Russia’s Northern Sea Route: The Superior Course for Maritime Trade in the Arctic

Lynx Global (AI)ssisted-Data-Science™ Dashboard facilitates public and private risk strategy

ABy:  Anthony J. Riddle,  Lynx Global Intelligence

 

The Chinese government intends to redraw the lines of power in maritime trade. In a Chinese-language only report distributed by the Chinese Communist Party (CCP), they signaled their intent to encourage Chinese shipping companies to utilize trade routes in the arctic circle. This will catalyze a paradigm shift in global maritime trade because China is the first major power committed to utilizing the Arctic Circle; setting a new precedent in naval history. Specifically, the CCP prioritizes the increasingly navigable Northwest Passage which crosses through Canadian and American territorial claims. Shortening transit times for maritime shipments is the primary motivation for using emerging Arctic sea routes to link China to European markets. The Chinese Maritime Silk Road ends at the Port of Piraeus, Greece, and leads through the Indian Ocean and Suez Canal. The current route cuts 10 days off the journey to Central or Eastern Europe when compared to routes which lead around the Horn of Africa. [1] Because of this accelerated transit speed “most of China’s $1 billion in daily exports to Europe [now] traverse the Gulf of Aden and the Suez Canal.” [2] The CCP now looks to the Arctic to further expedite shipments to European consumers at a time when China’s “online revenue [is] projected to double to $1.1 trillion by 2020.” [3]

China currently controls fourteen of the top twenty high volume sea ports and has launched the One Belt, One Road Initiative with the intent of establishing new trade routes to bolster its economy and expand its international influence. The maritime component of this initiative initially used a shipping route that ran through the Indian Ocean, the Straits of Malacca, and the Suez Canal. [4] This route, however, forces shipping vessels to transit through three high risk piracy zones which increases shipping costs resulting from the combination of higher insurance premiums and augmented security measures. Costs to shipping companies are increased by $726.1 million a year when transiting just the East African piracy zone because of the additional security merchant vessels require to do so safely. [5] By shifting priority to the increasingly navigable arctic, Chinese shipping companies can effectively bypass these costly and dangerous areas when shipping goods to European markets. China’s Maritime Safety Administration spokesman Liu Pengfei was quoted as saying “Once this [arctic] route is commonly used, it will directly change global maritime transport and have a profound influence on international trade, the world economy, capital flow and resource exploitation.” [6]

The Russian controlled Northern Sea Route will become navigable far sooner than the Northwest Passage according to climate change models; additionally it will have the largest ice free area comparatively to other routes. [7] The Northern Sea Route is also approximately 40% shorter than using the Suez Canal trade route [8] and shortens voyages from Shanghai to Hamburg by 2,800 nautical miles. [9] Such a significant input cost reduction for delivering goods to European markets will be irresistible for shipping companies participating in Chinese trade. An example of how arctic transits create significant savings is “the Nordic Orion, a Danish bulk carrier, [which] saved $200,000 and four days’ transit time by shipping 15,000 metric tons of coal from Vancouver to Finland via the Northwest Passage in 2013.” The Arctic Ocean therefore represents an approximate savings of $50,000 a day in transit costs while simultaneously removing the necessity for Maritime Security teams that are required to safely transit piracy zones. This will drive Arctic and non-Arctic states to compete for access to these lucrative routes that are partly claimed by the United States, Russia, Canada, Denmark and Norway. [10]

122333The Russian government has heavily invested in making the Northern Sea Route navigable for trade to compete with the Northwest Passage. China stated in their 2015 military white paper that they place great importance on “managing the seas and oceans and protecting maritime rights and interests” [11] and, as a result, they made history in 2014 by having the first unescorted commercial vessel transit the Northwest passage which delivered a shipment of nickel ore. [12] This same year China and Russia signed a 30 year and $400 billion dollar deal for GAZPROM to supply China with Russian oil in an attempt to further link Russian and Chinese economies. This deal ultimately was crippled by plunging price of oil from the $100/barrel at the time of the deal and the global supply of Liquid Natural Gas (LNG) which has become more attractive because of the Paris Agreement on climate change. [13] Russia intends to manage their Northern Passage to circumvent western sanctions by taking advantage of Chinese economic growth to repair their own economy and improve Sino-Russo relations. The Chinese decision on which arctic route to rely on will rebalance global relations between the three superpowers.

To successfully attract Chinese shipments, Russia maintains forty icebreakers and has another eleven icebreakers on order to improve the viability of this emerging shipping lane. Additional signs of Russian commitment to controlling arctic trade are found in their four active Arctic combat battalions, recently established dedicated Arctic command, and creation of sixteen ports in the arctic circle. [14] Russia’s State Commission on Development of the Arctic Regions also founded a single company to boost the development of these new shipping routes and will oversee all logistical operations in the area. [15] The Northern Passage has already experienced a 30% increase in commercial traffic from 2008 to 2010. [16] Companies interested in participating in a region that is quickly becoming viable for trade, a first in recorded history, require both familiarity with the agreements between states in the region and to establish a dialogue with new partners already established there.

We are experiencing a paradigm shift in global trade. One that can be capitalized on if effectively managed through careful analysis of real-time competitive intelligence. Companies wishing to take advantage of this development require a dedicated team of subject matter experts who are familiar with the political forces affecting global supply chains. They will also require a network of professional partners who are firmly established in these expanding markets. Without a carefully constructed strategy to mitigate potential risks created by the geopolitical pressures between states, the subsequent volatility could cause irreparable damage to a company’s supply chain.

By introducing an Artificial Intelligence (AI) driven analytical dashboard to assist a diverse team of experts, Lynx Global Intelligence is uniquely positioned to provide the services necessary to successfully emerge from this transition ahead of the competition.

 

 

[1] http://unctad.org/en/PublicationsLibrary/rmt2016_en.pdf

[2] http://www.huffingtonpost.com/joseph-braude/why-china-and-saudi-arabi_b_12194702.html

[3] http://unctad.org/en/PublicationsLibrary/rmt2016_en.pdf

[4] http://unctad.org/en/PublicationsLibrary/rmt2016_en.pdf xi, 21

[5] http://oceansbeyondpiracy.org/reports/sop/summary

[6] http://af.reuters.com/article/commoditiesNews/idAFL3N17N1JK

[7] Scott Stephenson, University of Connecticut, https://www.newsdeeply.com/arctic/community/2016/02/10/scott-stephenson-the-future-of-arctic-shipping

[8] http://www.gallois.be/ggmagazine_2013/gg_02_03_2013_90.pdf

[9] http://www.scmp.com/news/china/society/article/1937327/china-wants-its-shipping-use-faster-arctic-route-europe-opened

[10] http://www.maritime-executive.com/article/rival-claims-to-the-changing-arctic

[11] http://thediplomat.com/2016/04/going-blue-the-transformation-of-chinas-navy/

[12] http://www.latimes.com/world/asia/la-fg-china-ships-alaska-20150902-story.html

[13] http://www.reuters.com/article/us-russia-china-gas-exclusive-idUSKCN0UT1LG

[14] SEN PERDUE (R-GA): Senate Armed Services Committee Holds Hearing on U.S. Southern Command and U.S. Northern Command Witnesses: Gen Lori Robinson (CDR USNORTHCOM) PG 25

[15] http://e360.yale.edu/features/cargo_shipping_in_the_arctic_declining_sea_ice

[16] https://www.afsc.noaa.gov/publications/misc_pdf/iamreport.pdf PG 16-17