Global Risks, Local Risks: The Toxic Legacy of Rare Earth Metals

Below I look at how the mining and extraction of rare earth metals creates environmental, social and geopolitical risks.

Deep in the remote western province of Inner Mongolia a vast dark lake is fed by a black toxic sludge trickling from metal pipes. Metal towers rising from countless refineries and coal power stations puncture the grey sky. From the towers sulphur, diesel, and solvent fumes rise and mix in the air to create a noxious toxic soup, all inhaled by Baotou’s two and half million residents. Nearly all of Baotou’s population settled there in the last twenty years, lured by a modern day gold rush.

Baotou and its surrounding mines is the fountainhead of a global supply chain which provides the crucial components of the modern world’s essential technology.

Rare earth metals are in fact found in relative abundance in the earth. The “rare” comes from the difficultly in chemically extracting them from other metals which they are clumped together with. This often involves dissolving them in the likes of sulphuric and nitric acid The byproduct of this is large amounts of toxic waste that have made cities like Baotou and others a public health hazard.

Rare earth metals occupy the lower reaches of the periodic table and includes the likes of lanthanum, cerium, scandium, terbium. Apart from the periodic table earth metals are connected by their importance in modern manufacturing.

Rare earth metals have properties such as magnetism, heat resistance and phosphorescence which make them indispensable for certain applications. Rare earth metals are crucial for smart phones, wind turbines, electric batteries, laptops and many modern defence applications.

Rare Earth Metal Geopolitics

Because China controls around 80% of the global supply of rare earth metals there is a strong geopolitical undercurrent involved in mining them. China hosts the majority of the world’s extraction facilities which appear to give it effective control of the global market. However, the 80 percent figures can be deceptive as this means the supply of processed metals.

China does not control 80 percent the world’s deposits. Other countries such as Australia, Myanmar, Russia, Greenland and many others have large reserves of rare metals.

China could if it chose order the halt of rare earth metal exports which would cause the buyers major supply problems. China strongly encouraged the development of rare earth metal mining and processing, its relative lack of environmental controls and cheap labour force put much of the rest of the world out of business.

Mining rare earth metals raises a wide range of Environmental, Social and Governance (ESG) issues and digging for rare earth metals are no different.

ESG Risk

Environmentally: the process of extraction is extremely costly unless it is done with no regard for the environment. Mining in China has left huge scars in the landscape and a legacy of dangerous ammonia and nitrate compounds along with many other dangerous chemicals in the ground.

Mining rare earth metals can also leave dangerous metals like lead and cadmium, other mines have been dug near uranium deposits. All this exposes miners and those living nearby to major health impacts, skin cancer and respiratory issues.

Socially: mining can have a profound impact local communities. Mining and the refining process can destroy landscapes and even uproot communities thanks to the setting up of the mine and the waste products created by refineries. Once land is identified as holding valuable metals or minerals it becomes much more valuable and without protections there is a risk that miners will steal or contaminate the land and drive indigenous people away.

Governance: the promise of mineral riches can distort local politics and create the temptation for illegal or unregulated mining. Illegal mining is unregulated so the chances it will cause pollution and environmental destruction are much higher.

For example the remote Kachin province in Myanmar has been the scene of a long running battle between the Government and local groups.

Can China’s Rare Earth Dominance be challenged?

While China has the lion’s share of processing capacity, other nations are looking to increase their capacity. Hull in the UK has been discussed as a potential new site of a new plant and the EU is looking to set up a raw materials alliance to ensure the sustainable supply and processing of rare earth metals.

If China moves to stop the export of rare earth metals other countries could rely on their stockpiles until new plants and supply chains could be created. The US and China have tiptoed around the issue of rare metals, leaving them aside in the trade war which has simmered over the Trump years.

Texan firm Blue Line announced in 2019 they would be working with an Australian firm to set up a new independent manufacturing centre. The Pentagon is funding MP Materials to reopen the Mountain Pass site in the US where it will mine for rare earth metals.

