Russia’s New ‘Arctic Offensive’: Do the Benefits Outweigh the Costs? (Part Two)

*To read Part One, please click here.

On February 1, Russian Prime Minister Mikhail Mishustin signed a decree approving the launch of six large investment projects in the Arctic that are to be completed by 2027 (Government.ru, February 1; see Part One in EDM, February 17). While this plan might result in some longer-term solutions to anemic socio-economic development in the region, Moscow needs to be able to generate revenues from its vast Arctic resources right away to cover growing budgetary expenses. Yet until recently, Russia’s ability to tap the economic potential of the High North has been hindered by two interdependent factors. First, as noted by the head of the financial-analytical Alperi Center, Alexander Razyvaev, “[T]he Arctic region is Russia’s last unexplored oil and [natural] gas province […] the problem is that without tax subsidies, development of the majority of local deposits is only economically profitable at an oil price of $100 per barrel…” He added, “[I]n order to be able to reap the benefits, some serious investments are needed” (Nezavisimaya Gazeta, February 1). Second, existing environmental laws and regulations constrain the ability of Russia’s largest oil-extracting corporations to increase the exploitation of Arctic-based energy resources.

This was explicitly underscored in an open letter (dated January 19, 2021) signed by representatives of Rosneft, Lukoil and Gazprom Neft, which asked the Russian government to amend existing environmental legislation in order to facilitate the exploration and extraction of hydrocarbons in the Arctic region (Salehard.bezformata.com, January 19). The main argument presented by the signatories boils down to the fact that these regulations not only obstruct the extraction of locally based natural resources, they also hamper further development of the geo-economically and geopolitically important Northern Sea Route (NSR) (Ridl.io, May 8, 2020). Each of the above-mentioned corporations have vital interests in the Arctic. For instance, Rosneft—whose CEO, Igor Sechin, enjoys close personal ties with President Vladimir Putin—is strategically interested in the launch of its major Arctic project “Vostok Oil” (Arctic-russia.ru, accessed February 15, 2021). Gazprom Neft has special interests in the Prirazlomnoye (located in the Pechora Sea) and Novoportovskoye (next to the Yamal Peninsula) petroleum fields. In turn, Lukoil is also interested in development of Bolshekhetskaya Depression deposits located in the Yamalo-Nenets Autonomous Okrug.

Russia’s leading oil companies seem to be particularly irritated by Article 11, sub-point 7.9 (which came into force on August 28, 2020), of the Russian Law on Ecological Expertise (Cntd.ru, December 30, 2020) that introduces somewhat stricter environmental regulations. As argued by Russian legal experts, this legislation can postpone the initiation of commercial exploitation of certain oil deposits for up to one year (Kommersant, January 19). Under current circumstances, this could have a serious economic impact on Russian oil corporations desperately seeking new sources of revenue. Nonetheless, the Ministry of Natural Resources and the Environment (Minprorody) responded that the necessity of preserving and enforcing Article 11 “is stipulated by the specific traits and uniqueness of Arctic nature, its brittleness and the much longer period it takes for the local ecosystem to recuperate” from pollution or ecological disasters (Interfax, January 19).

Later, however, the Russian government seemed to backtrack from that position. On January 27, Minprirody de facto agreed to scrap stricter regulations related to ecological expertise in the Arctic. In his comment, Alexander Kozlov, who now heads the ministry, said that the arguments presented late last year by the oil corporations were fully justifiable. And Kozlov declared that he fully understands these fears and concerns. Indeed, he noted, if existing ecological laws are followed, Russian oil producers are likely to lose both time and money (RBC, January 27). In effect, Kozlov’s remarks meant the natural resources ministry was giving the green light to dismantle some currently existing environmental regulations in the Arctic.

Undoubtedly, this relaxing of regulations will grant more opportunities to Russia’s largest oil-extracting corporations, giving them a free hand in expanding operations in the region. This growing commercial activity will, in turn, result in larger government revenues (coming from the pumping of oil) as well as the expansion of transportation via the NSR. And yet, despite gaining some immediate economic benefits, Russia runs the risk of encountering two serious challenges.

First, there is environmental risk. By loosening environmental standards and permitting a freer hand to corporations with questionable track records, risks associated with new ecological catastrophes and incidents—akin to last year’s notorious “Norilsk Disaster” (see EDM, June 29, 2020 and July 7, 2020)—increase significantly. New ecological accidents could have a deeply destabilizing effect on the ecosystem of the entire Arctic region, damaging the flora, fauna and local Russian communities.

Second, there is the challenge of economic sustainability and competitiveness. In effect, by betting on the development of new (and costly) oil deposits in the Arctic—which to some extent may be compared to the Coal Strategy to 2035 (see EDM, July 27, 2020)—Russia may be overlooking larger trends and profound transformations underway in the global energy domain. Incidentally, this concern has been voiced by Ruslan Edelgeriyev, the special presidential representative on climate issues, who warned that in the near future, the world’s most economically developed countries might completely refrain from purchasing Russia’s hydrocarbon-based energy resources. He stated that not only the European Union—where the issue of ecological sustainability has been prioritized for some time now—but also the United States and China are showcasing strategic interest in reducing the emission of greenhouse gases and pursuing carbon neutrality. Edelgeriyev cautioned that Russia risks missing a chance to join the “climate club” composed of countries actively pursuing ecological sustainability. In turn, this could result in growing tensions between Russia and these countries, which will point to the former’s lack of adherence to environmental sustainability standards to put more pressure on Moscow via, among other tools, imposing sanctions on its energy projects in the Arctic region (Kommersant, February 15). Incidentally, a similar idea had already been expressed by the CEO of Lukoil, Leonid Fedun, in late 2020. In an interview with Kommersant, Fedun stated that by 2040, Russian exports of oil and gas to the European market could drastically contract (by at least half) because of transformations the EU is pursuing in the domain of energy security and ecological sustainability (Rosbalt, February 15).