On December 8, 2017, Russian president Vladimir Putin gave the order to begin loading LNG on the world’s first commercial ice-breaking LNG carrier, the Christopher de Margerie. That ship will make unescorted trips from Yamal to mostly Korea via the Northern Sea Route (NSR) in the Russian Arctic from July through December every year.

These impressive vessels were built in Korea for Russia to transport LNG from Russia’s new Yamal LNG megaproject. The Yamal LNG project is lead by the Russian firm Novatek. The ships are owned by the Russian firm Sovcomflot (SCF Group) but flagged in Cyprus. A fleet of up to sixteen ships is envisioned for SCF. According to press reports, the same Korean firm constructing the Margerie has orders for twelve additional ships for two joint ventures involving investors from China and Japan. The massive Yamal LNG project is expected to produce 16.5 million metric tons of LNG a year. The project aims to tap natural gas reserves totaling more than four billion barrels of oil equivalent. To do so, more than two hundred wells have been drilled and three liquefaction trains built, each with a capacity of 5.5 million metric tons. It is estimated that nearly 16.5 million metric tons of LNG will transit through the new port of Sabetta, with all LNG production sold to customers in Europe and Asia under fifteen- to twenty-year contracts.

Novatek owns 51 percent of the project, the French oil company Total owns 20 percent, and China’s China National Petroleum Company and its Silk Road Fund own the remaining 29–30 percent, which means that portion is mostly paid for with People’s Republic of China (PRC)  government money. The massive $27–$60 billion project (some estimates) includes an international airport and the deepwater port Sabetta, which has the capacity to accommodate four LNG carriers simultaneously.    

By all appearances Yamal LNG looks to be a highly modern operation if—for no other reason—Total’s French shareholders will not want the company affected by substandard environmental practices that could cost their reputation or pocketbook.

Yamal LNG is just one of five major projects in and around the Yamal Peninsula; more or less the midway point between its vast eastern and western Arctic coastline. The five major areas of exploitation in the Yamal peninsula include Yamal LNG. Major investors include, as mentioned, China, France and India. No U.S. companies are participating. The U.S. government has had no input into the standards that these projects would follow even though most are on or near the coast and an industrial accident would potentially affect the coastlines of other Arctic countries, including the United States.

The Yamal Peninsula is not the only venue for development. There are significant Chinese financed mining projects under development and talk of Chinese investment in Canada to develop its Northwest Passage (instrumentation, ports, terminals) plus possibly more pipelines and rail lines. Some Canadian scholars and officials have even suggested that Canada should embrace China’s Polar Silk Road because, in many respects, China offers Canada more tangible economic and political rewards than the United States. Brisk economic and political activity is taking place in Greenland, Iceland, Norway, Russia and Canada because those nations—in contrast to the United States—have figured out that their security and economic well-being is heavily linked to the Arctic because of its resource and transit benefits.

The U.S. policy community and press is more inwardly focused on the climate change in or near the Alaskan Arctic; even though most of those efforts cannot prevent other countries from exercising their sovereign right to host foreign investment and resource-extraction projects. Indeed, Greenland and to a lesser extent Iceland and Russia, both view Chinese FDI as an important ticket to economic independence. As detailed in a new CNA Report Unconstrained Foreign Direct Investment: An Emerging Challenge to Arctic Security, all FDI is not equal and that past instances of Chinese FDI has resulted in trade-offs in terms of sovereignty, labor standards and environmental protection that need to assessed alongside the economic benefits of outside cash.  

The Arctic economy is comparatively small. Yet, there has been significant foreign direct investment (FDI) North of 60 degrees latitude and China appears to be leading investor (nearly $90 billion 2005–2017) in a range of projects. The projects include mining, energy, infrastructure and financial products. Hard numbers are difficult to come by but the CNA study suggests that Chinese FDI appears to dwarf that of other countries. Some of this is due to the fact that investors in the United States and other western countries perceive the Arctic as “hostile environment for industry and development” because of negative political perceptions of engaging in economic activity in the environmentally fragile Arctic region. Sanctions against Russia—a leading venue for FDI—has created considerable uncertainty among United States and some Western Investors who lack assurances that a direct investment in the Russian Arctic, or entering into a joint venture with a Russian company, will have to be abandoned if additional sanctions are imposed.

