10-12 days shorter on average Eliminates monsoons in Pacific near Hong Kong, India

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Sherman Harris
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1 Polar Silk Road Draft 5th May Over the past few months, there has been a number of announcements regarding the formation and ultimate launch of the Polar Silk Road, the 2 nd such BRI Silk Road announced to date. This paper addresses the developments in the countries involved over the past decade leading up the announcements, describes the current status and key projects planned over the next 10 years. Overall, all of these projects, located around the Northern Sea Route, which faces unprecedented melt of Arctic Sea ice, are expected to be fully operational over the next 25 years, transforming a region of only 26 million (outside of Russia) into a region much more integrated into both Europe and Asia. Background Prior to Launch In 2013, COSCO, one of the world's largest shipping organizations, sent a ship from China's Dalian port to Rotterdam via the Northern Sea Route, across the Arctic Ocean. The voyage was completed in 30 days saving a third of the usual shipping time. In June 2017, a policy paper co-released by China s National Development and Reform Commission (NDRC) and the State Oceanic Administration (SOA), which provided new insights into how the Arctic may be more closely tied to international trade, in particular to the BRI. The paper outlined China s interest in working with other partners in the region which could include oil and gas exploration with firms from Iceland and Norway, cooperation with Russia on the Yamal liquefied natural gas plant in Siberia, and mining projects in Greenland, including rare earth elements and potentially zinc. In October 2017, Wang Yang, previously Chinese State Council Vice-Premier, who has been at the forefront of the Arctic discussions for the past several years was elevated to the Politburo Standing Committee (PSC). In a November 2017 meeting between President Xi and Russian Prime Minister Medvedev, both agreed that China and Russia should jointly develop and cooperate on the use of the North Polar sea route and build a Silk Road on Ice. In January 2018, China s State Council published a white paper titled China s Artic Policy outlining China s long history (since 1925) in the Arctic and a Polar Silk Road. Since China trades over $4 trillion of goods per year, 90% of which are transported by sea, it has long sought ways to reduce its shipping costs. The Arctic routes will further drive global transport costs down by offering an alternative route to existing shipping routes, such as the Malacca Straits and the Suez Canal. The Polar Silk Road offers a number of economic and operational advantages to traditional shipping routes: North Sea Route Advantages over Traditional Shipping Routes (1) days shorter on average Eliminates monsoons in Pacific near Hong Kong, India 1

Eliminates pirate interventions Less carbon emissions Eliminates blockages/congestion at Suez Canal Ice Status Currently passable up to 6 months/year (July-November) Ice layer in the North Sea Route

2 Eliminates pirate interventions Less carbon emissions Eliminates blockages/congestion at Suez Canal Ice Status Currently passable up to 6 months/year (July-November) Ice layer in the North Sea Route near Yamal declined by 2.5%/year each of last 3 years Ice free year round by 2050 Proposed Structure The map below shows the proposed sea routes, key port, planned rail line and tunnel which would connect continental Europe to the Arctic in the Polar Silk Road. We discuss each component below. Iceland However, before discussing each new component, we think it important to discuss the success of the China-Iceland relationship. Since Jiang Zemin s first visit in 2002 the first-ever by a Chinese President China has cooperated with Iceland, where geothermal plants generate 66% of Iceland s primary energy, in clean energy. In 2012, China signed a framework agreement with Iceland to support greater cooperation on geothermal energy, along with marine and polar science. Sinopec in China and Iceland s AGEC have since developed geothermal projects in 23 cities in China as well as the planned Xiong a megacity near Beijing. In 2015, both countries signed a free trade agreement, 2