Western nations are clearly concerned about the heavy reliance on China as a provider. Rare earth metals represent an easily broken supply chain and while there are short term fixes, avoiding reliance on a geopolitical rival makes sense.

Australian firm Greenland minerals acquired control of the controversial Kvanefeld Project from Chinese investors. Kvanfeld looks set to be a major rare earth metal project in Southern Greenland.

The mine has faced major local opposition, but the government have given the green light to a public consultation period ending in March 2021. Supporters of the project claim it will bring jobs to a depressed area but detractors point to the prospect of environmental despoliation.

Russia also plans to ramp up its rare earth sector. It is estimated the country holds around 10 percent of global reserves but has a list of 11 potential projects which could make Russia self-sufficient and eventually an exporter of rare earth metals.

Recycling Solution

The long-term solution to the dangers of mining and extracting rare earth will come through recycling them from old equipment. Unfortunately, rare earth metals are often found in consumer goods such as phones and computers which are thrown away with alarming regularity but rarely recycled often because people are unaware or unable to do so.

There is probably more hope in recycling rare earth metals from industrial uses such as wind turbines. Increasing the cost of extracting the metals in the first place through tougher environmental protections will also raise incentives to recycle.

After the Storm: Long term risks in the aftermath of Covid-19

In July Intelligent Risk, a publication of the Professional Risk Managers’ International Association (PRMIA) published my article on long term risk to the world economy following Covid-19.

In March 2020, millions of office workers around the globe packed up their desks and almost overnight became remote workers. They left behind daily train journeys, coffees with colleagues and crowded meetings for a new world of virtual meetings, makeshift home offices, and juggled teaching with emails.

Now many firms are struggling to survive an unavoidable global recession. However, they also need to react now to the longer-term risks facing the economy.

  • Covid-19 will act like a fast-forward button, accelerating long terms trends such a shift to home working, rising economic nationalism and corporate sustainability.
  • Long-term structural shifts in the economy will permanently reduce demand for many sectors. New working and social patterns will threaten sectors such as airlines, entertainment, restaurants, and international tourism.
  • Shocks like Covid-19 create recession, mass unemployment and most likely major political aftershocks. However, shocks also trigger innovation, ingenuity, and new opportunities.

Globalization Under Fire

Globalization was already under threat from nationalism and trade wars like the US-China disputes. When Covid-19 first appeared in Wuhan at end of 2019, the main concern in the West was around disruption to supply chains that originated in China. Companies dependent on supplies from China faced and experienced shortages of pharmaceuticals, PPE, and many other goods.

These problems may ease soon. However, long-term firms may seek to make their supply chains more resilient. This could mean more “inshoring”, shortening and simplifying these often complex, opaque chains. Economic nationalism or economic independence may also see barriers raised to prevent shortages of critical medical supplies or the supply of goods deemed strategic or valuable such as rare minerals, oil, and food.

A new world means new opportunities and markets. Tech companies that provide work from home services like video chat should have a bright future, as should domestic tourism in a world scared to fly and online delivery services. Zoom a digital communications firm specialising in video meetings had 10 million daily meeting participants in December 2019. In April 2020, just four months later, Zoom counted more than 300 million daily meeting participants.

Less obvious niches like drive in cinemas could also enjoy a boom. The collapse and retreat of many firms due to Covid-19 will result in a wave of consolidation and restructuring. The successful firms of the future will be those that prove resilient now.

Covid-19 and Climate Change

The prospect of economies in ruins, unprecedented recession, and mass unemployment will prompt many to assume that action on climate change is no longer a priority. However, a Covid-19 recession is a stark reminder of how nature can deliver a deadly shock. Covid-19 is a dress rehearsal of how climate risks may soon affect society.

Disruption is a harbinger of change. Deep recession is the time and opportunity to remodel the economy on sustainable lines. This means building back better, sustainably. Kristalina Georgieva Managing Director of the IMF commented: “If this recovery is to be sustainable – if our world is to become more resilient – we must do everything in our power to promote a green recovery”.

