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Why the Northern Sea Route is Still of Limited Geo-Economic Importance

By and | Article
September 8, 2013
Ship in a bay

Yong Sheng in the Bay of Eilat. Photo: Oyoyoy

With the Chinese Yong Sheng1) currently transiting the Northern Sea Route (NSR), the potential of Arctic shipping is being discussed by the world’s media.2) The Yong Sheng is the first Chinese cargo vessel to transport container goods (steel and heavy equipment) from Dalian, China to Rotterdam, Europe.

Researchers and public media have often cited the development of Arctic shipping routes as the driving factor of China’s regional interests, and, vice versa, China’s interest in Arctic shipping is taken as an important factor in the development of the NSR. Consequently, the NSR is identified as the most promising Arctic seaway with a considerable potential to shorten sailing distances from Europe to Asia (and, to a lesser extent, vice versa). A closer look at the actual NSR statistics tells a more differentiated story about the future outlook of the route.

Shipping Statistics and Omitted Questions

As of September 5, 2013 the NSR Administration has issued 495 permits to navigate and operate on the NSR so far this year.3) However, most of these permits are for only parts of the route, predominantly the western part of Russian waters, i.e. the southwestern Kara Sea. As of 31 July 2013, of the 296 permits granted only 18% (58 permits) are for actual transits and 45% (133 permits) are approved for voyages only in the southwestern Kara Sea, primarily shipping goods within the region or bringing them south-westwards to Europe.4)

This is just one example of how current discussions on the NSR generally remain superficial, drawing an undifferentiated picture of current and future Arctic shipping. Discussions tend to ignore the complexity of global shipping and its immediate repercussions on the potential of Arctic shipping. Relevant questions such as for which goods the northern routes will be relevant and which markets can be sensibly served need to be asked. Shipping types of many kinds, including fishing, tourism, cargo, container, destinational, transit, and intra trade and supply, are lumped together, despite the tremendous differences in the economics, conditions and potential of different types of ship traffic.

Reliability and viability are key factors in global shipping operations that are often not taken into account when discussing the economic feasibility of Arctic shipping.5) That these factors are usually ignored is a major issue given that predictability, punctuality, and economy-of-scale of Arctic shipping are currently afflicted with many challenges and uncertainties, and will continue to be for some time to come.

Thus, public discussions regarding the future of Arctic shipping must begin to include the economic considerations given to global shipping in general. It would be equally important to go into more detail concerning the many particularities and subtleties that are decisive when aiming to evaluate the potential of Arctic maritime routes. In this regard, several essential questions arise:

  • Which kinds of shipping are relevant for northern routes? Will intra- and destination shipping remain the predominant shipping activity or will transit take over the leading role?
  • What are relevant goods for northern maritime transport?
  • What are the relevant import and export markets for these goods and what are their respective routes?
  • What do the major, global trading routes currently look like? How will they develop in the years ahead and how do northern routes fit into the general maritime trade picture?

From a less economic perspective, debates about the future of Arctic shipping also need to include the evaluation and acceptance of risks, including environmental and human risks, linked to navigation in Arctic areas. Important questions include: How safe is safe enough? What kind of risks can be accepted?6)

To shed some light on these questions, the following maps illustrate the regional distribution of China’s imports and exports. China is often highlighted as the driving force of potential Arctic shipping developments. However, the analysis of global trade patterns exemplified by China’s current imports and exports and its future outlook show a different picture. China conducts half of its trade with its neighbors in the Pacific region. Europe’s share – which would be relevant for Arctic shipping – is substantially smaller. Less than 20% of China’s trade is bound for or originates in Europe.

Further, the majority of trade between China and Europe is of a containerized nature, which, most experts agree, will not be routed through the Arctic Ocean, due to the seasonality of Arctic transit routes, limited reliability and predictability, and the lack of infrastructure.

National Incentives and New Administration

In addition to these geo-economic considerations, national deliberations and interests have to be kept in mind. With regard to the NSR, it is essential to discuss the immediate relevance of this seaway for the Russian Federation: What is Russia’s incentive to develop the NSR? Is it intended to be a national waterway or an internationally used sea route? Is it meant to transport regional goods, i.e. energy resources to Asian and/or European markets, or considered as a transiting route transporting goods from markets outside the Russian Federation navigating through Russian water? What is the strategic value of the NSR for Russia?

Several on-going developments in regard to the administration of the NSR currently influence the deliberation of these questions, with the “icebreaker paradox” as the most prominent. With the recently implemented Rules of navigation on the water area of the NSR,7) icebreaker assistance is no longer compulsory for each voyage through NSR straits, but now it depends on the ice class of the vessel and the ice conditions in the area in which the vessel will be traveling. Icebreaker fees will depend on the capacity of the respective ship, its ice class, the distance of the escort and the time of navigation.8)

However, while the legal framework is now established, a detailed mechanism for the calculation of the fees still needs to be developed. Until this mechanism is in place, shipping fees for using the NSR will continue to be determined by the old rules from 1990, meaning fee determination through individual negotiations.

According to the rules, the Russian authorities only demand fees for icebreaker assistance (not only for breaking ice but also for search and rescue and other functions) and pilotage for using the NSR, which constitute the only revenue sources from the NSR. As these sources are not enough to maintain and develop the necessary infrastructure assets for safe navigation on the NSR, the Russian government has to provide significant subsidies.

One begins to question the economic viability of the NSR for the Russian Federation. And also the question remains about who will bring about the vast investments needed to modernise, maintain, and (potentially) expand the existing icebreaker fleet. The potential lack of sufficient icebreaker capabilities in the NSR will likely lead to a delay in shipping traffic and has immediate negative effects on the development of the NSR as a transit route used for international navigation. For several maritime trading sectors, time savings are crucial for any economic feasibility considerations of transiting the NSR, especially in the case of seismic and liquefied natural gas (LNG) vessels, which have very high time-charter costs per day. Waiting times of a few days due to icebreaker delays may destroy any pre-calculated cost benefits in comparison to southern routes.

Based on these considerations, it may be possible that an agreement between the Russian Federation and user states of the NSR increasing the latter’s financial contribution to the maintenance of the NSR is a reasonable option to improve and safeguard NSR usage. This is especially relevant if Russia is seriously interested in the NSR not only being a national waterway, but also a route for international transits.

Conclusion

Development in the Arctic is happening and shipping numbers are indeed increasing. But both scientific and public debates and reporting need to be directed into a more nuanced and differentiated discussion about the region’s general future and the potential of shipping along northern routes.

A realistic perspective suggests that currently the NSR is intended as a Russian sea route. International shipping and potential revenues derived from the NSR are generally welcome but most likely Arctic shipping will not change major global trading routes. Consequently, while it is of regional relevance and potential importance as a niche route for a number of goods, the NSR’s geopolitical and geo-economic relevance, especially in the sense of global trade patterns, is rather limited.


This article is part of a larger study which takes a look at China’s geo-economic interests in Arctic shipping and the future of Arctic shipping generally, which can be downloaded here.

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