Enlisting oil and gas companies for Russia’s Arctic development. Implementation in a rent-based political economy

ABSTRACT

Oil and gas extraction remains a cornerstone in Russia’s development plans for the Arctic Zone, even as there are considerable constraints on new projects. But what does it take to implement hydrocarbon-based regional development in a rent-based political economy? This paper employs a case study of interaction between state and business actors over hydrocarbon-based cargo traffic for the Northern Sea Route to show how Russia’s elites respond to constraints on Arctic development. It is argued that aims of development and of national interest protection enable the state to enlist companies when implementing high-level priorities. This happens when state actors mobilise major companies, using their privileges in the limited access order context as incentives. This route to implementation of regional developmental aims reinforces Russia’s current oil and gas-based development model as a future model for the Arctic Zone.

KEYWORDS:

• Russian oil and gas
• Arctic development
• infrastructure
• Northern Sea Route
• policy process
• implementation

Introduction

A decade after the shelving of the grand Shtokman offshore gas project, and several years after international sanctions and lower oil prices curtailed many hopes for an oil and gas-driven regional boom in Russia’s north, parts of Russia’s Arctic Zone¹ are experiencing a second wave of hydrocarbon mega-projects, accompanied by infrastructure and regional development. The Yamal Peninsula has become a hotspot for gas extraction, with some production regions, such as Bovanenkovo, being developed by Gazprom for export by pipeline to Europe, while others, like the Yuzhno-Tambeyskoe field, are developed by Novatek, the gas being liquefied and exported to Europe and Asia. More recently, Rosneft has begun to plan for massive operations in the Taimyr Peninsula, east of Yamal. Significantly, these are projects where natural gas and oil fields are located onshore, meaning that they are less affected by international sanctions. However, it takes more than avoiding international sanctions for a major Arctic project to materialise (Aalto, 2016). Arctic Ocean shores are costly locations for hydrocarbon extraction, characterised by a harsh climate, remoteness, and consequently, long lead times. The oil price threshold for turning a profit on Russian Arctic projects is estimated at around 80 US$ a barrel (Henderson & Grushevenko, 2019, p. 18), which is high amid expectations of oil price volatility (International Energy Agency, 2021). Of course, uncertainties affect other Arctic regions as well. Projects were shelved in, for example, Alaska in the 2010s, and governments play a decisive role in moving stalled projects forwards (McChesney & Juneau, 2019). Uniquely for Russia, however, after its annexation of Crimea and military intervention in Donbas in 2014, Western sanctions on technology export and finance targeted Arctic petroleum projects especially (Shapovalova et al., 2020). While far fewer sanctions apply to onshore projects, the risk of future sanctions influences investment decisions.

These constraints on new projects complicate the pursuit of broader regional developmental aims (Kinossian, 2017; cf., Rowe, 2017). Nevertheless, gas extraction and liquefied natural gas (LNG) plants, pipelines, airports, and railways have been built and operate on the Yamal Peninsula, located in northwest Siberia by the Kara Sea. Continued hydrocarbon-based development remains a strategic priority for Russia’s Arctic Zone. Considering the obstacles to implementation, of both hydrocarbon-based development and wider regional developmental aims, it is appropriate to discuss how state and business actors interact when they attempt to deliver.

How do state and business actors interact to shape implementation of regional development? Implementing policy is a challenge in electoral authoritarian regimes, as they suffer from both the political business cycles of democracies as well as the politicised economy and patronage that dominate in authoritarian systems (Gel’man & Starodubtsev, 2016, p. 100). Implementation has been a persistent problem also with regard to Arctic policy (Zysk, 2015). In the wider perspective, Russia’s political economy is characterised by a lack of sorely needed structural reform (Mau, 2017) and bad governance (Gel’man, 2017b), where the sticking point is not in a lack of adequate policies, but in overcoming political constraints on implementation.

This paper employs a case study of implementation regarding resource-based cargo traffic for the Northern Sea Route² (NSR). The NSR was developed in the Soviet period. After a decrease in navigation in the late 1980s and 1990s, its modernisation and further development returned to the national agenda in the 2000s (Gunnarson & Moe, 2021; Moe & Brigham, 2017). Changing sea ice conditions in the Arctic then increased both international and Russian interest in the route (Gunnarson & Moe, 2021, pp. 8–9), and Russia established new regulations and administrative bodies for the route in 2012–13 (Moe, 2020; Moe & Brigham, 2018). Recent scholarly work on the NSR’s development has focused on international shipping on the route (Gunnarson & Moe, 2021), on its modern icebreaking fleet (Moe & Brigham, 2017) as well as its port range (Faury et al., 2021). Modernising and developing the route is a complex process. As noted by Arild Moe in a comprehensive study of the policy process on NSR development, ‘[m]any agencies, businesses and regions can be considered stakeholders’, even as making policy and regulations for the NSR is the prerogative of the federal authorities (Moe, 2020, p. 210).

