Secretary of State Mike Pompeo openly challenged China’s and Russian’s Arctic intentions at the May 2019 Arctic Council Meeting in Rovaniemi, Finland. This marked a dramatic rhetorical shift in the usual diplomatic line that the United States regarded the Arctic as a venue for cooperation and research and that climate change is the clear and present danger to Arctic security. Climate change unquestionably is altering the Arctic landscape and will have long term effects. However, Pompeo’s statement was a significant expansion of the warning by former Secretary of State Rex Tillerson that the United States is “late to the game” in the Arctic and needs to start making policy, security, and economic investments in the Arctic or be left on the sidelines. Even though Pompeo did not suggest that the Arctic Council should take any particular action(s), it was clear that the Trump administration was not satisfied with what was happening in the far North.

Pompeo issued a blunt rebuke of China’s recent declaration that it is a “near Arctic” state and Russia’s territorial ambitions vis-à-vis its Northern Sea route and its expansion of bases. Evidently, his speech writers had listened to what analysts were saying about the Arctic Council’s passive approach to Arctic governance. They aired concern that the rapid expansion of economic activity in the region threatened that the council would “fall victim to subversion” from influences inside of the Arctic (Russia) and non-Arctic States (China).

Why Now? 

None of these recent statements should come as a surprise. Tillerson knew the importance of the Arctic from his time as CEO of ExxonMobil when he cut deals in 2013 with Rosneft, the state-owned Russian oil company, to enable ExxonMobil (and by extension the United States) to have an economic foothold in the Arctic oil and gas economy. Because of sanctions, ExxonMobil abandoned its joint venture with Rosneft in March 2018. U.S. oil and gas companies have more or less abandoned the Arctic oil and gas economy, although there is continued talk of a natural gas pipeline project between an Alaska natural gas consortium and China’s Sinopec. But, because of sanctions and the maturity of the oil, gas, and mining deals that have already been concluded, it will be impossible for the United States to displace Russian, Indian, French and Chinese financed oil, gas, mining, and infrastructure projects in the richest new oil and gas region in the world. 

This is a problem on two levels. First, U.S. participation would have been beneficial since it could help influence supply levels and price stabilization since the United States is now a net energy exporter. Further, the influence over world energy prices is beneficial to the U.S. economy. Secondly and perhaps more importantly, U.S. participation would provide an economic lever to press for responsible development standards in all sectors (mining, oil and gas, etc.) since an accident in one part of the Arctic affects all of the coastal states. As things now stand, an oil and gas accident, the sinking of a passing ship carrying noxious cargo, or another type of incident affecting the Arctic marine environment, is a “jump ball” in terms of who will pay for the mess even though accidents will likely affect all coastal countries. If the United States were a more active participant, it is probable that U.S. companies, their shareholders, and regulators would push for a better-defined liability scheme. 

The United States and some allied militaries are starting to pay more attention to Russian military activities in the Arctic, including its upgraded military base structure and increased modernization of its forces in the region. NATO is starting to discuss possible security challenges posed by China’s statements that it is a “near Arctic” state. China’s statement in its January 2018 White Paper that Beijing, as a member of the UN Security Council, would have to promote “peace and security” in the Arctic—a curious statement since 85 percent of the Arctic Ocean is completely under the legal jurisdictions of coastal countries. The remaining 15 percent is considered high seas; not under the jurisdiction of any single country. 

For its part, DOD sounded warnings in its new Arctic Strategy in which it assessed that the Arctic is a potential corridor for “great power competition” and it pledged to increase its force posture, contest excessive maritime claims, and work with allies and the U.S. Coast Guard to ensure that the rules-based order in the Arctic persists. In addition to the new DOD Policy, U.S. military leaders have embraced the fact that the Arctic has strategic importance and U.S. military exercises involving the Arctic are slowly on the upswing. A few icebreakers (two thus far; now known as “polar security cutters”) are being funded and will deliver in 2023. Also, the U.S. Navy’s reestablishment of the Second Fleet in May 2018 suggests more Navy deployments to the Baltics and possibly the Arctic. The secretary of the navy has even gone so far as to say that the U.S. Navy would be mounting Freedom of Navigation (FON) operations in the Arctic to challenge Russia’s Northern Sea Route (NSR); however, there are good reasons to question whether such a move would make good policy or operational sense since it would seem to this analyst that driving a wedge between Russia and China in the Arctic needs to be the highest policy priority in the administration versus FON operations in the remote NSR. 

