Guest Post: China’s Arctic Strategy

Tyler Durden's picture

Submitted by Stephen Blank via The Diplomat,

China has certainly been busy since it won observer status at the May Arctic Council summit in Kiruna, Sweden.

First, Yu Zhengasheng, Chairman of China’s Political Consultative Conference, visited Finland, Sweden and Denmark with an eye to boosting general trade and cooperation, particularly in the Arctic.

China then announced an expanded research and scientific polar institute that will collaborate with Nordic research centers to study climate change, its impact and desired Arctic policies and legislation. With this, Beijing made clear it did not intend to be a passive member of the Council; it planned to have a real say in its future proceedings. China National Offshore Oil Corporation meanwhile announced a deal with Iceland’s Eykon Energy firm to explore off Iceland’s Southeast coast.

State-owned mining firm Sichan Xinue Mining has also agreed to finance a major international mining project at Greenland’s Isua iron-ore field. If this venture succeeds, other Chinese state-owned mining companies, such as Jiangxi Zhongrun Mining and Jiangxi Union Mining, which have prospected in Greenland but have not yet started production, would then join it to explore for gold and copper. And other projects like aluminum smelting are already taking shape or will begin, espeically if the Isua project is successful.

These moves come on top of recently announced deals with Rosneft and Gazprom to explore Arctic fields for oil and gas. At the recent Sino-Russian summit, China concluded a contract with Rosneft to triple the size of current oil deliveries to China to 900,000 BPD, putting it on a par with Saudi deliveries to China, according to a recent report in the Financial Times print edition.

But Rosneft won that contract only by accepting further huge Chinese loans of $25-30 billion as cash infusions and agreeing to facilitate the acquisition of oil and gas assets in Russia by Sinopec, an oil and gas company. In other words, as part of its huge energy deals in the Arctic and the Russian Far East (RFE), China has added to Rosneft’s already sizable indebtedness to China, going back to the 2009 deal for the East Siberia Pacific Ocean pipeline. This indebtedness and the size of the planned oil deliveries from Rosneft will give China substantial leverage in the region.

Rosneft will consequently consider Sinopec’s participation in its large-scale project in the RFE, namely the Eastern Petrochemical Refinery jointly established in 2007 by Rosneft and Sinopec’s rival CNPC, China National Petrochemical Corporation. While China will loan Rosneft $2 billion backed by 25 years of oil supply, Rosneft will boost oil exports to China by 800,000 metric tons this year. Annual exports may reach 31 million tons annually or 620,000 barrels a day, more than doubling present volumes.

Igor Sechin, Rosneft’s boss and Putin’s right-hand man, even hinted at going to 50 million tons per annum. Rosneft’s other deal deal with CNPC to drill in the Pechora and Barents Seas in the Arctic similarly highlights CNPC’s growing clout in global markets.

Gazprom also announced its intention to conclude a long-awaited gas deal with China in 2013 by signing a Memorandum of Understanding to that effect. That deal, too, might involve advance payments from China to an increasingly vulnerable Gazprom.

Given Russia’s equally strenuous efforts to explore and exploit the Arctic’s hydrocarbon and mineral resources, it is understandably unnerving for it and possibly other governments to see this flood of vigorous Chinese activity, which comes on top of the opening up of the Northern Sea Route to intercontinental trade from Europe to Asia. Certainly, it seems Moscow is concerned, even though it is Beijing’s “strategic partner.”

China is clearly after more than simply investment and trade opportunities as it continues to display its obsession with securing energy and other supplies where the U.S. Navy cannot or will not go. Beijing Review claimed that other actors were trying to exclude China, but by dint of enormous exertions and large outlays to finance energy infrastructure in Russia and Canada, as well as its own scientific program of Arctic research, “China has ultimately managed to reshuffle the Arctic balance of power in record time.”

More crassly, we might say that China has paid dearly for its newfound status. Still, it will achieve some tangible goals. For instance, in its deal with Iceland, China will not only gain real access to state-of-the-art Icelandic clean energy technologies, it will also acquire leverage and influence in Iceland itself and that influence, once Iceland joins the Council, will redound to China’s benefit.

But beyond even these considerable commercial and energy, investment and trade access benefits, China gains strategically in Northern Europe and Russia, if not Canada. It now possesses a venue where it can fully participate in addressing issues of climate change that could, if unchecked, affect China’s climate to extent of eroding its agricultural capacity or rendering it vulnerable to flooding because of its low-lying coast.

In addition, as the Northern Sea Route opens up as a cheaper alternative for transcontinental shipping and trade, Russia will almost certainly seek to establish an advantageous tariff regime; China can now make certain that Russia heeds its voice in setting those tariff rates.

China will also now have a secure footing from which it can defend what it will claim to be its “legitimate rights” in the Arctic. It is quite conceivable that China will now use that foothold to demand as well a voice in the resolution of Arctic territorial boundaries that are up for decision. In 2009-10 it had claimed that no state had sovereignty in the Arctic, a clear slap at Russian claims. Now, to join the Council, it had to repudiate that earlier position and state that it respected the sovereignty of all the states claiming territory in the Arctic but accept that the decision will be made in the future, a sharp contrast to its rigid insistence on its “core interests” and sovereignty in the Senkakus and the South China Sea. Indeed, given those claims on the seas adjacent to China, it had no choice but to recognize existing exclusive economic zones and boundaries if it wanted to be a member of the Council. Nonetheless, it now calls itself a “near-Arctic state” and an “Arctic stakeholder.”

Probably this is what is unnerving for Moscow. According to Interfax, Prime Minister Dmitry Medvedev, with no apparent cause, told an interviewer in Norway on June 4 that “China is trusted. But it is you and us who draw up the rules of the game, that is to say the Arctic states.” Medvedev went on to claim that while Moscow wants productive cooperation with all Council members, including China, and has purely “peaceful and pragmatic goals” there, only Arctic Council members should determine the rules on these questions because, “This is natural, this is our region, we live here. This is our native land.”

Unfortunately for Moscow, not only China but also the other new Asian members will seek to maximize their influence in the Council for many of the same reasons. The Arctic may be Russia’s home, but it can no longer be its castle.