By investigating implementation within the existing institutional framework and model of rent redistribution, the aim here is to contribute to our understanding of how Russia responds to changing circumstances of uncertain market conditions and international sanctions. It is argued that state actors enlist companies of systemic importance, drawing on the possibility to engage with companies’ privileged status, thus tying implementation of wider developmental aims to the continued pursuit of rents.

The starting point for the case study is a discussion of how central strategic policy documents for the Arctic connect developmental aims to national interest protection, thereby providing a framework for enlistment. The case study is of the enlistment process relating to NSR development. The analysis is based on publicly available sources, with Russian news media reporting on business and industry being complemented by reporting on Arctic issues from outlets inside and outside Russia. The analysis centres on significant actors in the process involving oil and gas companies, such as the president, federal ministries, and the Security Council; on the company side, the main actors are Rosneft,³ Gazprom⁴ and Novatek.⁵

This introduction is followed by a discussion of how the scholarly literature approaches the relationship between Russia’s rent-based political economy and development. It is argued that the state’s engagement with companies is key to implementation, and that enlistment, encompassing elements of incentivisation as well as mobilisation, is central here. Next comes the discussion of strategic documents on Arctic development, with an emphasis on recent documents. The case study follows, showing how state actors pressure, and incentivise, companies to take on obligations for development, and how incentives matter when companies respond. However, in this case, their response in turn influenced the outcome of another part of the policy process for Arctic development, the establishment of a special economic zone, to give resource extractive industries a central role in Arctic Zone development. Conclusions are advanced in the end.

The rent-based political economy and development

Russia’s political economy is widely seen to conform to a rent-based model, where significant parts of the economy are organised around the redistribution of ‘revenues not related to productivity growth’ (Mau, 2017, p. 65; cf., Gaddy & Ickes, 2015; Boettke & Candela, 2020, p. 342). As oil and gas generated on average 45.8% of federal government revenue in 2011–18,⁶ the hydrocarbon industries are the main sources of rent. While mineral resource extraction is not always synonymous with a rent-based model of political economy, in Russia, the rent management system is a central economic institution (Gaddy & Ickes, 2015). Rent management shapes large swathes of the economy. This includes the structure of economic and political incentives in the oil and gas industry. Incentives affect the ability of the state to implement policy, including developmental aims: commodity-based export structures and associated rents are particularly prone to erode the effectiveness of developmental policies (Dufy & Sindzingre, 2016, p. 70).

But why is development relevant here? Change in contemporary Russia is, after all, not driven by an overall economic agenda according to the Asian model of the developmental state, prioritising growth through investment, not consumption, and carefully managed promotion of export (cf., Wade, 2018, p. 525). Resource export generates a substantial share of federal revenue, but economic and industrial policy is more diverse. Considering the important role of rent redistribution in the economy, Russian developmentalism is better approached as a set of strategies undertaken by state actors to accomplish relatively limited goals of economic development. As such, they can form part of an authoritarian modernisation agenda, that is, a ‘narrow’ modernisation agenda that has economic growth and development as its top, and possibly its only articulated, priorities – without ambitions for political change (Gel’man, 2017a, p. 3). The historical as well as post-Soviet impetus to modernise comes from a perception of external threats arising from Russia’s relative backwardness (Tsygankov, 2014, p. 179).

While modernisation can include a broad aim to diversify away from resource dependence, as was the case under Dmitrii Medvedev (2008–12), it is also possible to rely on a more differentiated set of diversification strategies (Wilson, 2015). The latter may include elements of broad diversification to develop non-resource sectors, but also narrower aims pertaining to one or more sectors, such as geographical or market diversification, and diversification as development within and of the resource industries in themselves (Aalto & Lowry, 2021, pp. 32–33). This less comprehensive approach is consistent with the concept of post-Soviet developmentalism, understood as a narrower set of aims that target individual regions and industries, where incentives are used to promote exports-based development (Dufy & Sindzingre, 2016, p. 71; Wengle, 2012, p. 77). The aim of using a narrower, more specific concept is to arrive at a better conceptual fit than would be possible with a broader concept. By implication, the priority here is to make an empirical contribution regarding Russia’s development, not to contribute to the literature on development.