3 have engaged in a series of bilateral initiatives including a Joint China-Iceland Aurora Observatory and are allowing CNOOC to explore oil and gas resources in Iceland s territorial waters. More recently, Chinese tourism has rocketed annually to Iceland as well as their interest in Iceland real estate. Kirkenes Port/Norway Historically, Norway has been one of China s important trading partners in Northern Europe as well as one of China s main suppliers of fertilizer, aquatic products and oil in Europe. Norway is actively considering the possibility of greater Chinese Arctic shipping, with a focus point being the port of Kirkenes is the northernmost ice free port located on the Berents Sea. Kirkenes is the closest Western port to Asia, and is located along the Arctic s Northern Sea Route. Under the plan, ships could move goods from China as well as oil and gas from Arctic fields in Russia westward along this northern route to Kirkenes. Cargos would be offloaded to the railway and sent southward through rail connections --as discussed below. The Chinese and Norwegian Governments are seeking to revive stalled free trade negotiations and Norway s shipping groups are especially interested in greater engagement with China. Finland Arctic Corridor Railway One of the key proposed projects is for a US$3.4 billion Arctic Corridor railway that would connect Northern Europe with China and Arctic Ocean deep-water ports. It would connect the city of Rovaniemi in northern Finland with the Norwegian port of Kirkenes. Under the plan, ships could dock at Kirkenes, where cargos would be offloaded to the railway and sent southward through rail connections to Scandinavia, Helsinki, the Baltic States, Poland and St. Petersburg in Russia. It could also be joined at the Finnish border to Russia s rail network, which in turn connects with China s. In early November 2017, a freight train loaded with timber and pulling 41 containers set off on a 9,110km journey left Kouvola in southeastern Finland to arrive in Xian via Kazakhstan and Russia in 17 days. The Kouvola-Xi'an link is the first railway link to join China with the Nordic countries. By 2020, CRRC will be on course to unveil a cross-border high-speed train service at 400 km/hr that can alternate between different track gauges, which is important due to gauge differences between Europe and the Nordics (as discussed below). Technology Huawei, one of the world s leaders in 5G, despite having active Scandinavian competitors in Nokia and Erickson, expects to play a major role in 5G in Finland. It will likely have a role aligned with the Arctic Corridor smart rail. China s Ministry of Industry and Information Technology and state-owned China Telecom Corp. are among those participating in discussions about building a 10,500-kilometer (6,500 miles) fiber-optic 3

4 Maritime Cable link across the Arctic Circle. The proposal, which also involves Finland, Japan, Russia and Norway, aims to create the fastest data connection between Europe and China as soon as Importance of Helsinki as the Polar Silk Road air Hub The growing demand for air travel from China to Europe is evident through the large number of new direct routes seen over the last decade. It continues to grow as the size and wealth of the middleclass in China increases, and the concept of holidaying abroad every year is viewed increasingly as an expectation, rather than a luxury reserved only for the privileged. For a number of years now the Helsinki Airport has positioned Helsinki-Vantaa Terminal 2 as the No.1 transit hub for Chinese passengers travelling to other European destinations. The airport is best placed geographically to serve the needs of Chinese tourists, boasting the shortest flight times to many major Chinese cities. The number of Chinese route options continues to grow year on year, with Finnair s service to Guangzhou having been launched in May Helsinki serves 6 airport destinations in Greater China with direct scheduled flights, more than any other Scandinavian airport, and passengers travelling on scheduled flights from Helsinki to the PRC account for 5% of all international passengers, with Mainland China the 8th most popular destination country. Growth in Finland Tourism Travel from China to Finland has grown tremendously during the past two years. Finland s total of 157,980 Chinese arrivals in 2016 represented a year-on-year growth rate of 30.3%. The year 2017 continued to witness growth of Chinese tourists. Chinese overnight stays were over 300,000, an increase by nearly 40% from As a group, Chinese tourists spent some 214 million in the capital region in In 2017, Finnair, Finland's national carrier, to activate Alipay during its eight-hour flights from Helsinki to Shanghai and vice versa. It became the first airline to allow mobile payment system on board. Since then, a majority of the in-flight sales have been made through Alipay. Rovanemi-Capital of the Arctic Circle Rovaniemi is the Arctic capital of Finland and is known globally for issues of Arctic interests. For the next two years, when Finland will be chairing the Arctic Council, the main meetings will be held in Rovaniemi. Rovaniemi has a number of areas of planned expansion/shared interest with China including energy, mining ICT, clean-tech and film. The maritime cable project linking Europe and Asia via the Northeast Passage will pass through Rovaniemi. Chinese companies are discussing investing billions of euros in Lapland projects, which is helping to turn around a Finnish region hit hard by population drift and industry closures in recent years. The two largest projects: the Kemi 1 billion bio-diesel plant and the 1 billion bio-pulp plant in Kemijärvi. Construction of the Kemi bio-diesel plant will take 4000 man worker years to complete, and afterwards there will be several hundred permanent jobs at the factory and perhaps the same amount in sub-contractors associated with ongoing work at the plant. An increasing number of the travelers choose to go to the Finnish Lapland area in the winter. Rovaniemi expected a record-breaking 2017 winter tourism season, with the number of visitors set 4

