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The Arctic as a resource base

Photo: Sergey Erzikov / Shutterstock.com
Photo: Sergey Erzikov / Shutterstock.com

Опубликовано: 26/03/2024

Автор: Bellona

What’s wrong with Russia’s official documents on the Arctic.

In recent years, Russia has been concerned with the development of its Arctic territories. However, it appears to be rather one-sided. The main focus is on the extraction and processing of natural resources, their export to the international market, and the development of the Northern Sea Route (NSR). Other directions of socio-economic development receive much less attention, and the environmental management of the region, particularly in the context of existing and planned economic activities, lags even further behind.

Legislation defining the concept of managing the Russian Arctic was mainly adopted before Russia’s invasion of Ukraine. The international sanctions that followed have not yet affected this concept significantly, and has only adjusting certain indicators.

What is the Russian Arctic and how is it managed?

The main documents establishing the legal regime and determining the strategy for managing Russia’s Arctic territories include:

The boundaries of the Arctic Zone of the Russian Federation (AZRF) are established by Law No. 193-FZ. They differ significantly from the commonly accepted boundaries of the Arctic, which are conventionally determined either by the Arctic Circle or by the southern boundary of the tundra zone. Thus, the southernmost point of the AZRF (the south of the Turukhansky District of the Krasnoyarsk Territory) is approximately 800 km south of the Arctic Circle and 600 km south of the tundra zone boundary.

Since 2020, the AZRF has been regularly expanding with new territories. Soon, two more districts of the Khanty-Mansi Autonomous Okrug — Berezovsky and Beloyarsky — with areas of 88.1 and 41.6 thousand square kilometers, respectively, may be added to it. According to the text of the corresponding bill, this will create favorable conditions for the development and utilization of these municipal districts and the Arctic zone overall.

These favorable conditions are related to the fact that the same Law No. 193-FZ established a special economic zone in the AZRF — a territory with a special legal status distinct the rest of the Russian Federation, which implies various preferential conditions for attracting business.

The same law introduces the concept of “AZRF resident”. Only legal entities registered in the Arctic can be residents. Currently, there are 723 of them. Major corporations such as Gazprom and Novatek are not on this list, but their subsidiaries, such as Rosatom’s subsidiaries AO “Chukotatomenergo” and LLC “Arctic Atom-Service”, can be included.

Russia’s Arctic Zone. Source: erdc.ru

Among the residents is one of the largest industrial companies operating in the Russian Arctic, LLC “Severnaya Zvezda”, the operator of the Syradasayskoye coal deposit in the Taymyr (Krasnoyarsk Territory). It is planned that from 2029, the deposit will provide a cargo flow of 12 million tons along the Northern Sea Route (NSR).

Residents of the Arctic zone are entitled to tax preferences, such as a zero profit tax for 10 years from the moment of receiving the first profit (except for production related to the extraction of solid minerals), zero land tax, and others. Tax incentives may vary from region to region. Among the administrative bonuses is the possibility of obtaining land plots without auctions, which are state or municipal property, subsidizing the construction of infrastructure, and even assistance in personnel recruitment and management.

Moreover, the law provides for the possibility of applying the procedure of a free customs zone (FCZ) on developed and equipped areas of residents, which implies exemption from customs duties and VAT for the export and import of goods.

However, the FCZ procedure can be applied to specific areas of transportation facilities, such as seaports, international airports, as well as land plots adjacent to automobile or railway checkpoints, which may also be accessible to non-residents.

In addition to other benefits in the Arctic zone, established for non-residents, it is worth mentioning federal tax incentives for all organizations engaged in the search, evaluation, exploration, and extraction of hydrocarbon raw materials in certain territories of the Arctic zone and offshore deposits.

The law on the Arctic zone of the Russian Federation also includes two interesting points. The first is the possibility of conducting checks on residents, including compliance with environmental legislation, only with the consent of the Ministry for the Development of the Russian Far East and the Arctic (Minvostokrazvitiye) and within shortened deadlines. The second is that the managing company of the Arctic zone of the Russian Federation has the right to represent and defend the interests of applying residents in court, which increases their chances of success.