Implementing a set of narrowly conceived developmental aims is nevertheless a complicated task. Contemporary cases of successful implementation remain precisely cases: politically prioritised projects, individual success stories, set against a general backdrop of routine bad governance (Gel’man, 2021). Hydrocarbon-based development in the Arctic is set to be such a success story of mega-projects that underpin Russia’s position as oil and gas producer, and shape the economic and social development of the affected regions along the lines of a modern petronation (Bouzarovski & Bassin, 2011; Rutland, 2015). Of interest here is the question of how it is being achieved. Among the considerable constraints on implementation in authoritarian states is resistance from groups within the elite, especially when policy change has the potential to endanger their privileges. As proposed by Barbara Geddes, such resistance can be overcome by providing incentives for delivery; however, incentivisation is fraught with the dangers associated with bidding for implementation, given that the benefits of supporting developmental goals would still have to ‘outweigh the benefits associated with the various behaviours that undermine the pursuit of these goals’ (Geddes, 1994, p. 193). In a political economy where rent management shapes incentives, implementation costs may include costs associated with rent-seeking.

To the state actors concerned with implementing highly prioritised developmental goals, such costs are not necessarily the only problem. Performance legitimacy, that is, fulfilling the needs of society for welfare and security, is especially important in electoral autocracies such as Russia (Burnell, 2006, pp. 548–549; Gel’man et al., 2021, pp. 74–75). While reduced economic growth has led to a shift towards political stability, rather than economic performance, as a source of legitimacy for the current regime (Hutcheson & Petersson, 2016, pp. 1111–1112), a failure to deliver on policy priorities, particularly those articulated by the president, would undermine legitimacy and make the regime vulnerable. Regardless of whether its current performance is inefficient and constitutes ‘bad governance’, the regime will still need to deliver at roughly the current level to maintain legitimacy (Gel’man, 2017b, p. 499). Developmental aims, then, are still relevant in Russia, though they do not necessarily pertain to an overall economic policy of development. The agenda can just as well be defined by aims defined by a pursuit of legitimacy.

Privileges, incentives, and enlistment

The key to incentivisation is that rent streams are managed as part of a system of privileges integral to Russia’s limited access order. Powerful societal actors, including major companies, have a role in supporting the regime and maintaining its stability (North et al., 2009, pp. 20–21; Yakovlev, 2015). Their prominence is reflected in their privileges: superior access to business opportunity and therefore rent streams; considerable power in the system. Institutional frameworks differ and reflect industries’, and companies’, political significance (Ellman, 2015; Oxenstierna, 2015), as all elite actors are embedded in informal power networks, ‘sistema’ (Adachi, 2010; Ledeneva, 2013). The most privileged companies have top-level lobbying access, and therefore superior influence on the institutional framework (Adachi, 2009; Fortescue, 2016; Matveev, 2019). This applies also in the oil and gas industries (Fortescue, 2014; Gustafson, 2012; Hanson, 2009; Kryukov & Moe, 2013), where the framework for Arctic oil and gas development has long been a target for company lobbying. With the high costs and high risks involved, the extent of state support for a given Arctic project matters, and lobbying may influence outcomes in this respect. Thus, while the offshore oil project Prirazlomnoye, in production from December 2013, benefited from both general Arctic and targeted tax breaks, the lack of targeted fiscal incentives for the Shtokman project was among the several reasons for its shelving in 2012 (Henderson & Moe, 2016, p. 285; Aalto, 2016, p. 53). In the 2000s, the considerable lobbying power of state companies was demonstrated in the process of rewriting the Law on the Subsoil (Fortescue, 2009). The licencing regime for Arctic offshore oil and gas extraction, regulated by that Law, is another example. It reserves offshore Arctic licences for Gazprom and Rosneft, excluding the major private company Lukoil,⁷ which has considerable Arctic operations and experience from offshore operations in other parts of Russia and abroad (Shapovalova & Stephen, 2019, p. 910). But while state-owned companies are highly privileged, the relationship between state ownership and privilege is not straightforward. Privileges extend to private companies, too. The well-connected company Novatek obtained government and presidential approval to ‘reserve’ gas licences on the Gydan peninsula, east of Yamal, on its behalf and later obtain them in non-competitive auctions (Mordyushenko, 2019; Mordyushenko & Kozlov, 2016). Privileges tend to accumulate. In 2019, Novatek obtained exceptions for its fleet of icebreaking LNG carriers from new legislation that restricted navigation by foreign-built vessels carrying oil, coal and gas on the NSR (Staalesen, 2018, 2019b). Thus, privileged companies may benefit from several layers of discretionary regulation.