Governments and Firms can build on policies already in place:

  • Invest in green resilient infrastructure that can cope with a changing planet. The world will experience more heat waves, sea level rise and extreme weather as climate change becomes more intense.
  • Mandate measures like the Task force for Climate Related Financial Disclosures (TCFD) reporting which identifies climate risks in Bank’s portfolios. Canada launched the Large Employer Emergency Financing Facility (LEEFF) designed to support employment during a Covid recession. Any firms receiving funding with have to publish climate related disclosures (TCFD).
  • Use renewable energy sources to help mitigate climate change.
  • Encourage green infrastructure: cycle paths, electric vehicle charge points, and a faster broadband to make it easier to work from home
  • New stimulus packages combined with a restructured economy could be the impetus for a more sustainable economy. The world will look closely for green credentials in China’s forthcoming economic recovery package. The EU is pushing ahead with its EU Green New Deal in conjunction with its Covid-19 emergency response package.

The Long-Term Risks for a “Brown” Recovery

A “brown” recovery is one based upon traditional energy sources such as oil and coal. These energy sources feed resource intensive sectors such as cement and heavy industry these activities magnify climate risks through greenhouse gas emissions. A world of more extreme weather events, deadly heatwaves and sea level rise will disrupt economies in way that dwarves the current crisis.

Companies that are not reducing emissions may be penalised by governments or consumers. France has made reduction in emissions and domestic flights a condition of its bailout of Air France. Consumers could increasingly shun firms that are not acting responsibly on reducing emissions or taking sustainability seriously.

The Keys to the World: Geopolitical Risk and Maritime Chokepoints

Across the globe there are maritime chokepoints which hold valuable strategic value but also significant geopolitical risk. Below I look at both the history and geopolitics of the Suez Canal, Panama Canal, the Straits of Malacca and Hormuz and the Bosphorus Straits. Historically these places have been important thanks the huge amount of shipping that passes through them, as well as their military and naval value.

The Suez Canal

The Ancient Egyptians were the first to dig a canal from the Red Sea to the Mediterranean. Several different versions of the waterway were dug throughout antiquity but they eventually silted up and were forgotten.

When the modern version first opened in the 1860s the Suez Canal revolutionised international trade. By cutting the travelling distance from India and the Far East to Europe at a stroke. The new route also altered the world’s geopolitical landscape. Suddenly gifting Egypt a new military, geopolitical and economic significance. This was to prove both a blessing and a curse.

“A Key to World”

The Canal was originally conceived and financed by the French. However he British government soon realised its significance and took advantage of the Egyptian government’s weak financial position to buy a stake from them in the 1870s.

Over time shares in the company controlling the canal evolved into direct control over Egypt. The Canal soon became an essential part of British imperial thinking. At once a powerful “key” to control the world’s oceans and trade, but also a weak spot, vulnerable to enemy attack and something to be carefully guarded.

The Canal’s importance was cemented in the early part of the twentieth century as the region’s oil flowed through the narrow channel. Oil supplies became crucial for both industry and eventually the Royal Navy. The Navy switched from coal power to oil in the first decade of the 1900s.

Egypt Takes Control

Now the Canal lies firmly in the hands of the Egyptians thanks to President Nasser’s nationalisation in 1956. A bold move which resulted in a military intervention by the British and French who were set to lose their prize Middle Eastern asset.

“We shall defend [the Suez Canal] with our blood and strength, and we shall meet aggression with aggression and evil with evil”

Gamal Nasser 1956

But in turn these fading imperial powers were ruthlessly undermined by a lack of US support (who threatened to pull the plug on British debt). At once ending British illusions about its superpower status and pushing the French into a long term rapprochement with Germany.

 For the Egyptians it was a moment of national triumph. But a short-lived one, for the disastrous 1967 Arab-Israeli war saw the country defeated and Egypt closed the canal for 10 years.

Enter the USA

The Canal was eventually reopened and today ownership over the canal provides a good income from shipping fees and a useful diplomatic tool for Egypt. Cairo can opt to close the canal to traffic to countries (like Israel) it takes issue with. The Canal also helps bolster Egypt’s reputation as the geopolitical lynchpin of the Middle East. This despite a patchy record of political and economic management.