Russia and China Economic Ties

Analysts are also increasingly leery of the much increased economic and political cooperation between Russia and China in Arctic development because it helps further drive a wedge between the United States and Russia; the two Arctic countries with the largest reserves of oil and gas. The success of the jointly owned Yamal LNG project (which assures China a reliable supply of natural gas) is an example of how increased Chinese investment in Russian oil companies appears to be paying off for both sides (since Russia needs inbound capital and China needs raw materials/energy). This bilateral economic activity is almost certain to continue given that 20 percent of Russia’s GDP is derived from Arctic economic activity and China has ongoing needs for energy and raw materials that can move by sea. 

The Arctic is a growing market for bilateral economic activity but worldwide trade is growing rapidly between Russia and China. In June 2019, Presidents Xi Jinping and Vladimir Putin signed deals valued at US $20 billion in various sectors including nuclear power, hi-technology, e-commerce, 5G communications, etc. This came on the heels of a more than 20 percent increase in bilateral trade in 2018 and projections by the Chinese Commerce Ministry assert that bilateral trade will increase to over US $200 billion per year. A large portion of that increase will almost certainly involve Arctic natural resources.

America’s Most Important Interests

What should be of greatest concern to U.S. and allied navies are recent reports of Russian requests that China help finance and develop Russian ports and infrastructure along its Northern Sea Route. These press reports are fully consistent with China’s unabashed discussion of China’s wishes to “work with all parties to build a “Polar Silk Road” by “encouraging its enterprises” to “participate in infrastructure construction” for polar routes, including (by name) the Northwest Passage (NWP) and NSR. There have also been sporadic reports of China expressing an interest in developing the route and some Canadian academics have been promoting it as a way to jump-start the route’s commercial viability.

The implications of China owning a large “stake” in what will likely become strategic Arctic waterways is concerning since China could use its economic leverage to deny passage to U.S. or allied ships or those ships that threaten its interests. To be clear, this has not happened and China has not declared that this is one of their strategic goals; but, money talks! It is also not that far-fetched for China to use its investments along these routes as the premise for building or financing ports and infrastructure. According to Becker, Downs, et. al., this nationalist investment pattern has followed in South Asia and West Africa with mostly State Owned Chinese Enterprises (SOEs). With those actions (commercial on their face) came the People’s Liberation Army (PLA) Navy, which began using the facilities to support their vessels’ routine deployments and also started threatening those that might interfere with China’s right to make investments and use military force to protect Chinese nationals and their property interests. China’s July 2019 white paper, “China’s National Defense in a New Era,” makes very clear that it will develop bases and overseas logical facilities to address current “deficiencies” in the ability of the PLA to protect its citizens residing overseas and their interests (including commercial enterprises). By contrast, the U.S. National Security Strategy (December 2017) and the National Defense Strategy (2018) are silent on the point of whether U.S. defense investments and military power will be used to protect U.S. citizens abroad or U.S. overseas commercial investments. 

Even though the new DOD Policy correctly asserts that the Arctic is a venue for great power competition, in my opinion, most of the levers that the U.S. must play in the Arctic are economic and diplomatic; not military. Freedom of navigation (FON) operations to contest Russia’s establishment of operating rules through the NSR are much too little, too late, and frankly unlikely to garner support in the international maritime law community. Seasoned mariners understand that Russia has a legitimate interest (and some limited support in UNCLOS Article 234) to restrict traffic through the Arctic given the environmental sensitivity of the area, the lack of response capacity, and the extreme hazards of transiting through the remote and icy area except via an established route. Besides, the United States has previously restricted offshore maritime traffic off its Eastern seaboard to protect right whales and Washington State imposed unilateral rules (ultimately struck down by the U.S. Supreme Court) requiring only double-hulled tankers off its coast. These actions are in the same category as Russia’s actions vis-à-vis the NSR in terms of their strict compliance with UNCLOS. 