Privileges, then, matter in the policy process. When delivering on a developmental aim is highly prioritised, companies may be incentivised by the access to business opportunity, and to rent. In her analysis of the comprehensive electricity reform of the 1990s and 2000s, Susanne Wengle conceptualised this as developmental pacts, whereby government actors shaped institutions based on business interests, ‘while also enlisting [businesses] for regional development strategies’ (Wengle, 2015, p. 6). While developmental goals today are less grand, enlistment of companies that can participate in development remains key to implementation.

For developmental aims to succeed, companies will have to take on some obligations, such as responsibility for infrastructure, or extensive welfare provision. This introduces an obvious exchange element to enlistment: being privileged, powerful companies accept some obligations. The policy process facilitates lobbying over the terms of enlistment, that is, the costs of development. But enlistment also has a mobilizational side. The state does not gather resources to develop priority sectors of the economy itself, which would have constituted a fully-fledged mobilisation (Mau, 2016, p. 368). Rather, the state tries to make the market-based economy work towards fulfilling national economic goals, as an extension of strategic planning (Ellman, 2015, pp. 699–700). The more important it is to deliver, the more important enlistment becomes. The mobilizational element appears when state actors try to oblige companies to invest, for example, in regional development. The possibilities for mobilisation are amplified by securitisation of economic policy, as it is easier to mobilise companies when political control of central sectors of the economy is already a priority (Connolly, 2016, p. 769). Perceived or real backwardness, articulated in a drive to develop domestic technology, may have a similar effect, as may national interest protection. On a practical level, the mobilizational and exchange sides of enlistment are mutually reinforcing. Privileges and the opportunities they bring can function as a carrot to the stick of taking on obligations. The specific priorities of the President indicate to everyone, including company heads, which obligations are the most obligatory and therefore more likely to be incentivised when companies engage in lobbying (Brooke & Gans-Morse, 2016, p. 10). Thus, it is possible to distinguish between high-level priorities and those of a lesser order.

Hydrocarbon development in the Arctic Zone: strategic documents

The oil and gas industries have a particularly important role in development of the Arctic Zone. In 2019, 81.7% of Russia’s natural gas and 10.3% of oil and condensate were extracted in the Yamalo-Nenets Autonomous Region alone (Analiticheskii Tsentr, 2020). The recent Energy Strategy to 2035 emphasised that with new projects, the importance of Arctic oil and gas would increase, and pointed towards the Arctic Zone as one of three emergent centres of oil and gas production (2020, p. 5). The government has long viewed oil and gas extraction as essential for Russia in a future of intensified competition for resources (Bradshaw et al., 2019, pp. 7–9). As of yet, a rapid decrease in the reliance on hydrocarbon extraction is not on the agenda, even as plans for the global energy transition begin to appear in crucial energy markets, and Prime Minister Mikhail Mishustin in September 2021 requested an action plan for the Russian economy’s adjustment to the global energy transition towards 2050 (TASS, 2021). Thus, hydrocarbon-based development in the Arctic Zone seems likely to continue through the 2020s.

The sanctions and securitisation of economic policy

The international sanctions against Russia in response to the conflict in Ukraine increased the importance of oil and gas company privilege and lobbying power towards the state. From autumn 2014, Russia’s major oil companies were effectively denied access to US and European markets for capital, and the US sanctions also included the gas companies Gazprom and Novatek (Connolly, 2018, p. 93). The sectoral sanctions further curtailed cooperation with western IOCs and access to technology for deep-water, Arctic and shale exploration and production, thus depriving Russian companies of access to their main sources of know-how and equipment when developing frontier regions (Connolly, 2018, p. 93; Henderson & Moe, 2016, p. 288). In the Arctic Zone, the effects included suspension of major projects with international partners (Connolly, 2018, pp. 93–94; Shida, 2020). Wider adverse effects were related to compliance costs and the cooling effect on the business climate, as potential foreign investors were uncertain over the scope of sanctions, and wary of future sanctions.

Among the wider indirect effects was a general securitisation in economic policy, which played well to longstanding concerns over limiting foreign companies’ access to Arctic (and other) hydrocarbon projects. Securitisation emphasised self-reliance in the name of security and saw economic policy ‘subsumed within a wider effort to insulate Russia from a growing array of internal and external threats’ (Connolly, 2016, p. 769). It resonated with existing elite perceptions of resource wealth as a source of subordination internationally as well as a vulnerability to foreign influence (Rutland, 2015, p. 82). The view of the Arctic as a special zone of the national economy, apparent in strategic documents also before 2014, made it a central object of the securitisation effort. Increasingly, the lack of economic development in the Arctic Zone was perceived as a source of threat (Moe, 2020, p. 211). Second, on the background of the sanctions design, the state adjusted Arctic policies to include more active, developmentalist elements (Aalto, 2016, pp. 58–59). This affected the framework for engagement with already privileged companies. Strategic documents set out increasingly specific priorities for Arctic development, to direct companies to take on additional obligations for infrastructure. In parallel, a new regulatory regime for the NSR and shipping facilities was under elaboration, to facilitate resource export.