Egypt’s stewardship of the Suez Canal means strong US support in the form of military and diplomatic aid. Despite the uncertainty of recent years, Egypt is considered “to big to fail”. The geopolitical risk of an unstable Egypt is well recognised by the Washington establishment. It will come as no surprise that Egypt is the second largest recipient of US military aid.

China on the Horizon

The Egyptians also maintains strong links with China. Bilateral trade has blossomed between the two countries in recent years, as has Chinese direct investment in the country. Beijing’s increasing economic presence across the Middle East means it will get further drawn into the regions’ messy geopolitics.

While China presently has good relations with all the major economies of the region. It could one day be forced to choose allies and enemies. If that point arrives you can be sure Beijing will take into account the massive volume of Chinese goods passing through Suez to Europe before endangering relations with Cairo.

The Straits of Malacca

This narrow gap separating Indonesia and the tip of the Malay Peninsula was long recognised by the British as the fulcrum of trade and military power in East Asia and one of the “keys” along with Gibraltar and the Suez Canal that “locked up” the world through naval power.

Singapore lies to the north of the Strait and was the centre of Britain’s Far Eastern military command. The City’s position ensured the construction of huge sea facing fortifications (which in the event proved useless when the Japanese managed to attack by land in World War Two), to protect it and its loss was arguably Britain’s worst military defeat of the twentieth century.

Geography rules

Singapore’s strategic position and good governance has made it one of the world’s great hubs for shipping and commerce. It is by some measures the globe’s busiest port (vying with Shanghai for this particular honour). As well as watching over the immense flow of electronic and consumer goods leaving the factories of Asia to the shopping centres and malls of Europe and the Middle East.

In the other direction the Strait sees a hefty proportion of the world’s oil supplies en-route from the Gulf to China and the US. Overall a quarter of the globe’s merchandise pass through the Straits. This represents a huge geopolitical risk.

 Hostile Powers

Therefore the idea that the Strait could be closed or shipping stopped by a hostile power has long occupied the minds and plans of politicians and military chiefs among the world’s great trading powers. While the US does not have a permanent Naval presence in Singapore, it has a number of aircraft carriers in the region and retains strong relations with Singapore as well as its neighbours.

Beijing also retains good relations with the city-state which has a majority ethnically Chinese population. This undoubtedly helps cement business and social ties between the two nations. 

China is currently developing its naval capacity but remains a long way behind the US. Beijing views protecting its overseas trade as a major priority and lack of control over the Malacca Straits is of huge concern.

A String of Pearls starting at the Isthmus of Kra ?

The next decade will see Beijing become more assertive in its “backyard”. This will be particularly felt on issues such as control over islands in the South China Sea and Taiwan.

There has been speculation that this will manifest itself in a “string of pearls” – a series of naval bases in Asia and the Indian Ocean to buttress Chinese power, but so far there is no sign of this materialising.

In the longer term China will want the US to accept it as more of an equal, something Washington may find very hard to accept, how this particular dynamic unfolds over the coming years is crucial for peace in the region.

Interestingly there were once rumours the Thai government would cut a canal through the Isthmus of Kra, (the narrow central section of Thailand) financed by the Chinese, reducing shipping times and the strategic importance of the Straits of Malacca at a stroke. This kind of bold move could strengthen China’s hand, but at the risk of angering the Americans than their allies.

The Panama Canal

In 2016 Panama Canal saw the conclusion of a huge expansion programme costing US$5.2 billion. This work allowed much larger vessels through the canal. This ushered in a new wave of Panamax class supertankers, which in turn will bring about even greater economies of scale in the shipping industry.

Geopolitical Risk

The troubled and lengthy construction of the Panama Canal helped to forge a new Central American nation. The Canal was also crucial in the USA’s journey to becoming a global power. The opening of the Canal helped reduce shipping times dramatically. With the Canal open ships could avoid the long and arduous Cape Horn route at the foot of South America.

