Sanction-Stymied Sino-Russian Partnership Undermines Security in the Arctic

ACADEMIC INCUBATOR — In January, as Putin prepared to invade Ukraine, two Chinese companies signed long-term agreements with Russian firm PAO Novatek to buy liquified natural gas (“LNG”) extracted in the Arctic. The producer of this gas would be “Arctic LNG 2,” Novatek’s yet-unfinished project in which CCP-linked firms hold substantial stakes. These deals sought to deepen Sino-Russian energy relations, potentially increasing both countries’ resilience to economic pressure from the U.S. and its allies.

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Sanctions are already testing this resilience. As the West breaks ties with Novatek, European firms are reportedly considering exits from Arctic LNG 2. Manufacturing facilities in China may soon have to halt construction on vital components of the project’s facilities.

Challenges to Beijing’s Novatek investments undermine efforts from China, a self-dubbed “near-Arctic state,” to woo a powerful friend and potential military proxy in one of the last geopolitical frontiers. To counter Russia and China, the U.S. must continue to look North.

From Novatek, With Love 

Novatek, which recently claimed to produce more than 5 percent of the world’s LNG, would not currently be an Arctic powerhouse if not for China’s investment. In 2013, China’s state-owned National Petroleum Corporation acquired a 20 percent stake in “Yamal LNG,” Novatek’s first Arctic project. Novatek in return pledged to send China 3 million tons of LNG per year. When the U.S. sanctioned the Putin-connected company after Russia invaded Crimea, China’s Silk Road Fund bought another 10 percent stake. 

China’s investments worked. By 2018, Yamal LNG had shipped its first million tons of LNG. The project last year hit 50 million tons, and Novatek announced its first dividends for investors. Amid Yamal’s success, Novatek launched its Arctic LNG 2 project, with Chinese state-owned firms buying a 20 percent stake in the second venture. Arctic LNG 2, which had aimed to begin production next year, will eventually send 1.6 million tons of Arctic-born LNG per year to China as part of the two January deals alone.

However, unlike in 2015, Western sanctions seem to be impeding Novatek. In April, Novatek’s sanctioned CEO Leonid Mikhelson reportedly said the project’s launch date might need to change. A few weeks later, industry publication Upstream wrote that Chinese manufacturing yards ordered “a halt to the fabrication of modules” for Arctic LNG 2. While a source at one manufacturing firm told the South China Morning Post that there was “no final word” on the stoppages, the CEO of French firm Technip, which holds the construction contract, said sanctions rendered the “execution of [Arctic LNG 2] more complicated.”

These issues represent a significant setback for one of Russia’s nascent economic opportunities. As dirty energy faces scrutiny, natural gas is likely to be a “transition fuel,” as it produces less than half the carbon emissions per megawatt-hour compared with coal. Also, in its cooled liquified state, natural gas occupies under 1/600th of the space than it does as a gas and is thus easier to transport in bulk; one shipload can heat 40,000 homes a year. Importantly for Russia, 30 percent of the world’s undiscovered natural gas reserves are in the Arctic.

These reserves are also crucial for China, which became the world’s largest LNG importer in 2021. Beijing relies on the West for much of its supply, with Australia and the U.S. ranking as China’s top LNG suppliers in 2021. Indeed, China bought 39 percent of its LNG in 2021 from Australia. The two deals Novatek signed in January would alone increase Russia’s exports to China by roughly a third; a fully functional Arctic LNG 2 operation would yield more LNG than China currently buys from Russia and the U.S. combined.

Friends In High-Latitude Places

Should these partners overcome their obstacles, China’s Novatek involvement would enhance Beijing’s relationship with Moscow and anchor its emerging presence in the Arctic. Russia has ruined even its most cooperative Arctic ties, as all seven of its neighbors have paused participation in the Arctic Council. Ready to fill this vacuum is China, whose own Arctic relationships have similarly stalled amid skepticism of Chinese economic coercion. Russia previously rebutted some of China’s Arctic advances; however, with Russia now isolated, China has an opening. Just weeks before Russia attacked Ukraine, Putin and Xi “agreed to continue consistently intensifying practical cooperation for the sustainable development of the Arctic.”

For Xi, buying influence in Russia through the Novatek partnerships — which one Norwegian professor calls “a cornerstone in China’s political aspirations in the Arctic” — is worth the price. A Sino-Russian axis gives China a valuable ally in countering Western shipping and environmental standards. Even if sanctions slow energy development, China likely appreciates any diversification to its 78.9 million-ton supply chain — a defensive consideration should the West ever sanction China’s energy sector. Moreover, should China want a military proxy in the area, Russia is probably the only state willing and able to play that role.

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The U.S. On Thin Ice

As other great powers make inroads in the Arctic, the U.S. must explore novel approaches to the region and continue to pressure the Sino-Russian relationship. U.S. Arctic policy, per CSIS, “remained largely stagnant” during the Obama and Trump administrations, with neither deploying “a meaningful policy response to either Russia’s or China’s increased economic and military ambitions in the region.”

President Biden should consider the benefits and costs of various approaches, ranging from carrots to sticks. The U.S. could invest in a premier Arctic economy — with opportunities for well-regulated Chinese partnerships — by developing Alaska’s undiscovered natural gas basins, though Alaskan gas projects could cost twice as much as Texan ones. Regardless of where it harvests its gas, if the U.S. strengthens its own already strong LNG trade with China, this could disincentivize further Arctic investment by the Chinese. The U.S. could also pursue a more combative approach: sanction China if it undermines Western sanctions on Russia. The U.S. in March warned China not to help Russia evade sanctions.

Of supreme importance, the U.S. should ensure it possesses the intelligence capabilities necessary to monitor Russian and Chinese developments in the Arctic. It should also have the military capabilities to deter Russia and China from intimidating other Arctic states.

Peer Reviewed by Larry Pfieffer, Director, The Michael V. Hayden Center for Intelligence, Policy, and International

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