On January 30, the Russian government approved a number of acts concerned with rendering new economic benefits and subsidies to businesses or investors willing to engage in projects in the country’s High North. The adopted proposals were jointly prepared by the Ministry of Finance (Minfin), the Ministry of Energy (Minenergo) and the Ministry for the Development of the Russian Far East (Minvostokrazvitya). Taken together, this initiative provides a steady foundation for the introduction of Russia’s Arctic strategy until 2035 (1sn.ru, January 31), which is premised on the following documents:
– The Federal Law on a Special Economic Regime of the Arctic;
– The Foundations of State Policy of the Russian Federation in the Arctic Until 2035;
– The Strategy on the Development of the Arctic Zone Until 2035; and
– The Foundations of State Policy in the Arctic.
This legal framework covers Murmansk Oblast, Chukotka, Yamalo-Nenets Autonomous Okrug and Nenets Autonomous Okrug as well as portions of five other federal subjects—Arkhangelsk Oblast, Sakha Republic (Yakutia), Krasnoyarsk Krai, the Republic of Karelia and the Republic of Komi. Related: Oil Rig Count Inches Higher As Prices Stabilize
As a means to attract foreign financial capital to the above-mentioned Arctic territories, Russia has outlined four main groups/types of projects under consideration for various government benefits (Arctic-russia.ru, January 30):
– The extraction of hydrocarbons located offshore, on Russia’s continental shelf, with a severance tax (imposed on the removal of natural resources) set at 5 percent for oil and 1 percent for natural gas over the next 15 years, starting from the inception of industrial extraction. It is also rumored that the Russian state might be willing to provide additional benefits for “surveys, assessments and exploration for hydrocarbons” in this area;
– The extraction of hydrocarbons on the continent, with an emphasis on liquefied natural gas (LNG) and gas-chemistry (gazokhimiya). New investors are expected to be promised a severance tax of zero percent in the next 12 years upon starting industrial extraction;
– The production of LNG (as well as other projects related to the gazokhimiya industry). Investors will have to pay the severance tax in full only after 17 years of industrial production;
– Other projects (prospective benefits will largely depend on what will be extracted and the scope of the project). Aside from non-hydrocarbon-related branches (including minerals), this group will include various infrastructure projects (such as seaports and pipelines).
The head of the Ministry for Development of the Russian Far East and Arctic, Alexander Kozlov (appointed in 2020), has stated that the key idea behind the proposed benefits and stimuli for investors is premised on Moscow’s strong determination to break the post-1991 trend in the region. Specifically, he argued that the Arctic zone, whose actual share of Russian GDP is close to 10 percent and receives 10 percent of total foreign direct investment (FDI), suffers from chronic under-population, containing less than 1.5 percent of the total Russian population. Furthermore, he argued that all major components of the Human Development Index (HDI), including education, healthcare, employment and economic wellbeing, are lower in the High North than the Russian average. As a result, he stated, “For the past 15 years, the local population has decreased by 0.3 million” (Yakutia-daily.ru, November 26, 2019). Sergey Veller, the president of the Union of Manufacturers and Entrepreneurs of Murmansk Oblast, expressed similar concern and argued that the only way to stop further depopulation of the Russian Arctic is to increase its attractiveness through new economic opportunities and job creation (Murman.ru, June 19, 2019). Related: Goldman Slashes Oil Price Forecast By $10
These and other concerns are all reflected in the above-mentioned government planning documents. The main expectations pinned to the initiative are premised on the prospect of creating more than 21 new large regional mega-projects (including the Indiga Port, in Nenets Autonomous Okrug), exploration of large deposits of platinum and other metals in Krasnoyarsk Krai and Murmansk Oblast, and the creation of a full-cycle lumber/timber-producing complex in Arkhangelsk Oblast. These and hundreds of smaller commercial initiatives (to become fully operable within the next 15 years) are expected to result in the creation of 200,000 additional jobs in the region and “make the Arctic attractive to Russian youth and young specialists” (Rossiyskaya Gazeta, November 25, 2019).