It was the French under Ferdinand Lesseps, the same man who had successfully built the Suez Canal that pioneered the construction of a link between the Atlantic and Pacific. At the outset Lesseps was supremely confident thanks to his experience in Egypt. However, he severely underestimated the difficulties of the terrain. Mountains proved difficult to dig around and the tropical climate had thousands dying of disease.

Enter the USA

Eyeing the failing French effort the increasingly confident and out-going US government authorised the purchase of the project. However when negotiations with Colombia the host country at that point failed, it started a chain of events which led to the US supporting Panama’s independence.

Panamanian rebels were assisted by a US naval blockade and overt political support. All of which allowed the new territory to split away from Colombia and then sign over the rights of the canal to Washington in the Hay-Bunau-Varilla Treaty, part in gratitude for helping them win independence, part in ignorance of the treaty’s consequences. 

Complete Control

Once the Canal was finally complete in 1914 it gave the US control over the most important trade route in the Americas, but also helped to confirm Latin American suspicion over Washington’s motives in the region and it is often cited as a classic case of gun boat diplomacy.

The Canal rapidly became an increasingly significant international waterway, now seeing around 16% of US trade pass through it every year and one the country was willing to defend with arms. The US deposed the increasingly anti-American Panamanian President Noriega in 1989 with a swiftly executed military invasion.

While the US finally relinquished control of the Canal in 1999 – on the condition it became a demilitarised zone. As the preeminent military power in the region it is unthinkable that Washington would allow a potentially hostile power to take any kind of control over the route.

The Prospect of a Rival Canal

China is now the major trade partner with much of Latin America and sees a significant chunk of its imports and exports pass through the canal. From Brazilian iron ore destined for the factories and workshops of the world’s foremost manufacturing nation. In the opposite direction tools, toys and all manner of consumer goods bound for North American shops and malls.

Fear of this vital route being compromised or cut off to Chinese shipping has led to outlandish schemes springing up. These include a Chinese backed alternative waterway through Nicaragua. Another idea is a “land” canal – a new rail line for heavy cargo cutting across Colombia to connect Pacific and Atlantic ports.

China’s Plan?

So far these ideas have made no real progress and remain unlikely to be carried out.  But the confidence and ambition of China has been underestimated before, so nothing should be ruled it out.

In this scenario it would be interesting to observe the US reaction. The idea of a major foreign power de facto controlling a trade route which comparable to the Panama Canal in Central America would not be popular in Washington. The US has already seen China take the economic initiative in its backyard. A Chinese controlled canal would I suspect be a step too far.

At its narrowest point it is only 700 meters wide. But the Strait represents a border between Asia and Europe as well as access to global trade for the Black Sea States. The Straits represent a strategic chokepoint and represents a huge geopolitical risk.

The Geopolitics of The Bosphorus

Istanbul was once called Constantinople. Named after its founder the Roman Emperor Constantine it soon became the most powerful and wealthy city in Europe and the pinnacle of the Byzantine Empire. A position it claimed for nearly 1000 years until its decline along with the Byzantines.

The rise of the Ottoman Empire and its invasion of the Byzantine Empire, culminating in the siege and capture of Constantinople in 1453 marked the eclipse of that great power. For many scholars the event signaled end of the medieval era in Europe. The conquest also represented the rise of a new power that would dominate the Middle East and much of Eastern Europe for centuries.

The Rise and Fall of the Ottoman Empire

In particular control of the Bosporus gave the Ottomans control of the key trading routes in the region. It also cemented their ability to control the Silk Road trading routes to the Far East.

Militarily it gave the Ottoman’s leverage over their northern neighbours, bottling up Russian naval ambitions to the Black Sea. However control over the Silk Road gave others the impetus to find new routes East.

Over time the opening up of oceanic sea routes by the Spanish, Portuguese, Dutch and English diminished its importance as Western Europe states could ignore the Silk Road to trade with China and India. Instead they could look across the Atlantic and Pacific for trade.

