Summary by Geopolist | Istanbul Center for Geopolitics
The article from ISPI examines Russia’s Arctic projects amid the ongoing war and sanctions. It focuses on LNG projects, icebreakers, and the Northern Sea Route. Despite economic challenges and international sanctions, Russia continues to invest heavily in the Arctic, aiming to exploit its natural resources and develop new shipping routes. The geopolitical implications of these developments are also considered, highlighting Russia’s strategic priorities in the region.
Read the full article below.
Russia’s invasion of Ukraine burdens the Russian economy, including its Arctic projects. The target deadlines of many projects have already been postponed. However, energy projects in the Arctic are one of the main resources of the Russian economy and for accumulation of military power for Moscow. In this respect, the development of economic projects in the Arctic is a strategic issue for Russia. It is important not only in terms of continuing the current invasion of Ukraine, but also in terms of increasing Russian military power after the war. This analysis explores how far Moscow might achieve its geo-economic goals in the Arctic by increasing energy production, especially LNG, increasing the cargo volume of the Northern Sea Route, and building the required icebreakers and ice-class vessels.
This article argues that although Western sanctions block or at least slow down Moscow’s economic projects in the Arctic, Russia is stepping up its efforts to circumvent sanctions and acquire the technologies it needs for its Arctic energy and transport projects. Russia also intends to involve some Asian and Middle Eastern countries in the projects. In this respect, Russia’s cooperation with China is more visible. Moreover, the forecast increase in global LNG demand by the 2040s may help to develop Russia’s Arctic energy projects in the coming years. For this reason, after the war ends, Western companies may return to the projects. At the same time, delays and the slow tempo of development of Russia’s Arctic projects are unavoidable. Climate, energy demand and prices, Russia’s foreign policy and regional and international geopolitical processes are all factors that will have a major influence on the extent to which Russia’s Arctic projects develop.
Energy projects
In 2023, Russia was the fourth largest LNG exporter in the world. In the same year, the United States sanctions started to target Russia’s LNG exports, including Russian and international entities involved in NOVATEKS’s Arctic LNG 2 (specifically, the US put sanctions on Arctic LNG 2 itself, as well as on transshipment facilities). In addition, the threat of retaliatory sanctions prompted Chinese, Japanese, French and other companies to avoid or freeze their cooperation with the project. More recently, for the first time, the European Commission also has proposed sanctions.
Despite all the sanctions-related challenges, according to experts, NOVATEK’s Arctic LNG 1, 2 and 3 projects1 should yet achieve a sufficient resource base and recoverable reserves to underpin each project.
Sanctions now target project construction, shipbuilding and the marketability of liquefied gas. Moreover, Western financial institutions have also cut off participation in the LNG projects. For instance, Italian Intesa Sanpaolo and Cassa Depositi e Prestiti (CDP) terminated their involvement, and Export Credit Agency SACE abandoned Arctic LNG 2 due to the risk of secondary US sanctions in 2024.
However, Russia had started to diversify its exports of energy resources and increase its exports of natural gas and crude oil to Asia even prior to 2022. Since the beginning of the invasion, it has partially succeeded in re-routing Arctic oil to China and India. Whereas in February 2022 Russia exported about 400,000 barrels of crude oil to Northern Europe, in Decembre 2022 this figure decreased to zero, while exports to Asia reached 300,000 barrels per day. Although Moscow already had a detailed plan or import substitution of equipment for oil and gas production, this issue has been acute since the beginning of 2022. for oil and gas production, this issue has been acute since the beginning of 2022.
Before February 2022, Chinese state companies already held ownership stakes in several major Russian energy projects in the Arctic, including Yamal LNG and Arctic LNG 2. The same can be said for Indian companies, with Moscow actively promoting projects like the Vostok Oil and the Syradasaysky coal mines to Indian investors. Similarly, Moscow also aims to attract Chinese investments into Rosneft’s Vostok Oil project.
This year China is continuing to provide LNG modules for Arctic LNG 2. The delivery of the plant module has enabled the Russian energy company NOVATEK to complete the construction of a second production unit for Arctic LNG 2. Yet, it is not clear whether NOVATEK will be able to build the third gravity-based production unit, as initially planned. However, a vessel carrying the first two LNG modules for the third production train of Arctic LNG 2 set sail several days after the US sanctioned four heavy lift vessels for carrying LNG technology to Russia.