That said, it is important to underscore that Russia’s main economic interests the Arctic region actually boil down to just two elements (Rossiyskaya Gazeta, November 25, 2019). First is production of liquefied natural gas, which, “in the upcoming 15 years, could turn Russia into one of the largest players on the global LNG market.” This will be achieved primarily through Yamal LNG (located in Sabetta, on the Yamal Peninsula) and Arctic LNG 2 (Gyda Peninsula). Second, Russia is making huge investments in the so-called Northern Sea Route, intended not only to give Russia access to Arctic natural resources, but also to provide a maritime corridor for Chinese goods traveling to the European Union. Russia aims to be solidify its role as the main transportation artery between the two—both on land and by sea.
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Importantly, in line with the above-mentioned legal documents and proposals, some specific suggestions have already been voiced. Namely, it has been argued that a subsidized mortgage program (2 percent annual rate) should be created to aid all who are willing to move to the Arctic region (Rossiyskaya Gazeta, November 13, 2019). Additionally, Minvostokrazvitya proposed creating a new state corporation, “Roshelf,” specifically tasked with the exploration and extraction of hydrocarbons in the High North and the Far East. Accordingly, this corporation should be given exclusive rights to “represent Russia’s interests” and to “exploit [Russian] resources and grant the right to participate in projects [to] private investors” (Rossiyskaya Gazeta, December 31, 2019).
Two important inferences should be drawn from these developments related to the Russian Arctic. First, for the first time, an initiative of this scope and ambition has been jointly drafted by three powerful institutions, with one of them being made directly responsible for the region. Second, the Arctic Strategy has outlined Russia’s most important national interests in the High North. And aside from its economic aspects, this Strategy clearly points to a necessity to defend Russian sovereignty and territorial integrity in this remote but resource-rich region.
By Jamestown Foundation
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President Putin attaches great strategic importance to developing the huge oil and gas reserves in the Arctic to replenish depleting Russian oil reserves in Siberia and also enhance its gas reserves thus enabling Russia to consolidate its position as the world’s largest producer of crude oil and the world’s largest gas exporter well into the future. To that end he has spared no money in supporting Russian oil and gas companies’ exploration in the Arctic and also the development of a home-grown Arctic exploration technology. Putin wanted to demonstrate that US sanctions won’t deter Russia from Arctic drilling.
Russia is reported to have more than $8 trillion worth of untapped oil and gas in its sector of the Arctic. This will enable Russia to add more than 1.5 million barrels of oil a day (mbd) to its current oil production of 11.23 mbd in a few years’ time.
Moreover, the development of the Russian Far East and Arctic is of paramount importance for Russia’s economy. The Arctic currently accounts for only 10% of Russia’s GDP when this figure could more than double in a few years with the development of its hydrocarbons and other natural resources.
An extensive development could also help populate the Arctic which currently accounts for only 1.5% of total Russian population. It could also create numerous large mega-projects ranging from the building of ports to the exploration of large deposits of platinum and other metals and the creation of a full-cycle lumber/timber-producing complex. These and hundreds of smaller commercial initiatives (to become fully operable within the next 15 years) are expected to result in the creation of 200,000 additional jobs in the region and make the Arctic attractive to Russian youth and young specialists.
The Arctic could also help turn Russia into one of the largest players on the global LNG market. This will be achieved primarily through Yamal LNG and Arctic LNG 2.
Moreover, Russia is investing heavily in the so-called Northern Sea Route, intended not only to give Russia access to Arctic natural resources, but also to provide a maritime corridor for Chinese goods traveling to the European Union (EU). Russia aims to bolster its role as the main transportation artery between the two—both on land and by sea. This is helping attract Chinese investment to the Arctic. As a matter of fact, Russia is the largest recipient of Chinese investments under China’s Belt and Road Initiative (BRI).
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London