All this time other powers eyed the straits jealously. In particular the rise of the Russian Empire to the north and its desire for free access to the Mediterranean and beyond was a major contributor to the numerous wars between the two great Empires. The Ottomans and Russians went to war

The Great War

On land the capture of the city gave the Ottomans the impetus to move West and seize much of Eastern Europe only being halted at the gates of Vienna. That was probably the high point, over time slow decline took hold of the empire. Its last stand was the First World War where despite its technological disadvantage it successfully threw back the British assault on the Bosporus focused on Gallipoli.

Churchill’s doomed plan was to seize the Ottoman capital and knock a major German ally out of the war, while at the same time provide a supply route to their Russian allies and further encircle the remaining Central Powers.

The Turks bravely repulsed the British Empire forces, famously many of them from Australia and New Zealand and attention in the war shifted elsewhere.

The Ottomans won the battle, but the result of the war eventually dissolved the Ottoman Empire and led to the birth of the new Turkish Republic. The new republic brought a desire to move away from what was seen as a capital soaked in the old fashioned corrupt ways of the Sultans and their court and instead make a fresh start in a new capital in centrally located Ankara.

Istanbul and Reinvention

For other cities this might have might have resulted in decline and obscurity. Istanbul’s geography ensured its continuing relevance and since losing its capital status it has grown into a powerhouse. The most populous city in Europe, the commercial hub of Turkey and indeed the Eastern Mediterranean.

The Geopolitics of the Straits

Now with many predicting a global shift of world trade and investment away from the Atlantic and towards Eurasia and one dominated by China rather than Western powers. Istanbul looks set to profit. The Bosphorus holds a pivotal position on the Eurasian landmass. 2.9 million barrels of oil pass through Istanbul every day.

A huge volume of trade also pass through Istanbul, grain and the rich agricultural produce of Ukraine. While in the other direction goods from the rest of world flow to the Black Sea states such as Romania, Bulgaria, Ukraine and Russia. All of this can be cut off in a stroke by the Turkish Government.

The option to block the Strait on one level provides Turkey a great deal of leverage over its northern neighbours. But cutting off access to the Bosphorus would provoke a massive international reaction and represent a huge geopolitical risk. Even the threat of military intervention. But the fact that Ankara is able to take this measure ensures that any move against them will have be weighed up against this possibility.

Russia’s Watchful Eye

The Russian invasion of Crimea gave it a new platform to project power in the Black Sea. This along side military engagement in Syria and the growth of Tartus naval facility in the country enhanced its role in the Middle East.

It has also made Russia naval traffic through the Bosporus route ever more important. But any expansion of Russian naval power is ultimately frustrated by the narrow strait, as its fleet and exports and imports can be bottled up.

Beyond the Bosphorus Turkey is a significant regional power player. Its long standing President Erdogan is keen to extend its influence further into Africa, the Balkans and Middle East. This “neo-Ottomanism” is perhaps the inevitable result of Turkey’s power and economic success. Others see a power with Imperial designs which needs to be checked. Whatever its current stance, the Bosphorus gives Turkey a permanent geopolitical trump card.

The Straits of Hormuz

The narrow Straits of Hormuz connects the Persian Gulf and Indian Ocean. To the North lies Iran, while to the South the United Arab Emirates and Oman. A quarter of the world’s oil and a third of all gas supplies pass through the narrow waterway. Cutting off the Strait or interfering with tankers can send oil prices through the roof in an instant.

The Strait has been the scene of frequent stand offs between US and Iranian Naval vessels. Iran has threaten to cut off the Strait in the past. This power gives it a certain amount of leverage. But actually cutting off the route would incur a US military response as well as heavy criticism from many other states.

A world faced by oil and gas supplies disruptions would not look kindly on Iran. So far Iran has not carried out any of its threats. If however conflict arose between Iran and its neighbour Saudi Arabia or the US, closing off the Strait could be an unconventional and vital tool.

Melting Ice, Freezing Politics: Arctic Geopolitics

Icelandic President Ólafur Ragnar Grímsson made it clear: “The security of Shanghai in the future will be determined in the Arctic.” Shanghai is the world’s major city most vulnerable to flooding in a warmer planet. As more Arctic ice melts sea levels will rise, which in turn will sink China’s financial capital.