In 2023, NOVATEK started opening tenders for Russia-based contractors to supply auxiliary equipment and machinery for Arctic LNG 2, but major machinery such as gas turbines and generators were contracted in China. NOVATEK has recently ordered key equipment for supplying power to Arctic LNG-2 from the Russian company “Power Machines”, instead of purchasing machines from the Chinese Harbin Guanghan Gas Turbine, because of the deadline; but there are question marks over the quality of this equipment.
Russia also actively uses schemes to circumvent sanctions. In recent years, Arctic LNG 2 has continued to receive prefabricated modules from China, even though EU sanctions prohibit their export. However, not only Chinese companies have been involved in this business: EU firms have also supplied over $630 million worth of equipment to Arctic LNG 2 despite the sanctions imposed since Russia launched its invasion of Ukraine. Nonetheless, sanctions have affected NOVATEK’s projects: NOVATEK’s plan to lease a floating power plant from the Turkish company Karpowership was not implemented, because the terms of the lease were subject to change every month.
Other companies also face problems. Gazprom Nedra – one of Russia’s major oil and gas service companies, operating several rigs for the exploration of the Arctic shelf – was included in a US sanctions list. Moreover, the recent sanctions target Asian companies, including Singaporean company “Singaporean shipping operator Red Box, which continued delivering modules from China to Russia throughout 2023 and into 2024. The new measures also target vessels working for Rosneft’s Vostok Oil. Sanctions will likely complicate other companies’ ability to carry future modules from China or elsewhere, thus hindering the completion of Arctic LNG 2 or the upcoming Murmansk LNG project. The ban on transshipment of Russian LNG in EU ports with re-export to third countries, as part of a new round of EU sanctions adopted on June 24, may affect up to 11.8 million tonnes of contractual obligations of NOVATEK’s Yamal LNG, which continued delivering modules from China to Russia throughout 2023 and into 2024. The Arctic LNG 2 and Murmansk LNG are among the 116 individuals and entitites hit by the EU’s 14th package of economic and individual sanctions on Russia. The EU will forbid reloading services of Russian LNG in EU territory for the purpose of transshipment operations to third countries. This will cover both ship-to-ship transfers and ship-to-shore transfers, as well as re-loading operations. New investments, as well as the provision of goods, technology and services for the completion of LNG projects under construction, such as Arctic LNG 2 and Murmansk LNG, will be prohibited. However, this will not affect import but only re-export to third countries via the EU. Moreover, it appears that the ban will not enter into force until March 2025, allowing Russia to tranship LNG for another full winter season.
The most recent round of U.S. sanctions also targets the planned Obsky LNG, Arctic LNG 1 and Arctic LNG 3 projects, as well as companies building pipeline infrastructure for Murmansk LNG and Vostok Oil. Sanctions have already started to affect the Russian LNG projects in the Arctic: China’s Wison New Energies, a key manufacturer of liquefaction modules for NOVATEK’s Arctic LNG 2, announced that it has decided to discontinue all of its ongoing Russian projects, and will indefinitely stop cooperation with any Russian business. The decision was made a week ago, after the U.S. for the first time sanctioned a Chinese yard, Penglai Jutal Offshore Engineering Heavy Industries. The company manufactures large-scale modules for Russia’s LNG projects.
Nevertheless, Russia might overcome the lack of some Western technology. Mainly thanks to NOVATEK, Russia has acquired and developed the know-how to manufacture cryogenic equipment. Russian state companies have also tried to develop substitution projects – for instance, Rostec has listed among its priorities the production of turbines for the energy sector. However, how successful they will be in producing high-quality equipment is an open question.
In any case, all of the Russian Arctic energy projects will face similar technology, logistics and market problems. In the best-case scenario, the Russian projects will produce LNG but not to their full capacities.