The Arctic, a strategic resource base

The idea of the Arctic as a strategic resource base for Russia was established in the 2008 Foundations of the State Policy of the Russian Federation in the Arctic Until 2020 and Beyond (Foundations to 2020, 2008). It has remained a cornerstone in later documents such as the 2013 and 2020 Development strategies (Development Strategy, 2013, pp. 7–8, 2020; Khrushcheva & Poberezhskaya, 2016, pp. 559–560) and the renewed 2020 Foundations (Foundations to 2035, 2020). Beginning in 2014, national security and with it national interest protection became more prominent in Russian official documents on the Arctic (Khrushcheva & Poberezhskaya, 2016, pp. 558–559). General strategic documents, such as the Energy Security Doctrine and the Military Doctrine, also refer to the strategic resource base and single out the Arctic as a special, and vulnerable, part of Russia (Energy Security Doctrine, 2019, p. 14; Military Doctrine, 2014). This vulnerability has justified a strengthened military presence in the Arctic (Baev, 2019; RIA Novosti, 2015). It is bolstered by the assertion of Foreign Minister Sergey Lavrov that Russia would protect its interests, while no Arctic problem merits attention from NATO (Paniev, 2019). According to Security Council Deputy Secretary Mikhail Popov, the main economic opportunities as well as the greatest international competition lie in the development of the NSR (Interfax, 2020). Thus, the Russian view is that the developmental possibilities of the Arctic Zone are sufficiently attractive internationally to become a source of vulnerability to Russia, and accordingly, there is a need for protection from non-Russian actors.

The push for the Northern Sea Route: unlocking infrastructure development

As Russian companies have developed operations in the Arctic Zone, their contribution to infrastructure development has usually centred on operational needs. The 2017 version of the Arctic Development Programme, aimed at implementing the Development Strategy, called on resource companies to lead infrastructure development more generally in eight Arctic ‘support zones’, however, the project had faltered due to a lack of incentives (On changes to Government Resolution No. 366, 2017; Kryuchkova, 2019). In 2018, the support zone scheme was overshadowed by a presidential push to increase traffic on the NSR, announced in Putin’s address to the Federal Assembly and included in the May 2018 inauguration decrees. Thus, national interest protection and developmental aims met in the priority of developing infrastructure.

The NSR aim was dual: to modernise and expand capacity, and to increase cargo traffic to 80 million metric tonnes annually by 2024 (Comprehensive plan for backbone infrastructure to 2024, 2018). The former goal relied heavily on icebreaker capacity, a prioritised part of the import substitution programme (Analiticheskii Tsentr, 2018) included under the sea ports part of the national infrastructure project (Comprehensive plan for backbone infrastructure to 2024, 2018; Vedeneeva, 2018). Rosneft was heavily involved through its Zvezda shipyard, which had received tax exemptions (Moe, 2020, pp. 216–218; Netreba et al., 2015).

To reach the traffic target by 2024, NSR traffic volumes would have to increase substantially. According to the government’s Analytical Centre, cargo traffic in 2018 stood at a quarter of the target, 20.2 million tonnes (Analiticheskii Tsentr, 2019, p. 20). Expectations for transit traffic between Asia and Europe were low (Vedeneeva et al., 2019). In contrast to earlier projections (Analiticheskii Tsentr, 2014, p. 22), the NSR would not take substantial volumes away from international shipping routes in the short term. In the longer term, changing ice conditions could open shipping across the North Pole, impinging on NSR shipping. China prepared to develop a maritime and overland ‘Polar Silk Road’ and to develop national icebreaker construction (State Council Information Office, 2018). On this background, further development of the NSR was intended to shield it from foreign competition.