Melting Ice, Freezing Politics

China accepts the dangers of climate change and is a leader in environmental technologies that mitigate greenhouse gas emissions. But at the same time it appears more than willing to lend billions to projects like Yamal in the Russian Arctic. Yamal will provide 5 percent of the world’s natural gas supply and raising greenhouse gas emissions. But projects like this also place environmental pressures on the pristine Arctic environment.

Drill, Baby Drill

In contrast the US in the form of State Secretary Pompeo refuses to acknowledge climate change. Instead of seeing climate change as a geopolitical risk. He sees the disappearing ice as an opportunity for US firms to benefit from new mining and drilling opportunities.

The unpredecented melting of Arctic ice is a powerful reminder that reality of climate change has arrived. The rapid rise in average temperatures in recent years has shocked even seasoned climate scientists. Climate change is considered by many the biggest global risk.

The melting ice has allowed ships to traverse through Arctic Russia and even Canada’s Northwest passage. Vessels taking these routes will save time and fuel by avoiding traditional routes.

Russia’s Geopolitical Advantage

The opening up of this sea route transforms Russia’s geopolitical dynamic. As an ice free Arctic gives Russia influence over a new northern trade route. The lack of ice also opens up the possibility of more mining and drilling in the region. A prospect the US and Russians have openly welcomed.

Others like the Norwegians see the damage this would cause to a fragile region relatively untouched by humans until the recent ice melt. The Oslo government have ruled out oil drilling in the region and appear prepared to defend the Arctic’s environment.

Ownership of the region is also disputed. Russia put in a claim to the UN to extend its exclusive economic zone across the region. If applied this would extend the other Arctic state’s zones. The success of this claim would open up similar ones for the US, Denmark (via Greenland), Norway and Canada.

But this extension of territory could also stoke geopolitical conflict between the states, particularly if new mineral or hydrocarbon deposits are uncovered.

Other countries have also taken a keen interest in Arctic affairs through close proximity, Finland and Iceland are fairly obvious members. Others like the self styled “near-Arctic state” China demonstrate its new global role. China is a global power on the lookout for new markets, sea routes and avenues of power to explore.

Polar Silk Road

China has called for a Polar or Ice Silk Road and has sent an exploratory ice breaker Xue Long (Snow Dragon) to the region. China has also been investing in the Arctic such as the Yamal project and the hunt for rare earth minerals in Greenland.  

Every move by China will be carefully monitored by its neighbour Russia who remains friendly with China. Russia has watched painfully as China supplants it economically and diplomatically across much of the world. Russia will not be happy to see this happen in a region it views as its backyard.

Economic Potential

The Arctic region is reckoned to contain massive oil and gas reserves. It is reckoned that there are 44 billion barrels of natural gas and 90 billion barrels of oil. The Arctic is home to many different metal deposits and around 10% of global fish stocks, all of this makes it a hugely tempting target for a resource hungry world.

But the harsh conditions even with global warming make exploiting any of it rather expensive. Some analysts put estimate that the price of a barrel of oil would have to hit over US$ 100 to make it worthwhile drilling in the Arctic.

Currently oil prices are far from supporting that kind of investment. The geopolitical risks involved are significant and the reputational and operational risks are high. An oil spill or mining accident spoiling white ice bergs, killing seals and whales would be an environmental disaster but also a public relations one. The cost, difficulties and risk of operating in a polar region is also high. Most people do enjoy working and living in the freezing cold.

Arctic Risk and Global Risk

The irony is clear, the more climate change melts Arctic ice, the easier it is to exploit the Arctic through mining and drilling, which in turn will accelerate climate breakdown stoking massive geopolitical risk. So while China may well make significant short term investments and geopolitical point scoring. Ultimately it will also be contributing to the long term demise of its populous coastal cities such as Shanghai.

Instead China and the Arctic Council should focus on developing a more resilient region, better able to withstand the coming ravages of climate breakdown.