Moscow’s goals of transportation along the Northern Sea Route (NSR) and realities
In accordance with the Development Plan of the Northern Sea Route (NSR) until 2035, approved by the Russian Government in 2022, the main components of the route’s cargo should be hydrocarbons.2
Table 1: Projected traffic volume along the Northern Sea Route until 2035 (in million tonnes)
| 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | 2035 |
| 46,82 | 90,01 (803) | 110,21 | 124,39 | 139,81 | 164,59 | 192,54 | 216,45 (1504) | 224,96 | 229,83 | 235,35 | 238,31 | 238,11 (2205) |
Source: The development plan of the Northern Sea Route for the period until 2035 (August 1, 2022)
The volume of cargo transportation along the Northern Sea Route amounted to 36.254 million tonnes in 2023, a new record level. This was achieved primarily thanks to NOVATEK’s LNG projects, which make up more than half of the cargo traffic, but also thanks to Gazprom Neft, Lukoil and Norilsk Nickel, which redirected their cargos from the Western to the Eastern direction. Transportation of transit cargo along the NSR in 2023 also reached record values, amounting to 2.1 million tonnes. Despite the increase, volumes lag behind those of the plan for the development of the Northern Sea Route. According to the plan, in 2023 the cargo flow was supposed to be 46.82 million tonnes. It was not possible to achieve the forecast figure, partly due to the postponement of the launch of NOVATEK’s Arctic LNG-2 project, which was expected to produce about 3.6 million tonnes of product by the end of last year.6
However, exploration and production of oil and natural gas already face challenges and in the upcoming years the production goals may not be achieved. Besides the effects of the sanctions and the existence of a price ceiling limit of $60 per barrel for seaborne oil supplies since December 2022, some experts are concerned about the discrepancy between the confidence of Rosneft’s claims of huge reserves of Vostok Oil and its actual geological exploration. Russia’s Deputy Prime Minister Aleksandr Novak estimated that oil prices would need to remain between $70 and $100 per barrel to justify oil production on the Russian Arctic shelf.
The volume of cargo transportation along the Northern Sea Route by the end of 2024 should be about 40 million tonnes, which is half the amount specified in the development plan. The lion’s share will be the transportation of oil and gas from the projects that are being implemented in the Arctic zone of Russia. The forecast of 40 million tonnes of cargo planned for transportation along the NSR, should be LNG from Arctic LNG-2. Moreover, a proposal to link the ports with the “mainland” through railway lines needs a lot of investment, which is a huge problem for Russia at present. In other words, the government has now realised that achieving, or even approaching, its targets is impossible, and it must start justifying its shortcomings.
A decree signed by Putin states that the main increase in 2024 should come from the Rosneft-Vostok Oil project. Russian experts point out that the expected volumes of traffic differ from those indicated in the NSR Development Plan for the period until 2035 and are closer to reality, since they take into account the new geopolitical situation. Sanctions primarily affected the development of the NSR and the availability of the cargo fleet and reformatted the markets. The Head of Atomflot said that the tariff policy of the NSR as a whole needs to be revised. Maybe there will be a completely different hybrid scheme. However, tariffs may change when the NSR opens year-round and cargo traffic increases, so that there is equal access for all users to the services of the icebreaker fleet, not just the nuclear one. The shortcomings of the NSR port infrastructure should also be considered. .
Icebreaker and Ice-class fleet
The problems with the building of icebreakers and ice-class vessels started already in 2022 when Finnish companies left Russia. Challenges with access to technologies are increasing and cooperation with Finnish and South Korean companies was cut off or frozen. NOVATEK cannot receive six LNG tankers this year from the Korean shipyard Hanwha Ocean. The tankers were destined to export gas from the Arctic LNG-2 project. Three gas carriers are now unavailable because their customers, Sovcomflot structures, fell under direct US sanctions on February 23. Three more tankers are being built by order of MOL and are not subject to sanctions, but their delivery is delayed. As a result, NOVATEK does not yet have a fleet for shipments from Arctic LNG-2, despite the launch of the first train of the project.