At the same time, the managing company for all residents is the Far East and Arctic Development Corporation (KRDV). It operates in both territories of advanced development (referred to as TOR in its Russian abbreviation), belonging to the Far Eastern Federal District (FEFD), and in the Arctic zone of the Russian Federation. Both the Far Eastern TORs and the Arctic zone of the Russian Federation are under the control of Minvostokrazvitiye, and the chairman of the board of directors of KRDV is concurrently the head of Minvostokrazvitiye, Alexey Chekunkov. Thus, the activities of Arctic business are essentially protected by the state.

In the Arctic zone of the Russian Federation, there are also territories that have been separated from it into separate jurisdictions. For example, there are their own TORs here. These include the TOR “Arctic Capital” (Murmansk Region) specializing in port activities, logistics, industrial construction, and the TOR “Chukotka” (Chukotka Autonomous Okrug) specializing in “extraction of minerals and services to the population.” These TORs also have legislative incentives — in each individual case, they are different, and they also differ from the conditions in the rest of the Arctic zone of the Russian Federation.

But that’s not all. In the urban district of Pevek (Chukotka), the so-called Free Port of Vladivostok (FPV) regime is in effect, which also implies preferential tax, administrative, and customs regulation regimes, including the possibility of applying the FCZ procedure. In the urban district of Pevek, there is one of the most significant ports on the Northern Sea Route and large gold mining enterprises.

Thus, there are separate “autonomies” in the Russian Arctic living by their own rules.

Map of municipalities in five regions of the Russian Federation, which are subject to the regime of the Free Port of Vladivostok (marked in purple). Source: erdc.ru

The Arctic zone of the Russian Federation (AZRF) is the largest special economic zone in the world and, in turn, is also an “autonomy” with its own legal regime in relation to the rest of the country’s territory. The land area of the AZRF is approximately 5 million square kilometers. For comparison, the area of Russia is 17 million square kilometers (excluding Crimea and other occupied territories of Ukraine).

However, the development of the Arctic is not singled out as a separate direction but is controlled by the same structure that deals with the development of the Russian Far East (RFE) and manages all such “autonomies” both in the Arctic and in the RFE, despite their very serious environmental, climatic, socio-economic, and other differences.

Why all this is necessary?

Let’s turn to another important document that determines the fate of Russia’s Arctic territories. This is the presidential decree “On the Basics of the State Policy of the Russian Federation in the Arctic until 2035.”

The document begins with a list of six main national interests of Russia in the Arctic. Among them are sovereignty and territorial integrity; peace and partnership; the well-being of the population; environmental protection, including the interests of indigenous peoples.

Another point is dedicated to the economic aspect of the region’s development. However, here the focus is solely on the extraction of minerals. Thus, one of the national interests is understood as the development of the AZRF “as a strategic resource base and its rational use to accelerate the economic growth of the Russian Federation.”

The next point in the list is “the development of the Northern Sea Route (NSR) as a competitive national transport route on the world market.”

The strategy for the development of the NSR, as well as the target indicators for its use, are detailed in other state documents. The first is the Federal Project “Development of the Northern Sea Route.” The main task is to increase cargo traffic along the NSR to 80 million tons by 2024 and to 150 million tons by 2030.

The second is the Plan for the Development of the Northern Sea Route until 2035, approved by the government of the Russian Federation on August 22, 2022, and subsequently supplemented on April 28, 2023. It implies an even greater increase in cargo traffic compared to the federal project – up to 90 million tons by 2024 and up to 216.45 million tons by 2030.

The plan also includes a forecast for annual loading, according to which the bulk of the cargo flow along the NSR (approximately 70-75% depending on the year) should consist of oil, liquefied natural gas (LNG), non-ferrous metals, and coal produced in the AZRF by Gazprom, Rosneft, Novatek, Norilsk Nickel, LLC “Severnaya Zvezda,” and LLC “Baims Mining Company.”

The full implementation of these plans is in question, particularly due to sanctions. For example, the cargo traffic along the NSR in 2023, while breaking a historical record, reaching 36.25 million tons, still fell significantly short of the target indicator of the NSR Development Plan of 46.82 million tons.

Nevertheless, it is evident that a large portion of the cargo turnover along the NSR will eventually consist of minerals extracted in the AZRF. It is safe to say that two out of the six main interests of Russia in the Arctic, according to the Foundations of the State Policy in the region, are their extraction and transportation to markets.

Moreover, among the main threats to national security listed in the document is the “low pace of geological exploration of promising mineral resource centers in the Arctic zone of the Russian Federation.”

