Sanctions regime and the Northern Sea Route development outlook
Previously, the Northern Sea Route was considered mainly as a shipping route for the export of hydrocarbons from the Arctic projects. With Russia making a logistics ‘pivot’ toward the East region, the NSR importance for transit and coastal shipping increased dramatically. Will Russia be able to provide stable and regular cargo flow along the Arctic route?
Freight traffic in the waters of the Northern Sea Route in 2022 has exceeded 32 million tonnes.
Sergey Zybko, Director General of GlavSevmorput (part of Rosatom Corporation), commented on the results of the year: “Thus, we have reached ahead of schedule the target indicator of the federal project Development of the Northern Sea Route, which is part of the Comprehensive Plan for the Modernization and Expansion of the Main Infrastructure. According to our estimates, the cargo traffic along the NSR this year can reach 34 million tonnes. We will sum up the final results in January 2023”.
However, cargoes of from oil and gas projects still constitute the bulk of the cargo traffic volume: crude oil and oil products (7.224 million tonnes), LNG and gas condensate (20.489 million tonnes), coal (295 000 tonnes), ore concentrate (43 500 tonnes) and break-bulk cargo (4 248 million tonnes).
Nevertheless, the transfer of freight delivered now on the busy Far East direction along with the North-West and South to the Northern Sea Rout. “With Russia's U-turn to the East, the NSR has a chance to become even more in demand, taking on part of the cargo from the BAM and the Trans-Siberian. The importance of the main water artery of the country cannot be overestimated,” Yuri Trutnev Deputy Prime Minister, Presidential Envoy to the Far Eastern Federal District was quoted as saying on the occasion of the Northern Sea Route 90th anniversary..
Indeed, the Sevmorput container ship made this year two short sea round voyages that were funded by the Russian government. Starting this year, 560 million rubles will be allocated annually for these purposes. Nevertheless, cargo owners complained that the container ship was loaded only by 10% in its first voyage. They said that was due to poor PR campaign before the arrangement of this voyage.
The Sevmorput second voyage turned out to be more successful: the Far East bound ship was loaded by 90% of its capacity. The shipment included 90 export containers, cement, gantry cranes, vehicles). On the route to St. Petersburg, the loading was 46% (44 containers with Kamchatka fish, and 50 containers with various imported goods, metal structures).
In 2023, these voyages are expected to continue. The schedule is planned to be published earlier next year.
“In January-February 2023, we will have a fixed schedule and make it public. Accordingly, cargo owners will understand and be sure that their goods will be
delivered to the port of destination,” said Vladimir Panov, Deputy Chairman of the State Commission for the Development of the Arctic and Rosatom’s special representative for the Arctic development.
“We build logistics and communicate with ports so that loading times are minimal and there are no delays... Now we are preparing a schedule based on an understanding of the bottlenecks that we have already identified, arranging logistics windows for next year. I hope we will be able to complete three voyages. It is also important for cargo owners that the cost of delivering a container from St. Petersburg to Vladivostok is practically the same as by rail, that is, at the moment it is being done effectively.”
Mr. Panov also noted that the volume of bookings from consignors already exceeds the capacity of the vessel.
In this regard, the project to organize a regular container line along the NSR was announced in July 2021 as the COVID-19 was unfolding. This followed a spike in freight rates for transportation on the China-Europe-China routes. The corresponding agreement was then concluded by Rosatom and DP World. In April 2022, Yuri Trutnev announced that Rosatom would launch a regular transit line along the Northern Sea Route from 2025. This would help increase the volume of international transit by 2030 to 30 million tonnes per year. According to him, in terms of the development of port infrastructure, four terminals are being built in the water area of the Northern Sea Route (NSR). The total investment in this construction may exceed 300 billion rubles until 2030.
RZD Logistics said the company also would be willing to join this project. Dmitry Anoshkin, Director for Industrial Logistics and Outsourcing, RZD Logistics said speaking at the 12th Arctic: Present and Future International Forum: “We are negotiating with Rusatom Cargo so that RZD Logistics also participates in this work and that our competencies in terms of cargo volume access to ports are taken into account, we also take part in this work,” .
There is a potential, Anoshkin said, for export flows from the ports of Murmansk and Arkhangelsk along the Northern Sea Route of such goods as timber, ferrous metals, fertilizers, and paper. Imported flows will include consumer goods, equipment, components, products of the chemical industry. RZD Logistics, for its part, is ready to provide services for the consolidation of ship cargoes in Murmansk, Arkhangelsk and forwarding of waterborne transportation.
There’s a little left to do: to build the necessary fleet. Back in the summer of 2021, Central Marine Research and Design Institute (CNIIMF) completed a comprehensive feasibility study on the project for organizing a trans-Arctic container line. Based on the results of the analysis, CNIIPF recommended as a priority option a concept of the Arc8 class 6000teu Arctic container ship that would be outfitted with rudder propellers and powered by LNG.
It was long time ago, and the market environment has changed dramatically: freight rates took downturn trend again, with Western sanctions in force, and there has been a problem of congestion and delays seen in Far Eastern ports. All this may require the adjustments in the original plans.
Concerning the fleet, there is a need to build up an icebreaking vessels group. This fleet of icebreakers on the NSR should reach 17 vessels by 2030 and 22 ships by 2035 year. This is an opinion of Vyacheslav Ruksha, Deputy Director General of Rosatom Corporation, Director of the Directorate of the Northern Sea Route.
“We need to have 17 icebreakers to ensure East-bound year-round transportation on the NSR. This is the minimum estimate, and it has passed the expert discussion. In 2035, 22 icebreakers will be required,” Mr. Ruksha said. He added that 17 icebreakers can support a cargo flow of at least 150 million tonnes per year by 2030, and 22 icebreakers at least 220 million tonnes per year in 2035”.
It is important to remember when assessing the prospects for transit traffic along the NSR by 2023, that there is no interest for now among foreign carriers in the Arctic route, unless the circumstances change dramatically.
In September, Maxim Kulinko, Deputy Director of the Directorate of the Northern Sea Route of Rosatom, commented: “The Directorate of the Northern Sea Route, together with GlavSevmorput, carefully analyzes applications for passage through the NSR. So far, no applications have been submitted from companies that provided the transit volume last year. At the same time, when we communicate with them, ... they say: "We really wanted to, but the financial risks from the imposed sanctions are great, as well as due to the lack of the necessary fleet." So, time will show. Companies are looking to the coming years as the situation with Ukraine resolves and as we look forward to lifting these sanctions.”
For his part, the director of the Institute of Arctic Logistics at Yongsan University (South Korea), Sungwon Hong, referring to surveys, said in September of this year that Asian business is losing interest in the NSR. Nevertheless, there is a prospect: according to the scientist, Japan, South Korea and China should be involved in the development of the NSR. “We need to connect Japan and South Korea to the development of infrastructure, establish cooperation with ports. If we talk about South Korea, this is primarily the Port of Busan, it is also possible to attract Chinese ports in the northeast,” Sungwon Hong said.
Thus, while maintaining the current geopolitical situation in 2023, we can expect an increase in the volume of short sea and transit traffic along the Northern Sea Route due to the addition of a third voyage for the Sevmorput container ship and an increase in its designed capacity due to the need to unload the Far Eastern infrastructure. In the longer term, it is necessary to create our own transport fleet to organize a regular Arctic shipping route, while simultaneously developing port infrastructure and building up an icebreaking group.