The Russian government prolonged the building of diesel-powered icebreakers and cut funding for the building of Lider-class nuclear-powered icebreakers in 2023, to focus on project 22220. There is also competition between Atomflot and Rechmorflot, as well as between Baltik and Zvezda shipyards. But because of limited access to technology, Rosatom may further extend the service life of the Soviet nuclear icebreakers Taimyr and Vaygach (operational since 1989), which were due to be decommissioned in 2025. Their service can be extended for another five to seven years. One plan is to extend the service of Soviet nuclear-powered icebreakers in the Western part and deploy new icebreakers (project 22220) in the eastern Arctic. No one has ever operated nuclear icebreakers beyond 36 years, and it means potential problems for the environment. At present, Russia has neither the enough capacity, nor the time to build new icebreakers.
Long construction times led to losses for the shipbuilding companies. For instance, the United Shipbuilding Corporation (USC) faced similar problems in civilian shipbuilding, as in the construction of nuclear icebreakers LK-60. Moreover, the 2022 sanctions on ship equipment led to the need for a drastic change in projects, and serial production could not be achieved. At the same time, Russian customers face not only an increase in the price of ships, but also delays in deliveries, sometimes for years. Many customers now want to cooperate with Turkish and Chinese companies due to high prices and failure to meet construction deadlines at Russian shipyards. In Russia, quality suffers due to inconsistency in the interaction between designers and builders. Moreover, Russia’s intentions to replace Finnish and South Korean shipbuilding companies with Chinese cooperation to meet the needs of the energy companies after sanctions are problematic, again, because of the secondary sanctions.
According to estimates, Russian companies working in the Arctic need an ice-class fleet of 57 ships this year and 110 ships by 2030 in order to ensure transportation along the NSR. In 2023 there were 30 ice-class vessels. To ensure the increase in cargo traffic predicted by the NSR Development Plan until 2035 from 34 million tonnes to 90 million tonnes (or up to 80 million tonnes established by the Presidential decree), the number of ice-class vessels in NSR waters needs to increase by 27 units, comprising 16 gas carriers and tankers for NOVATEK, 9 large-capacity bulk carriers for transporting coal from the Sarydasay deposit (Northern Star LLC) and 2 tankers for exporting oil from the Vostok Oil project. Although NOVATEK has agreed with the Zvezda shipyard to build 15 gas carriers, their delivery has been postponed. It should be noted that from 2014 (the year of the first sanctions) to 2021, a total of only 18 icebreakers and ice-class vessels were built and put into operation in Russia (a little more than 2 units per year). In Russia’s Far East, where the shipyard is located, relevant industries now must be created practically from scratch, as a result of sanctions. Furthermore, even in pre-sanction times, the construction of a vessel on Zvezda was 20-40% more expensive than in the Republic of Korea. Based on those data, Russian experts argue that the shortage of ice-class vessels may turn from a medium-term into a long-term problem, significantly limiting the volume of transportation along the Northern Sea Route. A possible, realistic solution to this problem would be to involve the fleet of countries such as China, India, etc., but the ice-class fleet of these countries is also quite limited. Moreover, dependency on third-country fleets to provide transportation along the NSR would create additional geopolitical risks. Russia is concerned that it may reinforce their desire to establish an international regulation regime for the transport route and, accordingly, its withdrawal from the exclusive jurisdiction of the Russian Federation. “It will be difficult for Russia to insist that the Russian straits are not international, since cargo will pass through them on ships owned predominantly by foreign owners,” warned Russian experts. However, in May, Rosatom stated that Russia and China had created a subcommittee on the Northern Sea Route. The head of Rosatom noted that there is potential to increase Chinese transit to 50 million tonnes by 2030. Most probably, Moscow and Beijing are working on how to find secure ways for cooperation in the Arctic. It should be noted that already in 2015, Russian-Chinese negotiations were held on the creation of a joint Russian-Chinese shipping company, which will develop the infrastructure of the Northern Sea Route and transport commercial cargo along it. In June 2024, Rosatom and the Chinese shipping company Hainan Yangpu NewNew Shipping signed an agreement to organise year-round container transportation along the Northern Sea Route. The parties plan to create a joint venture for the design and construction of high-ice-class container ships and joint operation of the Arctic container line.
