Russia’s new Cold War

The Yong Sheng arrives in Rotterdam

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.

Northern Sea Route

Source: Wikimedia

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.

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  • http://www.copyfit.co.uk Jeremy

    “… of course, it’s a consequence of global warming.”

    I have observed that by the natural process of verbal osmosis the term “global warming” has now widely changed into the less controversial “climate change”. Much safer ground.

  • Andrew Jay

    I enjoyed the article.

    However, neither Finland nor Sweden are members of NATO.

  • Dizzy ringo

    Oh dear. Global warming? Have you seen the ice extent this year? Or the fact that the temperature has been static for the last 17 or so years?

  • Anon

    This is doomed to fail if we are indeed moving into a Maunder Minimum!

  • http://- Brian E J Bridgman

    Look at the Globe, the sea routes chosen are off the Russian coast. Russia has full
    entitlement to exploit this area. Finland and Norway will have to come to some accommodation with them over their respective regions. Denmark will like Canada
    also make their claims on a territoriality basis. Whilst the United States will be confined to the Bering Straight off its own coast line into the Arctic Ocean. It goes without saying, that the U.S should keep its council as it is very much a junior partner in this situation. However know doubt she will go blundering in with the U.S. Navy, failing to appreciate Canada’s position in this scenario, causing havoc. Creating anti Russian propaganda as she is now doing (new cold war) and
    similarly China will be no doubt start to behave, as she is already, in a very Nationalistic measure, as she races to build up massive armed forces to combat
    whoever stands in her way in any region that she chooses. The European Union,
    controlled by an unelected, undemocratic soviet style leadership, will want in on the act. Like China with no entitlement; is now trying to build its own armed forces taken from, France, Germany, Great Britain, etc, etc.
    This whole scenario is a massive “hotch pot” of potential trouble if not a disaster
    waiting to happen. Mankind’s History does not bode well in the manner to which
    this scenario will be approached by those concerned. Investment I feel will be too risky for many years to come. It will take a change in the U.S. Government, a totally reformed EU, and the, not as yet Democratisation of Russia, before any stablity will come.

  • Boris MacDonut

    Sweden and Finland are not in Nato due to misdemeanours in the last war. Taking the wrong side.

  • Boris MacDonut

    Bengt. Excellent article and reminds us all why you are asked to write here. This is one the next big things. It may even save China from being uncercut by Africa.

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