RUSSIA/CIS RISKWATCH – ISSUE 5 – JULY 2014

Arctic summer


By Tim Stanley, Managing Director Russia and CIS

Walking to work in the early summer mornings, Moscow feels calm, relaxed, empty. The sun is already high in the sky at 8am, promising another scorching summer day. The distant strains of church bells marking an Orthodox feast reach me as I walk through quiet streets all but free of the city’s infamous traffic, passing the Supreme Court and various embassies. The final stretch to the office is along the tree-lined boulevard which runs around the centre of the city in an almost uninterrupted circle. The scene is timeless, modern-day Chekhov: elegant ladies carrying tiny pocket dogs; grandpas pushing infants on the swings; a nightshift worker hurrying home, swigging on an energy drink; teenagers kissing lazily as a magical summer night comes to an end.

Looking around, it is hard to believe that life hasn’t always been, and won’t always be, like this. But the events of the past six months suggest otherwise: revolution in Ukraine, the return of Crimea to Russia, hundreds killed in an ongoing civil war, economic sanctions, hostile Cold War rhetoric. And the prospect of more sanctions, gas disputes and economic collapse in Ukraine suggest we’ve reached a turning point in the political and economic trajectory of this country and region. The ‘post-Soviet’ era, which lasted a generation and was broadly characterised by Russia’s increasing normalisation and integration into global structures, has come to an abrupt end and a new, more unstable, era in east-west relations has begun.

This newsletter seeks to highlight some of the developing trends most crucial to businesses operating in the region. We looked at what to expect in Sochi based on experiences at other major sporting events (Issue 2, August 2013), and discussed the improving Russia-China relationship (Issue 3, December 2013) months before the landmark 30-year oil supply signed between Gazprom and CNPC in May this year.

In this edition, despite summer temperatures of 30-degrees and more, our thoughts turn north, to the polar region and resource-rich but frigid waters of the Arctic Ocean and the Barents, Kara and Laptev Seas.  

With the eyes of the world focused on events closer to home – conflicts in Ukraine and the Middle East, sporting championships in Brazil and Europe – countries bordering the Arctic are preparing rapidly for exploration, transport, and defence, and the not-too-distant day when the fabled northern passage finally becomes a serious transport route to rival existing routes via Suez and the Capes.

As far back as 2007, Arctic explorer and senator Artur Chillingarov planted a Russian flag on the sea bed beneath the North Pole, a PR masterstroke which left no doubt of the country’s intentions to continue to pursue vigorously her claims in the region. Subsequent construction of a new generation of nuclear-powered icebreakers, special army brigades based in the Arctic, and this winter’s largest ever Arctic landings (350 parachutists and military hardware successfully air-dropped by night onto the remote Kotelny island) reinforce this preparedness.  By contrast, NATO is only now, post-Crimea, taking an interest, the US’s focus lies elsewhere, and Canada's mid-summer military exercises look a little weak. Meantime China’s successful application for observer status at the Arctic Council demonstrates that it is not going to be left out of discussions regarding the fate of such a strategic region.

Our two articles in this edition examine in closer detail what is going on Up North, and how this emerging new world order is likely to impact Arctic development.

In the first, Jonathan Friedman, of our Global Risks Analysis team, downplays the risks of geopolitical confrontation and recommends instead that companies focus on the reputational and hugely difficult operational challenges of doing business in the northern wildernesses. In the second article, Sebastian Villyn, analyst in Control Risks’ Maritime Risk Analysis team, examines the impact of exploration and increased shipping on the region, the potential for environmental damage, and the new front which has been opened by activists such as Greenpeace.

As always, we welcome your feedback and comments. If you’re coming to Moscow this summer, do feel free to visit us in the Control Risks office.

Sincerely yours,

Tim Stanley

Tim Stanley