5 to increase by 15-20% compared to The high demand for accommodation has attracted new investments, including a hotel in Napapiiri in Rovaniemi and another hotel in Inari worth more than 30 million to the local economy Estonia Helsinki to Tallinn Tunnel In February 2018, the Helsinki-Tallinn Transport Link Feasibility Study Final report by was released. The FinEst study indicated technical details for the proposed 16bn ( 14.2bn), 103km long rail tunnel connecting Finland to Estonia under the Gulf of Finland includes two huge artificial islands and a tunnel 250m below the sea s surface. Once constructed, it would be the world s longest undersea tunnel. The Helsinki side the line would run in parallel with the planned airport rail line providing connections to the rest of Finland, Sweden and northern Russia. On the Estonian side, the link would connect directly to the airport which is already connected to the rest of the rail network and Rail Baltica the new pan-baltic rail project due to start construction in Rail gauges differ between Finland and Estonia, so the line will be built to the European, 1435mm standard gauge to allow it to connect directly into Rail Baltica. Currently a ferry service connects the two countries, but it takes just over 2 hours and only runs 12 times a day. FinEst Link said the new tunnel would cut the time to only 30 minutes and allow it to run 40, 200km/h passenger trains, a total of 28, 160km/h car and truck trains and three, 120km/h freight trains each day. Passenger ticket prices would be an estimated 18/journey. The tunnel is projected to cost 7.5bn to build, with rail costs adding a further 2.3bn. The report says the total cost would be around 14.2bn but this could rise to 17.8bn when more detailed designs had been produced. Financing is due to come from a 40% EU grant, with a Public Private Partnership (PPP) contract, with a pay back cost of around 250M annually over 40 years. Revenue, it said, is set to far exceed the operational costs of the railway. The project aims to start construction in 2025 and be operational by Rail Baltica Rail Baltica is a project to link Finland, Estonia, Latvia, Lithuania and Poland with a European standard gauge rail line, providing passenger and freight service between the countries and improving rail connections between Central and Northern Europe The project involves building a contiguous 870km electrified standard-gauge railway linking the three Baltic capitals of Tallinn, Estonia, Riga, Latvia, and Vilnius, Lithuanian with a connection to the European standard-gauge network in Poland. The railway will be designed for operation by 240km/h passenger trains and 120km/h freight trains and will form part of the EU s North Sea Baltic TEN-T corridor and is one of the priority projects of the EU: Trans-European Transport Networks (TEN-T). The spatial planning for the new line in Latvia was approved in August 2016 followed by the Lithuania s approval in January 2017 and Estonia s approval in February

6 In April, GTS Rail, a subsidiary of GTS Express, signed a cooperation contract with Xian International Inland Port Multimodal Transportation Co. Ltd. for the promotion of railway transport to the port city of Muuga, which should start receiving 2 trains per week from Xian. The agreement should help increase trade with Estonia as well as with the EU as a whole as Estonia is the closest EU country to China. MedTech/FinTech In 2018 April, Talllinn's Science Park Tehnopol and China's Haidian Science Park signed a cooperation agreement aimed at strengthening cooperation between the two countries' respective technology companies. Haidian Science Park was the first development center for high technology in China and works closely together with Peking University, Tsinghua University and the Chinese Academy of Sciences. Science Park Tehnopol, situated in the Mustamäe District of Tallinn, is the biggest science park in the Baltics, home to more than 200 businesses, including Skype, Fujitsu, Trinidad Wiseman and Cybernetica. E Commerce Estonia is interested in tapping into e-platforms to increase the flow of goods from China through Estonia and has been discussing cooperation opportunities with Omniva, Tallinn Airport, EVR Cargo, Boomerang Distribution, GTS Express, Lexit Technologies from Estonia, and the Chinese companies Alibaba, JD Group, Huawei, SF Express, China International E-Commerce Co. Ltd. E Residency Estonia, a country of only 1.2 million population, became the first country to offer e-residency. It now has nearly 30,000 people and 4,000 companies from 139 countries signed up. Estonia launched its e-residency programme in 2014 so that anyone on Earth could apply for a secure governmentbacked digital identity and gain access to its e-services. Estonia s e-resident community has been growing at record speed so far in 2018, thanks in large part to new interest from entrepreneurs in south-east Asia especially Korea, Japan, and China. Tourism In the mid-2000s, around a couple thousand Chinese tourists visited Estonia annually. By end of 2016, these numbers have grown tenfold. While Asian visitors increased by 10% in 2017, they still only represent 3% of foreign tourists. Russia Russia is the only one of the Arctic countries part of the 2013 list of BRI countries and the clearly a leading propoent of the Polar Silk Road. Russia is convinced that the melting Arctic will open up a new economic frontier rich in oil, natural gas, and lucrative transport routes between the world s workshop and the world s consumers. In March 2018, Russian President Putin, whose government plans major investments by 2030 in ships, shipbuilders, navigational aids, and ports along the Northern Sea Route, stated Our goal is to make it a truly global and competitive transport route. 6