The theme of resource development in the Arctic is widely reflected in the Strategy for the Development of the Arctic Zone of the Russian Federation and Ensuring National Security until 2035, approved by the decree of the President of the Russian Federation.

Among other things, here, in seven points, the significance of the AZRF in the socio-economic development of the country and ensuring its national security is substantiated. Three points are devoted to the presence of useful minerals here, and a fourth — to the economic importance of the NSR.

Thus, the significance of the AZRF is justified by the fact that it contains 17% of all Russian oil (including gas condensate), and the continental shelf of the Russian Federation in the Arctic contains another 17.3 billion tons of oil (including gas condensate) and over 85.1 trillion cubic meters of natural gas, as well as the fact that the implementation of major economic projects in the AZRF (which again involves the extraction and export of raw materials) stimulates the production in Russia of high-tech and knowledge-intensive products and demand for them.

Foreign Participation

Russia currently seems to lack sufficient resources of its own to fulfill existing plans for the development of the Arctic, so foreign capital is actively involved in their implementation.

According to Law No. 2395-1 “On Subsoil,” only legal entities registered in the Russian Federation can use subsoil resources. However, nothing prevents foreign companies from being owners of these legal entities either partially or fully.

Such examples exist among the largest Russian mega-projects in the Arctic.

For instance, LLC “GDK Baimskaya,” developing the Baimskoye gold-copper deposit in Chukotka, is 100% owned by the Kazakhstani company Trianon Limited. Novatek’s “Yamal LNG” project is owned 49.9% by companies from China and France, and 40% of the shares of another project, “Arctic LNG 2,” are held by companies from France, China, and Japan. Indian companies have owned 49% of OJSC “Vankorneft,” the operator of the Vankor field in the Krasnoyarsk Territory, since 2016.

Moreover, Vietnam’s participation in the development of the North-Purovsky gas condensate field in the Yamalo-Nenets Autonomous Okrug (YNAO) and the possibility of Thailand’s participation in projects for hydrocarbon extraction in the Arctic zone of the Russian Federation, including LNG, are being discussed.

An exception is made for the Russian Continental Shelf. Only Russian companies can operate there, with state participation exceeding 50%. Moreover, since 2016, there has been a moratorium on issuing new licenses for shelf development, and currently, only Gazprom and Rosneft operate there under previously issued licenses. Moreover, extraction is carried out only at one deposit — the Prirazlomnoye field.

Regarding transportation via the NSR of resources extracted in Russia, including in the Arctic zone of the Russian Federation, using vessels under a foreign flag, this is also possible according to the Merchant Shipping Code. There are separate restrictions on the transportation of oil and gas; however, they do not apply to legal relations arising from international treaties concluded by Russia or any agreements concluded before February 1, 2018. An example of such cooperation are the 26 tankers chartered by Novatek, which are allowed to transport LNG and gas condensate via the Northern Sea Route under a foreign flag until 2044.

Environmental Policy in the Arctic

Thus, it is evident that in the Arctic zone of the Russian Federation (AZRF), there is active and planned new extraction and export of minerals. However, insufficient attention is currently paid to the environmental side of this process and to the overall fight against the environmental risks associated with economic activities in the region.

One of the main such risks is the thawing of permafrost. According to the Russian Ministry of Natural Resources, due to this process, 40% of the northern infrastructure in the country is already deformed. The potential economic damage to Russia could reach at least 5 trillion rubles (51.1 billion euros) by 2050, as stated by Deputy Minister of Ecology of the Russian Federation Sergey Anoprienko.

Therefore, in the updated edition of the “Foundations of State Policy of Russia in the Arctic until 2035,” issued on February 21, 2023, a point appeared on the creation of a state system for monitoring the condition of permafrost. And in the list of main threats to national security in the region provided in this document, there is mention of the unpreparedness of the environmental monitoring system located in the AZRF for environmental challenges.

The monitoring system began to be created in the first half of last year. On May 19, 2023, the first well for observing the condition of permafrost was opened in Salekhard. By the end of the year, there were 20 of them operating in five regions. By 2025, their number should increase to 140. Also, in December 2023, the first two stations for monitoring the concentration of greenhouse gases were put into operation.

