a recipe for disaster for everyone. Finally, the United States and Russia can take a leadership role in the Arctic Council to enact regional standards for offshore oil and gas development and to ensure that all visiting ships comply with the recently enacted Polar Code. Russia has just as much interest as the U.S. in the water quality of the Arctic to sustain their massive fishing interests. Reciprocal standards for shipping, oil and gas, mining and other industrial activities is the best way to sustain those fisheries in the long term.
The Arctic is one of the few places where U.S. and Russian interests are complementary. Building upon those shared interests will build confidence between the two leaders and two countries and hopefully lead to positive developments in other troubled regions of the world.
Mark E. Rosen, a maritime and international lawyer, is the SVP and General Counsel of CNA and holds an adjunct faculty appointment at George Washington School of Law. The views expressed in this paper are those of the author alone and do not represent the views of CNA or any of its sponsors.
Image: U.S. Navy