China obviously takes a different view of the Arctic both in terms of its investment patterns and its policies towards development. China’s State Council Information Office issued a new Arctic Policy on January 26, 2018. It asserts that China is an “important stakeholder in Arctic Affairs” and a “Near-Arctic State.” They also assert that as a permanent member of the UN Security Council, China “shoulders” the important mission of jointly promoting peace and security in the Arctic.” China honestly asserts that the “utilization of sea routes and the exploration and development of the resources in the Arctic . . . have a huge impact on the energy strategy and economic development of China.” Lastly, sharing “interests with Arctic States,” China hopes to work with all parties to “jointly build a ‘Polar Silk Road,’ and facilitate connectivity and sustainable economic and social development of the Arctic.”

China has moved past the words in its Policy document in a number of concrete respects. For starts, the CNA reports estimates nearly $90 Billion of Chinese investment (probably larger now) north of sixty deg. North and $1.4 Trillion in overall investment in the countries bordering the Arctic Ocean. These investments are well diversified. Second is the fact that even though China has no Arctic coastline, it commissioned its first icebreaker, the Xuelong 1, in 2010. China’s second Icebreaker, the Snow Dragon 2, is now under construction in China and will be completed in 2019. China has also been a major player in Arctic research under the auspices of the Polar Research Institute of China. It has a sizeable facility known as the Yellow River Station on Svalbard Island and a joint China/Iceland observation facility in Karholl. China also has research facilities in Iceland and Canada. Most recently, there was the announcement in January of 2018 of the creation of a “data silk road” that is being built by Chinese and Finnish state owned firms to lay undersea cables which traverse the Arctic. Lastly, China has moved past the concept phase in terms of shipping: its state owned COSCO shipping line has both sent cargo container vessels through the Arctic waters via the Northern Sea Route (NSR) and has plans to increase the number of transits of both cargo and heavy lift vessels because a transit via the NSR can save twelve to fifteen days in transit time and consume much less fuel. This evidence of concrete PRC activities in the Arctic means that its Arctic Policy has concretely moved beyond the stage of glossy publications. The UK based Cryopolitics examined what is meant by the term “Polar Silk Road” and concluded that:

If you thought the Silk Road was all about caravans of camels and spices trudging across the steppes of Central Asia, then I’m afraid you are wrong. Replace those two-humped ungulates with icebreaking tankers ferry gas between Europe and Asia via Russia’s forbidding north shore and that’s more like it.”

Why Worry?

Some have said that U.S. analysts and government officials should be cheering China’s expeditionary spirit and its contributions to Arctic research and Arctic Development. But, the statements in China’s Arctic Policy that it regards its right to have a terrestrial presence of Svalbard Island as a legal entitlement to regulate the region and its desires to actively participate regionally at a bilateral and multilateral level to promote “cooperation” in all fields especially regarding climate change, environmental protection, ecosystems, shipping routes, resource development . . . and capacity building” raises serious doubts that China does, in fact, respect the sovereign rights of the coastal nations. Under general international law and the 1982 UN Law of the Sea Convention, coastal countries own all rights to develop, manage, and exploit the land based and sea-based resources out to two hundred nautical miles from each country’s coastline. Given that China does not own coastline and no rights under UNCLOS or general international law to determine how the region is supposed to be developed (and protect the interests of those who live there), it is important that the regional states decide among themselves how this essentially closed-sea, and the coastal resources will be developed.