Exports would supply most of the NSR traffic in 2024 and later. Forecasts agreed that Novatek’s Yamal LNG and Arctic LNG-2 would provide the bulk of traffic, 32 to 41 million tonnes annually (Vedeneeva et al., 2019). The target of 80 million tonnes annually appeared unrealistic, and the Ministry for Natural Resources (MNR) in late 2018 estimated volumes would reach 52 million tonnes in 2024 (Podobedova & Burmistrova, 2019). But a few weeks later, forecasts varied, with the companies’ combined estimates indicating that 80 million tonnes was possible, and the Transport Ministry, Energy Ministry and MNR adjusting their targets upwards to 65‒71.5 million tonnes (Vedeneeva et al., 2019). Some weeks later, Energy Minister Aleksandr Novak appeared more optimistic, forecasting that hydrocarbon cargo volumes would reach at least 77.8 million tonnes by 2025 (Novak, 2019). There was a tangible urgency attached to the NSR target. In March 2019, Putin ordered the government and Rosatom, the corporation responsible for the NSR, to create long-term contracts with companies by 1 September to oblige them to fulfil the 80 million tonnes target (Shevchenko & Bakhtina, 2019).

Thus far, the drive for NSR traffic had elicited little response from Rosneft. However, at this point it announced the launch of a megaproject, Vostok Oil. Rosneft and Neftegazholding would develop several costly fields on the Taimyr Peninsula. This could boost shipping from the port of Dudinka, to the west of Taimyr, by another 20 million tonnes, albeit after 2024 (Kozlov, 2019a). The project included oil from the Vankor fields, which already contributed nine percent of Rosneft’s production. Rosneft head Igor Sechin pushed for additional subsidies for the new plans. Both the proposed investment and the tax breaks were unprecedentedly large, at 5–8.5 trillion and 2.6 trillion rubles respectively over 30 years (Kozlov, 2019a; Petlevoi & Sterkin, 2019).⁸ In effect, Rosneft sought tax breaks that included deductions for costs already incurred. Additionally, Sechin proposed to enshrine these measures in new legislation for Arctic development, under preparation since 2016, thereby suggesting an incentive for other companies to support the proposal (Petlevoi & Sterkin, 2019). When the Finance Ministry was reluctant, Sechin complained to Putin, arguing that Finance Minister Anton Siluanov had supported similar projects in the gas industry (Kozlov, 2019c). While the Finance Ministry maintained its default position in defence of revenue, the Ministry for the Development of the Far East and Arctic (MDFEA) was in favour, and the Energy Ministry in the middle (Davydov, 2019; Podobedova, 2019b). At that point in late 2019, the NSR development plan was finalised, with traffic projections from all the major companies, apart from Rosneft (Government of the Russian Federation, 2019; NSR Development plan to 2035, 2019).

The push for NSR traffic opened lobbying possibilities also for other companies. When the revised federal budget for 2020 failed to include funding for infrastructure development around Utrennii port on the Gydan Peninsula, Novatek CEO Leonid Mikhelson reportedly lobbied Putin for a budget allocation (Vedeneeva, 2019). To maintain budget discipline, the Finance Ministry proposed to re-allocate funds within the infrastructure budget (Vedeneeva & Kozlov, 2019). With Medvedev’s and Putin’s approval, the Transport Ministry was overruled, and road, rail and river projects in central European Russia were pushed lower down the list of priorities (Vedeneeva & Kozlov, 2019).

As the NSR development plan was finalised, the MNR duly revised its traffic estimates upwards to 82 million tonnes in 2024 (Podobedova & Burmistrova, 2019; Staalesen, 2019a). The Transport Ministry and MDFEA followed suit (Podobedova, 2019a). The MNR also estimated that traffic on the NSR would reach 157 million tonnes annually by 2034 (Kobylkin, 2019). Only months later in late 2019, the Audit Chamber questioned whether this was realistic, referring especially to the Vostok Oil project (Audit Chamber, 2020, p. 14). Nevertheless, Sechin remained optimistic for Vostok Oil, especially as the forthcoming Arctic development legislation promised tax breaks for infrastructure development (Staalesen, 2020a). Late in 2020, Rosneft secured control of the entire Vostok Oil project and brought in foreign investment (Staalesen, 2020b). The government, on its side, decided to maintain the goal of 80 million tonnes for the NSR in 2024. In effect, bringing NSR traffic volumes above 50 million tonnes depended on Vostok Oil (Vedeneeva & Kozlov, 2020).

The urgency of the 2019 push to increase hydrocarbon cargo volumes on the NSR was directed at mobilising oil and gas companies into taking on obligations. By targeting their operations, the May decree engaged with business strategies and did not oblige companies outright to finance infrastructure. This resulted in success insofar as traffic forecasts were revised upwards. However, Putin’s order for the government and Rosatom to make companies commit to long-term contracts demonstrated that the NSR obligations were indeed obligatory and a high-level priority. The implementation effort turned into a competition for plan fulfilment. Along with this mobilisation came the possibility of incentivising companies – the companies could negotiate over incentives for implementation. Rosneft’s launch of the Vostok Oil project and Novatek’s lobbying to secure funding for infrastructure around Utrennii port can be understood in this light. To develop projects in accordance with their business strategies, company heads with top-level lobbying access would be well served by committing to obligations and then negotiate over incentives. The Finance Ministry’s response to the port infrastructure proposal showed that it was aware of the danger of too high implementation costs, and in effect tried to stall a run on the incentives.