The United States has every right to expect that the NSR must be open to all seaworthy vessels and that the fees associated with transit reflect the actual costs of vessel services; however, simply stating that Russia (or Canada in the case of the NWP) cannot do anything to try and regulate traffic through these remote passages does not reflect the reality that these maritime passages have far greater than normal risks. Moreover, the United States needs to be cautious in swinging a big legal stick since many of the NSR regulations are designed to ensure the safety of navigation and that ships are adequately insured. These sorts of rules benefit the United States because an offshore accident in the Arctic Ocean can affect the U.S. homeland—the Arctic being essentially a closed sea means that a vessel’s oil spill in the Russian part of the Arctic Sea can easily reach the fish in the U.S. EEZ or wash up on Alaska’s shores. It is far better that the United States and Russia work collaboratively on the NSR since each has an equal interest in vessel safety and protection of the marine environment from pollution from vessels, oil and gas activities, mining, or an industrial accident. 

In my view, the continued expansion of the People’s Republic of China’s Belt and Road Initiative (BRI) throughout the Arctic is the more immediate concern. China can and likely will leverage its BRI investments to build political alliances to align against the United States, to potentially build military support installations, and to lock up future supplies of key natural resources. Even though the United States and Russia have parallel interests in the Arctic to retain political control over activities in the Arctic—since both have long coastlines and large offshore resources—China has been able to successfully exploit the freeze in U.S.-Russia relations and drive a political and economic wedge between the two countries. It certainly doesn’t help that Washington is so politically divided that the executive branch is politically prevented from trying to engage Russia constructively for fear that it will be accused of collusion with a totalitarian regime. Yes, Russia has major political issues, but both countries have large Arctic coastlines and lots of onshore and offshore resources. Working collaboratively is in both countries’ interests. 

The Impact of Chinese Money

The issue of unchecked Chinese foreign direct investment (FDI) is receiving increasing attention in military and policy circles. Senior military commanders have been sounding-off that Chinese FDI is destabilizing and threatening to traditional alliance structures. Former SOUTHCOM Commander Kurt Tidd’s 2018 posture statement before Congress decried the fact that China’s “commercial and diplomatic advances of moving it closer to its strategic goal of reshaping global economic and governances architectures” includes Latin America. Former CENTCOM Commander Gen. Joseph Votel stated that “we must be ready to compete with China…for regional influence” as they “threaten our vital national interests” and—referring to China’s BRI—their “burgeoning economic power could support and mask longer-term military and political objectives.” Finally, the Pacific Commander, Admiral Philip Davidson, strongly criticized China’s “pernicious approach” to its BRI for engaging in “debt trap” diplomacy by providing loans to countries for infrastructure projects (especially in the developing world), knowing they would be defaulted upon. 

The issue of Chinese investment in the Arctic was examined by CNA and the same sort of patterns as mentioned by U.S. military commanders are emerging. The Chinese FDI beachhead in Russia is well known; mainly in the Yamal oil and gas sector but it is expanding into minerals and infrastructure. Greenland is often thought of as the “battleground” for Chinese FDI because Greenlanders are thirsty for FDI, have lots of land and mineral wealth, and China has the cash to spend. Influential Chinese journals associated with the PLA label Greenland as the “strategic fulcrum” of the “Polar Silk Road.” This general concern applies in all Arctic littoral states including the United States, Canada, Finland, and Iceland.

Although Chinese investment in the Arctic is quite large, hard data is difficult to obtain. People can speculate over the actual extent of China’s inroads; however, Chinese firms have “attempted to purchase and invest in infrastructure of military significance, including an abandoned naval base in Gronnedal and three airports” in Greenland. The Central Danish government has blocked two of those transactions and there are very recent reports that China’s state-owned Communications Construction Company withdrew from consideration of a public offering to upgrade airports in Nuuk and Ilulissat; but, this level of Chinese activity—especially that which can be conducted “under the radar”—is likely to continue. 