As discussed in the CNA report and other sources, China has been aggressively seeking to purchase sites and finance and undertake large development projects in Canada, Greenland and Iceland for variety of sectors including oil and gas, mining, shipping/infrastructure, project finance and tourism. At face value this infusion of capital is great for entities that see Chinese money as a fresh new source of unfettered capital, but there are considerable downsides. China’s aspirations to potentially use the Arctic as a maritime superhighway exposes the classic free-rider problem when one of China’s underinsured ships vessels become involved in a casualty. China will self-righteously claim that these vessels carry the required insurance; however, the current IMO financial standards are grossly inadequate if a large vessel incident occurs in the Arctic Sea. The coastal countries would have to pay most of the cleanup costs (assuming cleanup is possible) and they have no power to prevent the passage of these underinsured vessels through international waters. There is a parallel problem of remoteness. For example, oil spills in Russia’s Komi Republic are frequent because of worn-out equipment and there are reports that some spills have not been detected for days after they occur. Some modern technology exists to detect spills, but the lack of response capacity in the region and the huge distances involved do not inspire confidence that industrial accidents near the sea will be immediately detected and responded to. Finally, as discussed in detail in the CNA report, there is a patchwork of laws and regulations governing extractive industries near the Arctic Ocean and few humans to monitor what is taking place. Countries like Greenland—that has vast land territories—does not have the sort of regulatory capacity necessary to monitor all of the extractive industry sites. Because development is new to the region and highly valued because of the near term economic benefits, it is questionable whether the local inhabitants even feel incentivized to closely regulate inbound FDI because of the promises fresh capital, jobs and infrastructure.     

What Has the United States Done?

Many federal agencies have their Arctic policies replete with scientific data and stunning photographs. In the two years that the United States was the chair of the Arctic Council, U.S. representatives managed to champion an oil-spill response agreement (which commits nothing in terms of financial resources or regulatory action) and expanded search-and-rescue cooperation. These actions were positive and, perhaps, in the context of the years of political turmoil in the United States, understandable because the country is mired in one political controversy after another and the leadership, and media, seem incapable of grasping the strategic consequences of allowing China to have a free hand when it comes to shaping the destiny of the Arctic. And, by extension, its vast resources.

One thing positive that can be said about the U.S. actions in the Arctic, is that Secretary of State Tillerson seems to be the first senior official to finally recognize that China and Russia have their eyes on the Arctic because of its strategic location and vast resources and the United States is sitting on the sidelines. Tillerson correctly stated in an interview at the Wilson Center on November 28, 2017: “The Arctic is going . . . It’s going to be increasingly important in the future, particularly as those waterways have opened up. What I can tell you is the United States is behind. We’re behind all the other Arctic nations. They are—they have dealt with this. They’ve gotten way ahead of us. The Russians made it a strategic priority. Even the Chinese are building ice-breaking tankers. Now, why are they building icebreakers when they’re not an Arctic nation? Because they see the value of these passages. So we’re late to the game. I think we have one functioning icebreaker today. The Coast Guard’s very proud of it— (laughter)— as crummy as it is.”

Tillerson continued that the Arctic is vitally important to U.S. interests and the United States needs to work with other Arctic countries (not China) on international norms because there are gaps that have not been addressed in the past. Tillerson quite correctly said that the United States is “late to the game” because the United States could help shaped Arctic policy at the Arctic Council when the United States chaired the Arctic Council—from April 2015 until May of 2017—–in areas relating vessel safety, the standards for development near the coastline. For example, the Council could have enacted rules that would have ensured that foreign states, like China, that economically play in the Arctic post a bond for every project that they sponsor so that the developers can’t skip town when one of their ships has an accident or a project goes bust. Tillerson is also right that the Arctic is “vitally important” to our national security because there are vast amounts of mineral and hydrocarbon resources and this is a natural lure for miners, oil and gas companies, and shipping companies. These resources can also be a lure for more frequent presence of Chinese and other non-resident countries to dispatch military forces to the region to watch over the investments of their nationals. In the period that the United States led the Arctic Council until today, there has, with one small exception in the fisheries area, been no real progress in fixing the gaps in Arctic governance. The Arctic states were not content to wait on the United States, and most have seen fit to unilaterally develop their resources—often with Chinese money or technology—irrespective of the fact that some of the new projects may not reflect the latest technology or otherwise not be safe for the Arctic marine environment. So too, this growth in activity will result in considerable additional shipping (mostly underinsured) that will traverse U.S. waters. Unlike Las Vegas, what happens in the Arctic Ocean stays in the Arctic Ocean and affects multiple countries.

