Sanction-Proof? Russia's Arctic Ambitions and the China Factor

Arctic offshore structures are able to withstand extreme sea ice conditions in frigid waters. Photo: Bureau of Safety and Environmental Enforcement (BSEE)

When Western nations imposed sanctions on Russia following its full-scale invasion of Ukraine, governments expected Russian Arctic energy projects to grind to a halt. In reality, Russia’s Arctic ambitions are not just surviving – they’re evolving, largely thanks to a deepening partnership with China. This resilience underscores the strategic importance Russia places on its Arctic resources and the increasing limitations of sanctions in a globally interconnected economy.

Arctic LNG 2

The Arctic LNG 2 liquefied natural gas project offers a perfect example of Russia’s priorities and adaptability. Despite sanctions causing Western and Chinese partners like TotalEnergies, JOGMEC, CNOOC, CNPC, and Mitsui to declare force majeure, Novatek, Russia’s second-largest natural gas company which is leading the effort in the Arctic, has found ways to keep the project moving forward.

When sanctions cut off access to Western gas turbines from Baker Hughes, Novatek swiftly pivoted to Chinese supplier Harbin Guanghan. While they had to alter the design of liquefaction unit Train 1 and operate it at a lower capacity temporarily and completely change liquefaction unit Train 2 to an all-electric configuration, the project is still advancing without Western support. Novatek is using profits from its successful Yamal LNG project to continue funding Arctic LNG 2, creating an internal financing mechanism that helps insulate the project from external financial restrictions.

Shipping challenges proved to be an additional barrier, but ultimately were not sufficient to deter Novatek. Sanctions have slowed the construction and delivery of ice-capable Arc7 LNG carriers manufactured in South Korea, making it difficult for LNG to be transported from the Arctic. In the meantime, Russia has optimized existing carriers from Yamal LNG and plans to use ship-to-ship transfers to keep them on track to complete the project by 2026. Russia can rely on a versatile entity to provide a range of services from commissioning of infrastructure to shipping:

Rosatom

At the heart of Russia’s Arctic energy strategy is Rosatom, the state nuclear corporation that has largely evaded Western sanctions and was the entity commissioning the infrastructure servicing the Arctic LNG 2 project. Rosatom’s role in Arctic energy development goes beyond its nuclear expertise; it has been granted almost total control over the Northern Sea Route, critical for transporting Arctic oil and gas. Rosatom is expanding its reach in ways that directly support Arctic energy projects. Its recent acquisition of Fesco, one of Russia’s largest shipping companies, gives Rosatom the ability to accept payments in Chinese yuan for energy-related transactions, effectively sidestepping Western financial sanctions on dollar and euro payments.

The relative immunity of Rosatom to sanctions has created a significant loophole in the West’s strategy to curb Russian Arctic energy development. The U.S. is still the biggest buyer of Russian uranium fuel annually, and Russia supplies nearly half of the global nuclear fuel market. This dependence makes it politically challenging to impose comprehensive sanctions on Rosatom, inadvertently providing Russia with a powerful tool to support its Arctic energy ambitions. As Rosatom continues to diversify its operations in the Arctic, it’s becoming an unsanctioned channel for technology and revenues that directly support Russia’s energy projects in the region, undermining the effectiveness of existing sanctions.

The China factor

Cut off from Western technology, Russia is doubling down on developing its own Arctic-capable technologies, potentially making it more self-reliant in the long run. Western sanctions, while creating challenges, have had some unintended consequences. They’ve pushed Russia and China closer together in the Arctic, potentially creating a more solid alliance than before.

China’s deepening involvement in Russia’s Arctic endeavors has become a crucial factor in Moscow’s ability to weather Western sanctions. As Western companies withdraw from Russian Arctic projects, Chinese firms are stepping in, providing much-needed investment and technological support. This support aligns with China’s own Arctic ambitions. Despite not being an Arctic state, China has declared itself a “near-Arctic state” and is leveraging Russia’s isolation to expand its footprint in the region. Chinese companies maintain significant stakes in key Russian Arctic energy projects, with combined holdings of 30 percent in Yamal LNG and 20 percent in Arctic LNG-2.

While this Sino-Russian cooperation in the Arctic helps Russia bypass Western sanctions, it’s raising concerns among A7 countries – the seven Arctic Council members without Russia – about China’s growing influence in the region and the long-term implications for Arctic security.

Sanctions: A Double-Edged Sword

Western sanctions, while impactful, have not derailed Russia’s Arctic ambitions – they’ve merely changed their trajectory. For Western policymakers, this raises some crucial questions: How can sanctions be made more effective without pushing Russia further into China’s orbit? Do we need to develop other tools other than sanctions to achieve our policy objectives? How should the West respond to the growing Sino-Russian cooperation in the region? Is more pressure always the right strategy or do we need to mix incentives with punitive measures?

Looking ahead, Western nations face a delicate balancing act in the Arctic. They must weigh the need to counter Russian aggression against the importance of maintaining dialogue and cooperation in a region critical to global climate, environmental and economic systems. As climate change continues to open up new opportunities and challenges in the region, the effectiveness of multilateral governance – including sanctions and other responses to Russian and Chinese aggression – will play a crucial role in shaping the future of Arctic development. A7 nations may need to reassess their Arctic strategies, considering not just the immediate impact of sanctions and other measures, but also their long-term implications for regional stability and security concerns. The challenge will be finding common ground in an increasingly divided geopolitical landscape with an uncertain endgame.

Isha Rao is a student at Georgetown’s Walsh School of Foreign Service in Washington DC.

Max Gruenig is a climate and energy economist with expertise and experience in the US and Europe, working with climate think tank E3G in Washington DC and lecturing at Georgetown University.