The ‘world’s largest special economic zone’: containing a run on incentives

In the 2010s, Arctic projects received fiscal incentives as field-by-field exemptions to the mineral extraction⁹ and export taxes in line with the general oil taxation system (Vatansever, 2020, pp. 1709–1712). Thus, the approach varied between the Shtokman project, which had been insufficiently incentivised, the Prirazlomnoe project, which received tax breaks late in the process (Aalto, 2016, p. 53), and Novatek’s LNG projects. The latter fulfilled a major national priority, LNG development, and obtained massive fiscal incentives, including regional ones (Fadeeva et al., 2019; Government of the Murmansk Region, 2019).

In 2017, as the drafting of new Arctic development legislation got underway, a priority on regional development suggested the possibility of a new fiscal regime (TASS, 2017). Around the same time, Rosneft obtained unprecedentedly large tax breaks for established fields¹⁰ near the Arctic Zone (Kozlov & Barsukov, 2017) and began to lobby for the Vostok Oil project (Kozlov, 2019c). This highlighted how selective, targeted tax breaks created levers for new breaks, with an accumulating effect on revenue. Selective breaks complicated any effort to stall competitive rent-seeking. Each additional exemption strengthened the arguments in favour of establishing a regionally defined fiscal framework for the Arctic to contain such tendencies.

It was the Finance Ministry’s customary position to protect revenue and avoid economic distortions (Vatansever, 2020, p. 1717). It obtained a governmental moratorium on production support subsidies until inventories were made of all relevant fields. According to Sechin, this jeopardised the development of several Arctic fields (Kozlov, 2019b). In a letter to Putin, he emphasised the dangers of a shortfall in NSR traffic, and of deterring foreign investors (Kozlov, 2019b). The Finance Ministry objected, warning about the potential loss of revenue, while Deputy Prime Minister Yurii Trutnev, presidential envoy to the Far East, and Sechin, worked to establish additional Arctic development subsidies (Petlevoi & Bocharova, 2019). Their preferred draft for an Arctic development law proposed zero percent extraction tax for new Arctic projects, tax breaks covering the full cost of investment for old projects, zero rate property and land tax, profit tax at seven percent not the usual 20, and substantial reductions in personnel insurance premiums, all for 30 years (Petlevoi & Bocharova, 2019). According to the Finance Ministry, should the draft pass, the annual revenue shortfall would amount to 200–300 billion rubles in the first years, increasing thereafter (Petlevoi & Bocharova, 2019). At this point, the drafting of the law was raised to the level of the president, emphasising its importance as well as the need to resolve substantial differences (Petlevoi & Bocharova, 2019).

The outcome was in effect a compromise. The revised Foundations to 2035 contained detailed priorities for increased private investment on the continental shelf, along the NSR, and the entire business chain from geological exploration to production, refining and petrochemicals. The state clearly pressed on companies to increase their investment, but it was also prepared to offer more support than before. The final fiscal regime for the Arctic Zone, agreed in March 2020, was less generous than Sechin and Trutnev’s preferred version, but still costly, as the government was now more open to subsidising new fields to maintain petroleum production. It established a 12-year, zero-rate extraction tax for gas projects with LNG or petrochemicals production; a 12-year, zero-rate extraction tax gradually increasing to full rates for new onshore projects in the eastern Arctic¹¹; a five percent extraction tax rate for new oil projects on the continental shelf; and offered companies a tax break to recoup up to 25% of infrastructure costs for established projects on the Taimyr Peninsula, applicable through 2029 (Ministry for the Development of the Far East and Arctic, 2020). Other breaks and additional support mechanisms targeted mining and services (Government of the Russian Federation, 2020; On state support, 2020). There was an opening for additional regional tax breaks, enabling a measure of selective taxation.