Where from Here?

There is no point in crying over spilt milk but the administration writ large needs to heed the warnings of Secretary Tillerson that the United States needs to be much more active in Arctic affairs on both a political and economic level. This includes a higher level of federal investment in such areas as icebreakers (some progress), deep-water ports, charting and mapping, navigational aids, maritime safety patrols, sensors and, most importantly, cooperative activities with the other states which share an Arctic coastline.

This inevitably calls into question activities and policies of Russia which has largest amount of infrastrastructure, industrial development and the longest coastline.  Unfortunately, cooperation with Russia on almost any front has become near political suicide for U.S. policymakers even though the practical effect of U.S. political disengagement and sanctions is to push Russia and China closer together. This is unfortunate because it is widely reported that Russia would like to make its own decision on how its resources will be developed and is acutely sensitive to the inflows of Chinese investments because political influence may follow. The same thing can be said about Chinese investments in Greenland and Iceland. But, cheap money comes with a price. According to new reports coming out of Australia, that the aggressive lending of billions of dollars for various projects in the South Pacific has caused some Pacific Islands to be drowning in Chinese debt and forced enact dire austerity measures to pay for the costs of infrastructure projects. As reported in CNA’s FDI report, this situation is not unique; it has played-out before in other regions around the world including South Asia, Africa and South America.

That is not to suggest that development of Chinese FDI is something which the United States can or should try to stop. But, in the near term, the U.S. government (mostly State Department) needs to begin using its political clout in the Arctic Council, the International Maritime Organization, and in its bilateral relations to push the bordering countries to establish reciprocal rules of the game to ensure that development and shipping in that very harsh environment is carried out by financially responsible actors using the best available technology. And, as suggested in the CNA FDI Report, the United States should work with other genuinely Arctic countries immediately to establish an Arctic Development Bank (ADB) so that local communities in Greenland, Iceland, Canada, and the United States have an alternative to inexpensive Chinese Capital. At the risk of some oversimplification, the ADB’s lending terms need to be equal or better than the terms offered by China. Importantly, the financing instruments can contain mandatory development standards to ensure that project operators use appropriate technology, practices and insurance while regional standards are developed among the states.

Time is not on the side of the United States. One thing is very clear from looking at Chinese FDI patterns, and its most recent policy, is that China has an “all of government” approach to the Arctic that fully aligns its government and commercial actors. China is not content to be a passive investor in the Arctic. Policymakers in the United States and other Arctic States need to ask themselves whether they are comfortable with China’s policy vision given recent events in South China Sea where the PRC chose to disregard UNCLOS and essentially appropriate the waters of the South China Sea and coerce the Philippines and Vietnam to surrender (for the time being) their sovereign rights in their EEZ and Continental Shelf. It is not hard to imagine that China would, if unchecked, try to leverage its rights to conduct research and some mining on Svalbard Island into a legal entitlement to establish a large “research station” replete with military facilities and personnel as they have done in the South China Sea. The key in preventing this from happening—over time—is for the Arctic countries to examine Chinese FDI practices and policies for what they truly are and to establish regional ground rules on how far that China, and for that matter other states, can participate in regional governance and the management of sovereign resources.

Mark E. Rosen is the SVP and general counsel for CNA and is an international lawyer with a specialty in the maritime area. The views expressed in this paper are those of the author alone and may not represent the views of CNA or any of its sponsors.