However, it is quite telling that the main Arctic documents usually focus not on combating climate change but on adapting to it. This can be explained by the fact that Russia still considers climate change not only as a threat but also as a stimulus for economic development. For example, in the Strategy for the Development of the AZRF, it is stated that climate change contributes not only to “risks for economic activities and the environment” but also to “new economic opportunities,” one of which is cited as increasing cargo traffic along the NSR.

The first bore hole of the permafrost monitoring system in the Russian Arctic. Photo: Ministry of Natural Resources of the Russian Federation

Also noteworthy is that, on the one hand, Russia considers climate change in the region as one of the threats to national security, while on the other hand, it enshrines in various regulatory legal acts a multiple increase in the extraction and export of hydrocarbons, the burning of which precisely contributes to global climate change and the rise in temperatures in the Arctic. However, unlike the ongoing development of oil and gas fields in the region, climate measures are only at the initial stage of implementation.

Furthermore, Russia is not yet ready to join the ban on the transportation and use of heavy fuel oil in the Arctic — a voluntary initiative developed by the International Maritime Organization of the UN. The ban will begin to take effect with some exceptions on July 1, 2024, and will come into full force in 2029. This measure will reduce black carbon emissions from shipping by 44%, emphasize the “Clean Arctic” alliance, which includes “Bellona”.

Among other steps to reduce emissions in economic activities in the Arctic zone of the Russian Federation (AZRF), a set of 13 measures adopted on October 29, 2022, by government directive No. 3219-r is illustrative.

These measures include reducing the use of coal and heavy fuel oil as fuel, modernizing boiler houses and thermal power plants to switch them to natural gas, biofuels, or wood pellets and chips, measures to eliminate open storage of coal. It is also planned to work on improving the quality of treatment of domestic sewage in settlements and wastewater from ships calling at Arctic ports.

In addition, according to the document, plans are being developed to stimulate the transition of automotive, maritime, and inland water transport to natural gas fuel and to develop proposals to increase charges for emissions and discharges of pollutants into the atmosphere and into the seas and rivers. However, as seen, these points are currently only about developing plans and proposals, not about concrete steps.

At the same time, in some cases, individual effective measures are being taken to reduce the negative impact on the environment. For example, in 2021, the energy system of Vorkuta was converted from coal to gas, sharply reducing emissions into the atmosphere.

Despite this, in the following year, 2022, the Vorkuta urban district took the 8th place in the list of Russian cities with the most polluted air, with total emissions of 168 thousand tons, because many environmental problems related to coal mining, decommissioning of closed mines, and the liquidation of accumulated environmental damage have not been addressed for 20, 30, or more years.

Another example is the reduction of emissions by the Norilsk branch on the Kola Peninsula. Emissions here were also sharply reduced, but primarily because outdated production facilities were closed and transferred to the Zapolyarny branch of the company, also located in the AZRF — in Norilsk.

Norilsk itself, along with another 11 cities across the country, is part of the federal project “Clean Air,” launched in 2019. However, as of the end of 2022, emissions from the largest polluter — Norilsk Nickel — were only reduced from 1.8 billion tons to 1.78 billion tons (for comparison, all emissions into the atmosphere of the Norilsk urban district this year amounted to 1.79 billion tons).

Summary

As a result of such environmental policy, emissions into the atmosphere from just the Arctic sites of Gazprom and Norilsk Nickel exceed those of the entire industry of Alaska and the Arctic zone of Canada combined. According to Greenpeace, the Zapolyarny branch of Norilsk Nickel is the world’s largest anthropogenic source of sulfur dioxide pollution in the atmosphere, and areas of historically strong pollution and disruption of the natural environment (in many cases, dating back to the Soviet era) are scattered throughout the European part of the Russian Arctic zone (due to its greater development), but also occur in its Asian part.

However, in Russian state documents on Arctic management, environmental protection measures are relegated to the background compared to industrial development of the region, are fragmented, incomplete, and often do not extend beyond the development of plans, while concrete steps supported by target indicators are needed now.

The foundations of state policy, the development strategy of the region, and many other important documents defining the fate of the Russian Arctic are adopted until 2035, and major changes are unlikely to be expected. This means that, barring economic obstacles, such as a significant strengthening of international sanctions, serious anthropogenic pressure is planned for at least the next 10 years, which will increase environmental risks for the entire Arctic, not just its Russian part.