Icebreakers escort cargo ships along Russia's Arctic Sea Route. (Source: Rosatom)

Russia’s Arctic Sea Route (NSR) allows Moscow to continue exporting oil to China despite sanctions, highlighting the route’s strategic importance.

With vast oil and gas reserves in the Arctic, Russia aims to significantly increase the NSR’s cargo-transportation capacity. The continued use of the NSR by sanctioned Russian tankers (following the outbreak of the conflict in Ukraine in February 2022) underscores the importance of the route and Russia’s Arctic hydrocarbon deposits. The vessels’ final destination is believed to be China, highlighting why the Kremlin has been pushing so hard to expand the NSR and its Arctic activities since Moscow annexed the Crimean Peninsula in 2014.

China - Russia's top important partner

Geopolitically, China is not only a world power to Russia, but also holds one of the five permanent seats on the United Nations Security Council. A single veto on the council is enough to block any resolution from this body.

Russia has been supplying China with a steady supply of oil and gas at prices that are said to be lower than those of the Organization of the Petroleum Exporting Countries and its allies (OPEC+). A large part of this flows through pipelines, including the Power of Siberia gas transit route. The pipeline is expected to carry 30 billion cubic meters (Bcm) this year and 38 Bcm by 2025.

Another part is liquefied natural gas (LNG), expected to be around 10 Bcm, which is expected to be delivered by the end of this year. Unlike gas delivered via pipeline, LNG does not require years of costly infrastructure construction and is not subject to long-term contracts. Instead, it can be purchased on the spot market and shipped anywhere quickly if needed.

It is safe to say that any major military escalation in the world will only increase the importance of LNG in the global energy landscape.

Russia’s strategic relationship with China makes ensuring Beijing continues to receive oil and gas crucial for Moscow. With Russia facing numerous Western sanctions, the NSR allows it to supply energy to China with relative ease.

The only problem is that due to its location in the icy Arctic, ships cannot sail during March to May, and also have difficulty at other times of the year. So Russia has been undertaking a major initiative to ensure that the NSR remains operational all year round.

“With NSR, 33 million tonnes of cargo were transported in 2021, 34 million tonnes in 2022 and more than 36 million tonnes last year,” a senior Moscow-based oil analyst told OilPrice . State energy giant Rosatom, which operates a fleet of nuclear-powered icebreakers, and Novatek, Russia’s second-largest gas producer and a pioneer in Arctic LNG development projects, said they could support an increase to 100 million tonnes by 2026 and 200 million tonnes by 2030.

Russia certainly has the resources in the Arctic to fuel export expansion, with an estimated 35.7 trillion cubic meters (Tcm) of gas and more than 2.3 billion tons of oil, most of which are located in the Yamal and Gydan peninsulas, south of the Kara Sea.

According to comments by Russian President Vladimir Putin, the next 10 to 15 years will see a significant expansion in the exploitation of these resources in the Arctic and the NSR will develop as a major shipping route, especially to China.

Russian President Vladimir Putin launches the first line of the Arctic LNG 2 project in Murmansk, Russia, July 2023. (Source: AFP)

As early as late 2021, it was revealed that a large gas field in the Kara Sea had been discovered by Russian oil giant Rosneft. The field, named after the Soviet military hero Marshal Georgy Zhukov, with estimated natural gas reserves of 800 Bcm, is located in the Vikulovskaya structure, part of the East Prinovozemelsky-1 license area, where Rosneft has exploration and production rights from November 11, 2020 to November 10, 2040. Rosneft is also developing the Vostok Oil project in Russia's Far North, which includes the Vankor cluster, the Zapadno-Irkinsky block, the Payakhskaya field group, and the East Taimyr cluster.

Overall, the proven liquid hydrocarbon reserves are estimated at at least 6 billion tonnes (51 billion barrels), all of which are near the NSR. Rosneft CEO Igor Sechin told President Putin that, with exploration underway at the Vostok Oil project and design work for the 770-km pipeline and port completed, the plan would create a “new oil and gas province” on Russia’s Siberian Taymyr Peninsula.

"Declaring war" on the US dollar

Moscow’s Arctic oil and gas push is also a key part of Russia and China’s plan to topple the US dollar-based hegemony in energy markets, especially since it involves one of the world’s largest oil and gas producers and one of its biggest buyers.

Early in the history of Arctic LNG projects, Novatek CEO Leonid Mikhleson said that they were considering using the Chinese yuan in future sales transactions. This was consistent with his comments on the prospect of further US sanctions at the time – following Russia’s annexation of Crimea in 2014 – that they would only accelerate Russia’s shift away from greenback-centric oil and gas transactions.

“This issue has been discussed for some time with Russia’s biggest trading partners like India and China, and even Arab countries are starting to think about it… If they really make it difficult for Russian banks, all we have to do is replace the dollar,” he said.

Such a strategy was tested as early as 2014, when state-run Gazprom Neft traded crude oil shipments in yuan and rubles with China and Europe, reducing Moscow’s reliance on dollar trading, in response to initial Western sanctions on Russia’s energy sector.

The thrust of these comments was echoed by former Executive Vice President of the Bank of China, Zhang Yanling, in a speech in April 2022, when she said that the latest sanctions against Russia would “cause the US to lose credibility and weaken the ‘throne’ of the US dollar in the long term.” She also suggested that China should soon help the world “eliminate the hegemony of the greenback.”