China is seizing the geopolitical opportunities of the melting Arctic

As the Arctic melts it is transforming from an icy waste ruled by polar bears to perhaps the most valuable global venue for natural resources including oil, natural gas and a variety of minerals.

As these resource potentials are unmasked, so too is the level of interest of a variety of states — especially from Asia — in being able to exploit those resources and potential of expanded Arctic Ocean maritime access, both for destination and transoceanic shipping route.

{mosads}This opening of the Arctic to resource exploration and extraction has created the need for a unified, or at a minimum, a coordinated response from the six Arctic nations exposed to both the benefits and the risks of accelerating development in the region.

In the near term, the Arctic Ocean is the common denominator for increased development since imports and exports will likely have to move by water. If there is a problem, then the six Arctic nations would have to bear the costs of humanitarian or disaster relief efforts and any required remediation.

The Arctic is already home to some of the world’s largest mining operations, but regional development of infrastructure — roads, railways and ports to carry the resources out of the Arctic face funding challenges.

This then raises the question: who exactly should be funding the development of the Arctic and Arctic Infrastructure. And more importantly, is development in the Arctic being carried out in a way that is securitized and responsive to the unique risks of polar operations?

Asking the “who” and “what” is important because the United States and five other countries share a common coastline, the Arctic Coastline, an incident in one part of the Arctic (a closed sea) can have adverse effects well beyond the physical boundaries of an oil and gas or mining site.

Each Arctic state has the sovereign right to develop and regulate its economic activities near the coast; however, all have an interest in ensuring that that development is done by persons and firms that have the technical experience to prevent incidents or if something goes wrong, have the financial bandwidth to pay for recovery, cleanup costs and claims.

Unfortunately, the regional legal structure in the Arctic is, in most respects, a blank slate. There are no standards or legal processes to deal with these types of incidents that have transboundary effects.

Complicating this situation is the problem of outside money flooding into the Arctic. Some cash starved countries like Greenland are eager to accept this foreign capital; setting the stage for a disaster if poorly capitalized foreign limited liability companies are not forced to commit the resources necessary to secure resource extraction projects both on an ongoing basis and when the mine or well is being decommissioned.

The distribution of resources in the Arctic is uneven, as are political attitudes toward development of the Arctic and legal frameworks. A new study by CNA on Unconstrained Foreign Investment in the Arctic demonstrates that foreign direct investment in the Arctic is ramping up at a brisk pace.

China is major investor in Arctic nations generally as well as in Arctic specific activity. From 2012-July 2017, Chinese investment in Arctic specific projects topped $89.2 billion, for comparison, the size of the entire Arctic economy is around $450 billion.

Energy, transportation, and infrastructure projects attracted the most foreign investment.

Russia received the most foreign investment during this period, with the U.S. and Canada receiving the second and third most respectively, as figure 1 shows.

The economic and political context of these investments are significant. For example, Chinese investment in Greenland may seem virtually negligible — however, the $4 billion from China constitutes over 185 percent of Greenland’s GDP. Compared to the other Arctic nations, this figure is remarkably high. Chinese investment in Canada constitutes 3.8 percent of Canada’s GDP, 2.1 percent of Russia’s and 1.3 percent of the U.S. GDP.

The U.S. has more transactions than any other Arctic nation, but each transaction is worth, on average $368 million, whereas in Russia, the average transaction is valued at $790 million, and $568 million in Canada.

Investigating investment in the Arctic requires more than just a superficial skim of values. To really understand the impact of FDI on the Arctic investments have to be examined through the lens of each nation’s unique legal and economic situation. Also, how closely this new foreign investment is being tracked, monitored and regulated and are complex legal structures defeating the ability of states to regulate what is happening on the ground.

The legal frameworks for foreign direct investment in the six Arctic nations — Canada, Iceland, Greenland, Norway, Russia and the United States —are not sufficient to ensure that individual investments (and projects) are done in a way that is fiscally or environmentally sound and protects the interests of other states that share a coastline.

Additionally, one of the largest investment destinations, Russia, remains an enigma. It has an excellent collection of statutes but the actual regulatory practices are not transparent and there is a low confidence that all transactions are being publicly reported. Given this, it is entirely possible that Russian investment controls are much weaker than Russian law would suggest.

Chinese investments are larger than ordinary market forces would suggest. Investments in some sectors have been large even though world commodity prices are soft. This is a concern. And while China’s foreign corporate operations have improved, Chinese companies seem particularly prone to environmental mishaps due to inexperienced operators and local labor abuse. The extreme conditions of the Arctic compounds the risk of a major accident.

With massive investments in the Yamal LNG Export Terminal and Belkomur Railroad in Russia, the $15.1 billion acquisition of Canada’s oil and gas company Nexen and multibillion dollar mine acquisitions in Russia, Canada and Greenland — there is a clear trend of Chinese investment in extractive industry in the Arctic. China’s resource strategy is driven by several factors: secure access to natural resources, alternative transit routes, establishing a presence in key markets and turning a profit.

China has also established a presence in policy forums such as the Arctic Council, through research initiatives such as the Northern Lights Institute and the China-Nordic Arctic Research Center. Large scale infusions of foreign capital and labor can have impacts on the political sovereignty of the recipient countries

This steady creep of these activities is mostly flying beneath the radar of Arctic policy makers and could lead to a situation where the Arctic states may find themselves captive to Chinese mine and oil and gas operators. China has a perfect legal right to invest in the Arctic and should not be the object of discriminatory treatment.

There need to be objective regional standards for investment and transparency to ensure that states with the lowest regulatory standards don’t become a magnet for unscrupulous operators.

Regulation is one approach; though it would take decades to accomplish. However, incorporating development standards into financing mechanisms, such as the creation of an Arctic Development Bank, allowing nations to pursue their sovereign rights to exploit their resources and develop much needed Arctic infrastructure.

Mark E. Rosen is senior vice president and general counsel for nonprofit research and analysis organization CNA Corp. David Slayton is a research fellow at Stanford University’s Hoover Institution. Both are members of the Arctic Security Working Group at the Hoover Institution. The views expressed in this paper are those of the authors along and do not represent the views of CNA, The Hoover Institute, Stanford University or any of their sponsors.