The Diplomat reports that China is stepping up its mining interests in Greenland; especially rare earth minerals (REEs) in the Kvanefjeld Project in which China already controls upwards of 90 percent of the world’s extractive capacity. Beijing has twice threatened the United States and Japan to cut off of REEs as a politically retaliatory move. This particular example is illustrative of the types of problems the United States could confront in terms of being able to participate in regional economic development and in the development of ports and waterways that are free and open to the United States and other international shipping on a non-discriminatory basis. The same can also be said about recent transactions which are being tracked at CNA in the area of Chinese financed fiber optic cable projects in Finland and submarine cable service to Greenland—the Data Silk Road. 

Massive Infrastructure Demand

Estimates vary but as development in the Arctic brings more people, ships, and economic activity there will be increased needs for all forms of infrastructure including ports, railroads, navigational aids and dredging, pipelines and cargo terminals, and roads. The Polar Connection based out of London writes

The recent growth in infrastructure is no small or minor trend, with $300 billion in projects either completed, in motion or proposed in Russia alone . . . An inventory of planned, in-progress, completed and cancelled Arctic infrastructure projects compiled in 2016 by global financial firm Guggenheim tallies 900 projects, amounting to an estimated one trillion dollars of infrastructure investment over the next 15 years.

There is a continuing international demand for natural resources including hydrocarbons, metals and fish and with that comes an associated need for transportation nodes (ports, harbors, railroads), energy supply (power plants, transmission lines, pipelines, offshore terminals), waste management, water and other infrastructure. The Arctic is one of the planet’s last big sources of mineral and hydrocarbon wealth. Yet, the macroeconomic data indicates that there is only modest population growth in the Arctic region to support and service this increased growth in extractive activities. This necessarily means that infrastructure capacity will likely have to come from beyond the Arctic. The question remains, will that capacity come from China or somewhere else? Will the U.S. play a role in all of this and, in doing so, help to drive the proper standards that will protect the U.S. coastline and its share of fisheries? 

The Biggest U.S. Challenge: Permissive Chinese Lending

In the short term, it is difficult to project the U.S. playing a major role in Arctic infrastructure development or extractive activities and that China will remain the leader here. There are two major U.S. challenges which seem to prevent it from leading in this emerging market: (a) lack of competitive financing and (b) a vastly smaller industrial sector that hasn’t competed in these emerging markets as in the past.

U.S. firms are likely not competitive in Arctic infrastructure projects so long as Chinese SOEs—or similar firms from other countries—have state financing. First, U.S. firms must collateralize the loans that they obtain from either U.S. trade finance lenders (such as EXIMBANK) or from international development banks. A Chinese SOE has no need to collateralize or secure its lines of credit from Chinese financers. Second, if a SOE (or even a Chinese commercial contractor with public financing) is unsuccessful and the loan becomes non-performing there is much less risk to the investors since the Chinese government has historically propped-up so-called “zombie companies” to maintain full employment and retain an emerging market presence. Private Chinese lenders are not disciplined to the same extent as western lenders. Bad loans are extended until “good times” when repayment is possible. Third, there is continued evidence (according to the Heritage Foundation that Chinese firms “frequently fail to meet the safety, quality control, and environmental standards set by Western and other international infrastructure firms.”) Even if the country where the infrastructure is being developed lacks the regulatory capacity to inspect and monitor, western firms have national regulators, an open press, and shareholders that will demand high labor and environmental standards. There are no such checks and balances with most Chinese firms. Fourth, Chinese firms still (according to Heritage Foundation) engage in bribery and blacklisting activities to secure contracts. U.S. and western firms have strict legal prohibitions (Foreign Corrupt Practices Act/EU Anti-Bribery Convention) against payments to officials to obtain public contracts. It is possible that things might change in China since the press is reporting a record number of defaults; however, that hasn’t happened yet. 

