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Rising temperatures leave Russia's Arctic ambitions on thin ice


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Rising temperatures leave Russia's Arctic ambitions on thin ice

Rising temperatures and several environmental catastrophes over summer have revealed the underlying risks to Moscow's ambitious plans to develop everything from military bases to mines and associated infrastructure in Russia's far-flung eastern and northern regions, including the increasingly strategically important Arctic.

Record temperatures and wildfires in Siberia this summer — following Russia's mildest winter yet — were accompanied by a series of highly polluting incidents in the High North, including one of the worst oil spills ever seen in the rapidly warming region.

Climatic concerns have by no means dampened Moscow's enthusiasm for exploiting the Arctic, though. "Today, the geopolitical, geostrategic and economic interests of the world's leading powers have collided in the Arctic," Mikhail Popov, a deputy secretary of Russia's Security Council, said Aug. 19.

"The melting of centuries-old Arctic ice, caused by global warming, facilitates access to the rich potential of the Arctic and opens up colossal prospects in the sphere of exploration of mineral resources."

"The Arctic has become 2.7 degrees warmer from 1971 to 2017," Anders Turesson, chair of the Arctic Council's Arctic Monitoring and Assessment Programme working group, told S&P Global Market Intelligence. "An inevitable consequence is the thawing of permafrost.

"In the northern parts of Russia a considerable [amount] of infrastructure, buildings and other installations are based on the permafrost and risk becoming unstable," said Turesson, who was Sweden's chief climate change negotiator at the United Nations.

"The warming temperatures in the Arctic have furthermore resulted in melting ice. In fact, since 1979 the volume of Arctic ice in September has declined by 75%. This has opened up new summer sea routes and the [possibility of] exploration for natural resources north of Russia. The consequences are considerable and pose multifaceted challenges for the Arctic environment."

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In May, PJSC Norilsk Nickel Co. blamed the collapse of an aging Soviet-era fuel tank near its Arctic base on melting permafrost, but a string of subsequent incidents cast doubts over how carefully the company operates in the hostile yet fragile region. A recent unscheduled inspection of the subsidiary responsible for the spill, which turned two local rivers red, by Russia's environmental watchdog uncovered 116 violations and revealed the site's main equipment to be "obsolete" and "worn out."

Despite the region's risks, the effects of climate change will only deepen its strategic significance to Moscow as President Vladimir Putin's government looks to shore up the economy with new resource-extraction projects and press its existing military advantage in the increasingly important antipodes — both objectives well served by the Northern Sea Route.

Great power competition

The Arctic provides almost 25% of Russia's GDP, according to a July U.S. Air Force report on Arctic Strategy, which describes the area as "a region of immense geostrategic significance and a key location for global power projection."

While the disappearance of sea ice is opening up the Arctic for shipping and fossil fuel extraction, onshore projects face a variety of risks from rising temperatures and permafrost degradation. The main issues are the stability of infrastructure foundations, extreme weather, and accessibility, since many remote projects rely on ice roads and river transport.

Infrastructure built in the Soviet-era and before 2000 is particularly vulnerable since their raft foundations are no longer stable, according to David Pearce, the managing director of SRK Consulting's Moscow office. Rising temperatures will have a more extreme impact on permafrost and ice roads than previously seen, and even greater snowfall poses problems as it is difficult to remove from open pits, according to Pearce.

The reliance of Russian reporting systems on compliance with standards that tend to be based around averages and static situations rather than possible peaks also creates a systemic risk, he added.

Commodity exposure

Most of Russia's major commodity producers are exposed to the risks of permafrost degradation with 60% of the country's vast landmass permanently frozen, according to a July Morgan Stanley report. With temperatures in these areas rising at three to four times the global average, Norilsk and state-owned diamond monopoly PJSC Alrosa face the greatest risks in the mining sector, along with Russia's two largest natural gas producers, government-controlled Public Joint Stock Co. Gazprom and PAO NOVATEK.

Nevertheless, improving navigability of Russia's northern coast is making the development of mining projects on and near its shore increasingly tempting as Moscow looks to raise mineral exports to Asia in particular. This mainly serves coal deposits and logistics at the moment, but there are other projects on the horizon. The mining division of Russia's state-owned atomic energy corporation is developing a lead-zinc deposit, Pavlovskoye, on the Arctic archipelago of Novaya Zemlya, and one of the world's largest uranium projects, Elkon, in the country's Far East.

Russia's two largest gold mining groups, PJSC Polyus and Polymetal International PLC, also face rising exposure to environmental risks as they develop new projects such as Sukhoi Log and Nezhda in permafrost areas. The same is true of two of steelmaker PAO Severstal's operating coal and iron ore mines in the Komi Republic and Murmansk Oblast.

"The necessity to develop the Far East and the Arctic (including the Arctic shelf), which are rich in oil, gas and metals, is a direct consequence of the fact that the Russian economy is not very well diversified and still largely resource-based," Vasily Astrov, an economist at the Vienna Institute for International Economic Studies, told Market Intelligence via email.

"Oil, gas and metals account (together with cereals) for the bulk of Russian exports, whereas production of goods with higher value-added is still largely a problem (with some well-known exceptions, such as weapons).

"But it is also a reflection of the fact that, at least in the case of oil and gas, traditional deposits, which are located in relatively more 'hospitable' areas (notably in western Siberia) and have relied to a large extent on investments undertaken in Soviet times, are by now largely depleted — hence the necessity to shift production eastwards and to the north. This excessive reliance on commodities is a 'structural' impediment for long-term economic prospects."

Energy transition

Russia's mineral wealth is nevertheless aligned with growing demand for a range of minerals necessary to changing technological needs, from battery metals to rare earth elements — of which the Arctic holds around US$1 trillion worth, according to the U.S. Air Force report. The sustainability of their extraction is coming under greater scrutiny, though. In early August, an association of indigenous peoples in Russia implored Tesla Inc.'s founder, Elon Musk, to boycott Norilsk's metals until the Arctic mining group compensated them for contaminating their ancestral lands.

"The various accidents Norilsk have had over the summer going back to the massive oil spill in May highlight the increasing fragility of operating in the Arctic caused by climate change," Richard Shirreff, managing partner of Strategia Worldwide, told Market Intelligence.

"At a time of increased focus on effective [environmental, social and governance] risk management by investors, Russia's push to develop the far north and east (particularly for mining), risks running into similar challenges," said Shirreff, who previously served as NATO's Deputy Supreme Allied Commander Europe.

"The thawing of permafrost is already seen as a tipping point for the climate, as it creates a potential vicious circle," Oskar Njaa, the Bellona Foundation's general manager for international affairs, told Market Intelligence.

"The more [greenhouse] gases are released into the atmosphere, the warmer the Arctic gets, leading to more permafrost melting and more gases releasing.

"It is very hard to predict how this will affect current and future infrastructure in the Arctic."