Last September a 19,000 tonne cargo ship called the Yong Sheng made history when it pulled into port in Rotterdam, Holland. The Yong Sheng was the first Chinese cargo ship to navigate the Northeast Passage – a shipping route from Europe to Asia via the Bering Strait and Arctic Circle.
The Northeast Passage is a shortcut. Normally it takes cargo ships 48 days to get from the factories of China to markets in Europe via the Malacca strait, Somalia and the Suez Canal. But the Northeast Passage gets you there in just 35 days, which cuts shipping costs dramatically.
The Northern Sea Route, aka the Northeast Passage, first became ice-free in summer in 2007. Since then, in the summer months it’s been used alternative to the existing shipping route. It’s become known as the ‘Suez of the north’.
Of course, traversing the Arctic comes with its problems. There are no emergency services, at times there’s need for an ice-breaker on standby, and it’s a generally inhospitable ride.
But both China and Russia are taking this new trade route very seriously. After all, the European Union is China’s biggest export destination, with €290bn in goods sold last year.
Only four cargo vessels sailed the whole route in 2010. In 2011, it was 34. It was 46 in 2012, and 71 in 2013. Now, Russia is investing billions of dollars in Arctic infrastructure to reap the benefit from the Suez of the north.
Now, regular readers will know that I’m a bit of a Russia bull. And it is Russia after all, that’s set to profit most from this new frontier. We’ll get onto that side of the trade in a second. But before we do, it’s important to look at the other reason Russia and China are so keen to open up the Arctic frontier.
China and Russia’s land grab
The Arctic Council comprises the eight full member states with a land border: Canada, Denmark, Finland, Iceland, Norway, Russia, Sweden and the United States. And interestingly, China recently gained observer status in the council.
Though China has no border, it’s muscling in an attempt to gain better access to natural resources in the region. China is also interested in scientific research and the region’s strategic value, as what some analysts call the “military high ground”.
The US Geological Survey has said that the Arctic may be the biggest unexplored oil and gas prospect on Earth. And as The Economist reminds us, things are already starting to happen: “Half the Arctic’s basins are unexplored. But this is now changing, with oil firms increasingly heading north, nudged by high oil prices, better technology, a dearth of easier opportunities, and melting ice.”
Russia, the only non-Nato Arctic state, has made a military build-up in the Arctic a strategic priority. “The Russian leadership has made a political decision to return to the Arctic. “We’ll be restoring airfields, reviving Soviet-era hydrometeorological services, and deploying the naval means to convoy ships and defend Russia’s economic zone of interests”, says Viktor Litovkin, military affairs editor of a Moscow newspaper.
This strengthens Russia’s hand
This is very much a long-term story. I’m not for one moment saying that anyone’s going to be making gazillions out of their Arctic ambitions any time soon. But there’s no doubt that as the region becomes more hospitable, so nations such as Russia look set to take advantage.
Already Russia is commodities powerhouse. And China will keep Russia in this business for a long time into the future.
Of course, the situation leaves many in the ‘old world’ concerned. The US Coast Guard is demanding money to build a fleet of icebreakers, to break Russia’s near-monopoly in the region. And some shipping executives fear that Russian control will keep them from using this new and potentially lucrative trade route.
At this stage, we don’t want to overreact to developments. But this new frontier, alongside a powerful trade partner, is surely another feather in the cap for Russia.
For Westerners, this is a slightly unsettling story. And of course, it’s a consequence of global warming. But still, we ought to align ourselves to make the most of it.
Either on Friday or early next week, we’ll catch up on my favourite investment fund with exposure to this emerging colossus.