Beijing has made international commitments that it wishes to eliminate SOEs; however, the data suggests that Beijing has different ideas. It has embarked on a path of reducing the overall numbers and restructuring those remaining to make them “bigger and stronger.” This makes perfect sense; Beijing has calculated that it can more easily weather the international criticism of their SOEs versus the internal problems of having to furlough large numbers of workers. According to the World Economic Forum, China is home to 109 corporations listed on the Global Fortune 500 but only 15 percent of those companies are privately owned and Beijing is likely to continue its past practice of using SOEs as a mechanism for implementing policy, providing socioeconomic policy (full employment), and building infrastructure. China’s official “Belt and Road” portal brags that eighty SOEs are the backbone of China’s Belt and Road construction and have carried out over three thousand infrastructure projects.        

The second reason why there is likely to be lackluster U.S. participation in Arctic infrastructure projects is that Chinese have much greater international construction capacity. Deloitte’s 2017 Global Powers of Construction (GPoC) found that, among global construction companies, Chinese firms “dominate the Top 100 rankings in terms of revenue, with the largest three Chinese groups representing around 30% of the GPoC’s total sales.” According to the same report, the United States continues to have a good presence in the international construction but Chinese firms are generally much larger and, in total, had sales of 440B Euros. U.S. firms had sales of only 20 percent of that amount (roughly 85B Euros) during the same period. The market cap of Chinese firms was 113 billion euros to the U.S. 55.6 billion euros.

Given the less advantageous funding opportunities and much smaller size, it is hard to envision U.S. businesses (or frankly those from Norway or Canada) playing a dominant role in Arctic infrastructure if it means they will have to compete head-to-head with the Chinese without help. CSIS recently did a study and found that in Asia, the vast majority of companies (roughly 90 percent) involved in infrastructure are Chinese because of the above advantages and because Chinese firms are networked better, have more advance information of proposed projects. One may also assume they have much lower operating costs for such things as insurance, audit, and workplace compliance. Given this, it is understandable that U.S. owners and shareholders are unwilling to chase Arctic projects.

Implications for the Trump Administration 

All of this clouds the question of where exactly is the Trump administration when it comes to the Arctic. Is Pompeo’s speech just a rhetorical flourish? If you went to the office of a U.S. legislator or public official in most any federal agency and mentioned the work “Arctic” they would probably say that they enjoy a good “Arctic Blast” from Dairy Queen every now and then. That ignorance, which seems to permeate most in the Congress and the administration, is troubling. Russian author, Vladimir Isachenkov wrote for the Associated Press that the United States (save for an occasional statement) seems uncommitted to Arctic security:     

[W]hile U.S. President Donald Trump’s administration has seen the Arctic through the lens of security and economic competition with Russia and China, it has yet to demonstrate that the region is a significant priority in its overall foreign policy. The post of special U.S. representative for the Arctic has remained vacant since Trump assumed office.

Russia, however, has made reaffirming its presence in the Arctic a top goal, not the least because the region is believed to hold up to one-quarter of the Earth’s undiscovered oil and gas. Russian President Vladimir Putin has cited estimates that put the value of Arctic mineral riches at $30 trillion.

For the United States, the implications of continued brisk Chinese and other states participating in the Arctic economy is that the United States must figure out how it is going to secure a place in the overall Arctic economy. Some of this begins with better financing and, to that end, a consensus is emerging that the Arctic coastal countries form an Arctic Development Bank for Arctic infrastructure projects. U.S. international trade and development lending organizations like EXIMBANK, SBA, TDA and OPIC could offer new loan products that provide rates which are at least as good as those which are available from China’s institutions. Aggressive action by U.S. embassies and the Department of Commerce to identify potential areas for U.S. industrial participation either alone or in combination with other countries such as Russia, Canada, Norway, is something that should be implemented immediately. Greater military presence to reinforce the United States commitment to the region is also appropriate to militarily stabilize the region; however, those actions should not be viewed as a substitute for much larger U.S. economic footprint. 

Mark E. Rosen is the SVP and General Counsel at CNA. A retired Navy Captain (JAGC) who served nearly nine years in the Pentagon as a military planner and international affairs advisor, Mr. Rosen’s particular expertise is in the maritime field including maritime disputes, piracy, maritime security and maritime arms control. Mr. Rosen holds an appointment at GW School of Law. The views expressed in this article are those of the author alone and do not necessarily represent the views of CNA or any of its sponsors.

Image: Reuters