7 The Northern Sea Route, which stretches roughly from Murmansk in the west to the Bering Strait in the east, has become the focal point of both Russia and China s Arctic strategy. While it offers cost and time savings, it is also a way to rejuvenate a depressed part of the Russia economy. The route was fully operational during the Stalin years, and again in the final days of the Soviet Union, but was severed following the Soviet Union s collapse. Thanks to the rapid sea ice melt and investment commitments both from Russia and China, it is coming back to life. Specific Projects/Investments YAMAL LNG The most important commercial project to date is YAMAL LNG. The project, which became operational in Q4 2017, is seen as vital in opening up Russia s arctic and in addressing China s energy needs. YAMAL LNG is an integrated project encompassing natural gas production, liquefaction and shipping. The Project consists of construction of a liquefied natural gas (LNG) plant with an output capacity of around 16.5 million tons per year (by 2019), using the South Tambey Field as a resource base. The field s proven and probable reserves are estimated at 926 billion cubic meters making this the world s biggest Arctic producer of liquefied natural gas. Extensive transportation infrastructure is being built in the scope of the Project, including a sea port (began in 2013) and the Sabetta Airport. The $3.22 billion railway connecting Sabetta Port (298% growth y-oy) to the Eurasian railway network was awarded Russia s infrastructure project of the year To date, this project has employed as many as 30,000 Russian workers from Central/Southern Russia. China s involvement has been vital to this important project, especially in light of US sanctions: China s Silk Road Fund owns 9.9% of the equity, CNPC 20%: Yamal also received $12 billion loans, payable over 15 years, by China Development Bank and China EXIM Bank, dominated in euros and yuan. Now that the Yamal project is operational, Russia aims to gain a larger share of the global market in liquefied natural gas as the Yamal gas is low-cost and can thus undercut rivals including the United States. Even under current sea conditions, Yamal is projected to double Russia s share of the growing global LNG market by the time it reaches full capacity in Arkangel Port In September 2017, numerous Chinese state-backed companies stated that they are keen to invest in a new project near Arkhangel, a historic Russian port city, which would include the Belkomur railway project and the development of a deep-water port in the Northern Dvina River. A delegation from Arkhangel visited Beijing and reportedly received backing for a new railway that will take raw materials (coal, mineral fertilizer, oil, timber, ores, construction materials and containers) to a new port 55 km north of the city of Arkhangel and reloaded for sea transport at the new port. This new port will be built near the Mudyug Island in the Dvina river delta; close to the existing port facilities for larger vessels. CEXIM has committed to provide loans for the project while Cosco has 7

8 said it would like to participate as well as Chimbusco, a state-run Chinese bunker company, Poly Group and the China Marine Fuel Service Corporation. The new port is estimated to reach 30 million tons of cargo by 2030 and act as a central Arctic hub for Russian export and import in trade with Europe, the Asia-Pacific region and North America. Both of these projects have the effect of bringing Russia closer to China and to Europe. China is expected to be big customer for Russian gas. These contracts, combined with lower cost arctic shipping over time, will help meet China s huge demand for natural gas. Arkangel Port and its related railway will link into the Arctic Corridor Railway, the Baltics Railway, into both Europe and back to China. While many of these projects have yet to be built and while no one can accurately predict the pace of sea ice deterioration, considerable progress has been made over the past decade in Iceland, a number of projects are in the process of being implemented across many of these countries and there is a real momentum which has been developed. It is our belief that many of the long held economic goals of many Arctic countries will be realised over the next years and much closer links formed between China, Russia and Northern Europe as a result of all of this planning and the combined efforts of the relevant governments and businesses. Footnote: (1) Several scientists have predicted that the North Pole route, which extends from the Netherlands to Alaska s Bering Sea and the Arctic Bridge which extends from Manitoba past the southern tip of Greenland and up to northern Europe and Russia will also see increased shipping flows by About the Author Henry Tillman is the Founder, Chairman and CEO of Grisons Peak, a 15 year old UK based merchant bank focussed on cross border advisory from UK/EU into/out of Asia. In 2008, he founded and has served as Editor of China Outbound Investments, which tracks all Chinese outbound activity across G2G, policy bank loans and M&A/equity. Mr Tillman, who presents frequently on the BRI, is a long term friend of 48 Group Club and represents them on BRI related presentations. 8

Index. Opportunities for China and achievements

Index. Opportunities for China and achievements 1 Index The One Belt One Road Initiative Opportunities for China and achievements B&R Projects Advantage for Hong Kong Opportunities for Hong Kong Conclusion 2 In 2013 President Xi Jinping proposed the