On March 29, the 4th Arctic: Territory of Dialogue international forum will open in Arkhangelsk. It will focus on promoting cooperation and development in the Arctic. More and more forums are being held with the goal of facilitating the conversation on an ever-widening scope of Arctic-related issues among businesses, researchers and government officials (the Arctic Circle in Reykjavik, Iceland, the Arctic Frontiers international conference in Tromso, Norway, etc.). The Arctic’s appeal for the international community can be explained by its immense resource potential, as well as the possibility of developing new transit routes. This is especially relevant for Asian countries that lack energy resources and depend in their foreign trade on the route that passes through the Strait of Malacca and the Strait of Singapore and on to the Indian Ocean and the Suez Canal.
International businesses are increasingly interested in the Northern Sea Route as Russia develops its part of the Arctic and the navigation season along this route becomes longer. However, in the current conditions companies are not ready to take bold steps in this direction. Three South Korean majors, Hanjin Shipping, Hyundai Merchant Marine and Hyundai Glovis, have been exploring Arctic navigation for several years now. Two of them decided to suspend efforts aimed at developing navigation along this route, while Hyundai Glovis made a test voyage through the Northern Sea Route in 2013 to deliver 44,000 tons of crude products from Russia’s Ust-Luga port to Korea’s Gwangyang and Yeosu. This remained the only time the company used the Northern Sea Route, despite its announcement the same year of plans to invest in developing it and enhancing competitiveness in this segment of the shipping industry.
So far, the Northern Sea Route has been unable to compete with the southern routes despite the promise to cut the distance by one third. According to Hanjin Shipping and Hyundai Glovis representatives, this is attributable to a large extent to the costs associated with equipping ships with icebreaking capabilities, which becomes particularly burdensome given that the navigation season along the Northern Sea Route lasts only a few months. These capital costs vary from 10 to 30 percent. Higher tariff duties compared to the Suez Canal are another obstacle, since icebreaker support is mandatory for all Arc5 and lower class vessels along the whole route.
Of course, the shorter distance helps reduce fuel costs, but this is partially offset by relatively higher fuel consumption (ships with icebreaking capability tend to be heavier) and higher prices of fuel that can be used in northern latitudes. Representatives of these companies also pointed to additional insurance and crew training costs. In fact, navigation in the Arctic environment requires better training for the crew, especially the pilots, which adds 10 percent to the training budget.
In 2013 transit shipments along the Northern Sea Route hit a record high of 1.36 million tons, followed by a sharp decline in international shipments against the backdrop of escalating foreign policy tensions and lower energy prices. At the same time, Russia’s domestic and export shipments are growing along the Northern Sea Route. In 2016, cargo turnover reached 6.9 million tons on the back of mineral extraction projects, while transit shipments came in at just 215,000 tons.
Moving forward, cargo turnover along the Northern Sea Route will be dominated by Russian energy projects with shipments of Yamal LNG expected to begin this year. The plant can produce up to 16.5 million tons per year, and 95 percent of this volume has already been sold: 7 million tons will be shipped to Europe (Total and Gas Natural Fenosa), China (PetroСhina) and India will receive 3 million tons, and another 2.9 million tons to Singapore. There is also the Lukoil’s Varandey Oil Terminal (up to 6 million tons), Gazpromneft’s Novoportovskoye (6−8 million tons) and Prirazlomnoye fields (up to 6 million tons), as well as ore and non-ferrous metal extraction projects (up to 3.5 million tons), which means that shipments along the Northern Sea Route could well reach 30 million tons by 2030.
According to the financial and economic development model for the Northern Sea Route prepared by the Analytical Center under the Government of the Russian Federation, these 30 million tons could be supplemented by 2030 by an additional 20 million tons in transit shipments diverted from eight southern sea routes. To achieve this, an Arctic container shipping line should be created between Murmansk and Petropavlovsk-Kamchatsky by building by 2023 seven class Arc8 container vessels with a capacity of 5,000 TEU. In the current economy, these large-scale plans seem unrealistic and largely redundant.
The economic attractiveness of container shipments along permanent routes to a large extent depends on the possibility of achieving economies of scale by transporting large quantities of goods on a single vessel and distributing sharing costs along the way. Container ships stop at various ports along their route to unload containers and take new ones on board, thereby reducing overall transportation costs for every product. The fact that there are no major markets along the route as well as the specific features of Arctic navigation with makes it challenging to guarantee delivery time, further delay the emergence the Northern Sea Route as an international transport route by at least several decades. Shipments of bulk and liquid cargo have better potential, but there is less demand for this kind of cargo in Europe and Asia. Today, more ships sail through the Suez Canal in a day than along the Northern Sea Route in a year.
These modest transit volumes remind us that for Russia the Northern Sea Route is first and foremost a transportation route for domestic and export shipments. Its primary purpose is to facilitate economic development in the sparsely populated northern regions of Russia, enhancing connectivity in the Arctic zone and integrating it and Russia as a whole into the global economy. Efforts to develop the Northern Sea Route and Arctic projects are an important element in terms of Russia’s cooperation with Asian countries, including as part of the initiative to coordinate the development of the Eurasian Economic Union with China’s One Belt, One Road initiative. Against this backdrop, the key projects are the ongoing construction of a port and gas terminal in Sabetta, and efforts to develop the Murmansk transport hub as a key link on the way from Northern Europe and the Kola Peninsula to the Northern Sea Route, as well as the development of ports and logistics hubs in Russia’s Far East.