The vessel problem is especially challenging for the new LNG projects. While Yamal LNG can rely on 15 Arc7 vessels, the situation for Arctic LNG 2 is difficult. Amidst recent US sanctions, experts suggest that Russia’s ability to independently construct LNG carriers without help from South Korean or Japanese shipyards will be set back by at least another 5-7 years. The planned Murmansk LNG will have transportation problems as well. Although the waters around Murmansk remain ice-free year-round and thus the project will not require specialised Arc7 vessels, acquiring conventional LNG vessels may still prove to be a problem for Russia. Similar problems with ice-class vessels also affect the development of Rosneft’s Vostok Oil.
In perspective
Although Moscow tries to attract investments and launch joint projects with Asian and Gulf countries, Western sanctions following the invasion of Ukraine heavily challenge the development of Russia’s Arctic projects. The region holds strategic significance, but Russia’s foreign policy behaviour risks jeopardising its economic development.
Moreover, Russia faces a policy dilemma. On the one hand Russia needs investments and technology to realise energy and infrastructure projects; on the other hand, the Russian Arctic zone is home to several strategic military bases. Moscow’s dilemma is whether to open up to attract investment or clamp down to protect its security interests. Furthermore, although Moscow tries to involve non-Western powers in the transport project, it wants to keep navigation through the NSR under strict Russian control.
Although Western sanctions are blocking or at least slowing down Moscow’s economic projects in the Arctic, Russia is increasing its efforts to circumvent sanctions and get access to the technologies it requires for its Arctic energy and transport projects. Moreover, using small-scale land and sea-based nuclear power plants and extending the service of Soviet nuclear-powered icebreakers mean potential problems for the environment, which Moscow may also use as a form of blackmail.
However, Russia’s energy projects will likely benefit from rising global demand for LNG by the 2040s and its role as a transition fuel in the coming years. When the war ends, Western companies may return to the projects. Also, the possibility of these developments encourages Moscow to try to keep the projects going as much as possible and wait for them to happen. However, delays and the slow tempo of developments of Russia’s Arctic projects are unavoidable. Geopolitical processes in the region and the international system, Russia’s foreign policy, the prices in the energy market and climate will be major factors in how Russian economic projects do or do not develop in the coming years. In any possible scenario, the development of economic projects in the Arctic is a strategic issue for Russia and is not only important in terms of continuing the current invasion of Ukraine, but also in terms of restoring its military power once the current war ends.
1 Arctic LNG 2 is another LNG production-related project of NOVATEK and it includes the construction of three LNG trains, with a capacity of 6.6 mtpa of LNG each. The total LNG capacity of the three trains will be 19.8 mtpa and about 1.6 mtpa of stable gas condensate, according to the company, Arctic LNG-1 will become the next LNG project of NOVATEK after the existing Yamal LNG and the Arctic LNG-2. In December 2022, NOVATEK stated that it discovered the field at the Bukharinsky subsoil site for the Arctic LNG-1. Reportedly, the recoverable natural gas reserves of the new field are estimated at 52 billion m3. NOVATEK claims that total proved reserves (SEC) of Arctic LNG 1 amounted to 2,237 million boe, proven and probable reserves (PRMS) amounted to 4,236 million boe. In 2018, NOVATEK stated that it discovered a new gas field with reserves of at least 320 billion cubic meters. m and resources exceeding 900 billion cubic meters. m. These reserves will be used in the production of liquefied natural gas at the company’s third plant- Arctic LNG 3.
2 The main cargo on the Northern Sea Route, according to the Plan, will be oil from Arctic fields (35.6 million tonnes in 2024; 103 million tonnes in 2030; 102.9 million tonnes in 2035), liquefied natural gas from Russian Arctic projects (LNG export via the NSR are expected to increase to 32.9 million tonnes in 2024, 64.1 million in 2030 and 67.6 million in 2035), coal from the Saryday deposit (up to 12 million tonnes per year).
3 In accordance with the Decree of the President of the Russian Federation of May 7, 2018 No. 204 “On national goals and objectives of the development of the Russian Federation for the period until 2024.”
4 In accordance with the approved targets of the strategic initiative “Year-Round Northern Sea Route”.
5 Ibidem
6 According to Rosatom, in 2023, 1,218 permits allowing navigation in the Northern Sea Route were issued (1,163 in 2022), including 115 to foreign companies (55 in 2022).
Source: ISPI
