Northern Sea Route
Global trade patterns show the logistics system faces several challenges. Geopolitical dynamics and economic volatility, climate change and increasing awareness are changing dramatically the existing logistics landscape. The COVID-19 outbreak and shifting consumer needs emphasize the necessity of diversifying global supply chains amid the growing demand for quick delivery services. The Northern Sea Route, which once was an inland Soviet transportation route, is now emerging as a new opportunity to meet the traffic needs for connections between Europe and Asia.
The NSR runs along the northern coast of Russia through Arctic waters (Kara, Laptev, East Siberian seas, Chukotka and Bering straits) connecting the European and far Eastern parts of Russia. The comparatively short transit distances, relatively cheap prices and conveyance capacity are seen as the main advantages of this route. Recently interest in Arctic shipping has increased, though development of the NSR as a competitive global transport artery will require a high level of international cooperation and a significant upgrade of the fleet and port infrastructure for operation in severe weather conditions.
The NSR is little more than half the distance of other sea routes from Europe to Asia. For example, from St. Petersburg to Vladivostok via the Suez Canal - over 12,840 nautical miles, and along the NSR – 5,770 nautical miles which is 40% shorter. The route from Rotterdam to Yokohama via the NSR is shorter by about 34% than via the Suez Canal. Although currently the navigation season is limited to 2-4 months, ongoing climate change, the extensive use of icebreakers and innovations in the shipping industry could one day make it feasible all the year round. Originally, the NSR was used for ‘Northern Deliveries’ – supplies of fuel, food and medicines to Russia’s hard-to-reach territories. In Soviet times, the record NSR traffic was reached in 1987, at 6.6 million tons. Recent developments have led to significant increases in cargo volumes, from 9.9 million tons in 2017 to 31.5 million tons by the end of 2019. Although we observe significant growth, cargo volume is still much lower than the ambitious 80 million tons targeted in the 2018 Presidential Decree.
Maritime transportation remains incredibly important for the global logistics ecosystem as it handles more than 90% of cargo by volume. Now Russia is willing to make the Northern Sea Route a truly global transport artery integrated into the global logistics ecosystem.
In 2018 Russian President, Vladimir Putin, said the Northern Sea Route would become "the key to the development of the Russian Arctic and Far East regions", setting the ambitious goal of increasing the volume of cargo moved to 80 million tons by 2024. Significant growth will be driven mostly by the development of large energy projects such as Yamal LNG, Arctic LNG, etc. They will compel the problem of outdated transport infrastructure to be addressed, while cargo remains skewed toward natural resources. In order to be integrated into the global logistics ecosystem, the NSR fleet and infrastructure need significant modernization in compliance with new requirements in the shipping industry.
For this reason, Russia has committed to investing up to 7 billion dollars, 80% of which will go to building modern ice-class cargo ships and icebreakers, and the remainder to upgrading port infrastructure. The base-case scenario outlined in the NSR development strategy sets out 82 million tons of cargo by 2025. In the current geo-economic context of slumping oil demand, trade wars and the COVID-19 outbreak this objective does not seem to be feasible. However, the strategy also suggests a more conservative scenario of 65 million tons by 2025. With these numbers, the Northern Sea Route will operate at approximately 5% of the level of Suez Canal traffic, which places it in a specific market niche.
The Northern Sea Route is attracting new foreign investors. On the one hand, there is the promise of quicker, cheaper and safer delivery services, but on the other hand, the Northern Sea Route provides access to the development of the Arctic’s natural resources.
Global trends are promoting the development of the Northern Sea Route, but geopolitical competition limits it. At the same time, global competition in logistics increases. Greenhouse gas emissions would be cut on the NSR by 23% when trading with China, Japan, Korea and the EU, when using LNG, by 38%. Using a carbon- free ammonia, hydrogen or nuclear fleet, that reduction would be by 100%.
Massive natural resources and the transport potential were what attracted the first foreign investors, as France, China, Japan, India and South Korea. LNG remains the key commodity of interest. In total, the CNPC and the Silk Road Fund have already directly invested in Russian Arctic projects operated by Russia’s private company Novatek to develop a gas field and construct an LNG terminal in the Yamal region.
As China is becoming one of the most important players in the global logistics system, China’s government has expressed interest in developing new routes via Russia’s Arctic. In 2019 the leaders of Russia and China agreed to integrate the Northern Sea Route into the Belt and Road Initiative to boost bilateral ties and develop the Arctic territories. The BRI is by far the biggest infrastructure undertaking worldwide. It connects China with the rest of the world by both hard and soft infrastructure, thereby deepening economic, political and cultural ties. The alignment of the Northern Sea Route with China’s Belt and Road Initiative extends the vast Chinese initiative into the Polar regions and is expected to favour economic development, science and research on the Arctic shores. China’s state-owned COSCO shipping corporation, in partnership with the Japanese-owned MOL, has already despatched some LNG-related shipping via the Northern Sea Route.
The increasing share of non-energy cargo will require global logistics operators to explore the NSR in order to gain confidence in it. In 2018 COSCO sent a multi-purpose cargo vessel via the NSR to deliver equipment for subway and fertilizer plant construction. The Danish shipping giant, Maersk, for the first time used the new route in 2018, shipping Russian fish and other refrigerated cargo, plus South Korean electronics, on the ice-class 3,600 TEU vessel, Venta MAERSK. It was the first commercial containership to pass through the Northern Trade Route. Such examples are still rare, as the NSR’s development is related mostly to large energy projects.
The shipping industry in the Arctic requires special international cooperation and a regulatory framework to provide sustainable services while conserving the unique Arctic environment. As for now, the major part of the fleet operating in polar waters uses heavy oil fuels. The regulation framework set by the International Maritime Organization bans maritime oil fuel in the Arctic. Although the ban was postponed and countries with access to the Arctic coast (Russia, Denmark, Canada, Norway, USA) would be able to issue additional permits for ships under their flags for the use of marine fuel oil until July 1, 2029, this situation affects the vessels that provide the ‘Northern Deliveries’, and which export hydrocarbons. This highlights the acute need to move toward lower carbon, greener fuels.
Although the Northern Sea Route will not capture more than 1% of the world's sea traffic even in the most ambitious scenario, it is still one of the most important emerging solutions for global logistics. Compared with the Suez Canal, the Malacca Strait and other traditional routes, the NSR is shorter and cheaper, but still safe. The cargo’s carbon footprint along the NSR will be lower, which may help to attract environmentally responsible shipowners. However, to fill its own market niche in the global logistics ecosystem the NSR requires a serious technological and governance upgrade if it is to comply with sustainable shipping standards and regulations while providing safe navigation in the Arctic. This is what makes the Northern Sea Route one of the biggest business challenges.