In July 2020, this was followed up by the Law on State Support for Entrepreneurial Activity in the Arctic Zone (On state support, 2020). According to Vice-Premier Trutnev, this law, along with the new Foundations and an updated Development Programme, established the world’s largest special economic zone (Government of the Russian Federation, 2020). And in due course, the special economic zone was described in the 2020 Development Strategy as a measure for the resource industries (Development Strategy, 2020, Article 12a). The Law on State Support launched special fiscal terms for all oil and gas industry businesses in the Arctic Zone (Article 27), as well as special procedures for private investment management and control (Articles 5‒6). It allowed for the refusal of permits on the grounds of national interest protection, simultaneously easing procedures when establishing operations. General stakeholder consultation and environmental protection¹² were placed under the purview of a specially designed Public Council (Article 7), but not defined. In effect, industry development was prioritised above other non-military aims in the Arctic Zone and on par with strategic and security aims. This was confirmed by a new organisational arrangement, whereby the Security Council’s Interdepartmental Commission on the Arctic, launched in 2020, was established to coordinate overarching security and economic policy (Security Council of the Russian Federation, 2020; On the Interdepartmental commission, 2020). Putin’s appointment of Dmitrii Medvedev, instead of someone with predominant security credentials, to chair the Commission, confirmed that economic goals had a high priority (cf., Schulmann & Galeotti, 2021).

Overall, the special status reinforced how business opportunity was a privilege. For example, when attracting international partners, companies could draw on a priority of ‘actively attracting Arctic states and states from outside the region to engage in mutually beneficial economic cooperation’ (Foundations to 2035, 2020, Article 16e), and call for top-level political endorsement or favourable fiscal terms, just as Sechin had done with Vostok oil. The emphasis on the Arctic Zone as a strategic resource base placed the oil and gas industries at the centre of state developmental efforts. While this had been visible in the 2008 Foundations, the significance was stressed further in the 2020 version. At that point, the special economic zone and the Law on State Support placed a priority on economic activity in line with security-related national interests in the Arctic Zone.

In the wider perspective of Russia’s economic development, the final fiscal framework for Arctic development, and the institution of a special economic zone, tied Arctic Zone development to continued hydrocarbon extraction. Inside the Arctic Zone, company privileges were strengthened. The obligations that were exchanged for the new fiscal framework, that is, infrastructure development tied mainly to the NSR, were narrowly conceived. Many of their wider obligations towards regional and local stakeholders, organised in strategic agreements and typically renewed every few years (Henry et al., 2016, p. 1353), depended on lower-level input through local channels of access, and on regulatory mechanisms. The new legislation added a bureaucratic layer tasked with business and land-use permits (On state support, 2020). This could reduce local communities’ potential to take an active stance on new projects. In another legislative change, the establishment of registers for claimants of group-based economic and social rights appeared aimed at increasing authorities’ control over indigenous communities (Britskaya, 2020; On changes to the state information monitoring system, 2020; On the state information monitoring system, 2017). These changes placed resource companies as land-users, and security agencies as register owners, at a greater advantage over local stakeholders. In consequence, the risk of marginalisation of local stakeholders, especially repression against indigenous activism, increased (Plantan, 2018; Strelkov, 2019). The changes also had a potential impact on the possibilities for development of non-hydrocarbon based economic activity and livelihoods, as it reinforced the priority on industrial and oil and gas-based development in the Arctic Zone.

Conclusions

The state tries to deliver on developmental aims within the existing institutional framework and the current model of rent redistribution. When powerful companies are enlisted, significant elite actors consolidate around the regime’s high-level priorities. At the same time, the element of competition among companies, not just for incentives, but also for being seen to deliver on those priorities, is integral to the system.

The high-level political priority is crucial. The 2018 May decrees raised NSR development aims to a higher priority, targeting companies for engagement through mobilisation and exchange. For implementation, the state relied on existing incentive structures, centred around the extraction and redistribution of rent. Developmental aims provided the state with a rationale to enlist companies through incentivisation. Securitisation of economic policy, in particular the emphasis on national interest protection, introduced an element of mobilisation and obligation to state–company interaction. This was a source of strength to the state, beyond the possibilities that lie in incentivisation.

However, national interest protection opened possibilities of limiting access to certain activities for some companies, thereby reinforcing existing hierarchies. This works to the advantage of already privileged companies. In strategic documents, the Arctic Zone appears both an attractive resource base and vulnerable to outside interest. The effect on economic policy is to make business activity an aim of itself, opening possibilities for sufficiently privileged companies to negotiate over terms. The special economic zone added another layer of privilege for major companies to use to their business advantage. Industrial activity in the Arctic Zone will receive preferential treatment, while local stakeholders outside of local power structures are marginalised. The weakened position of some local stakeholders, such as native communities and environmental groups, added another obstacle for alternative, non-hydrocarbon-based development models for the Arctic Zone to grow and take hold from below. In this way, developmental aims and national interest protection interacted and made it difficult for local and national Russian actors to challenge the resource extraction model of Arctic Zone development. Accordingly, securitisation of economic policy is central to the way in which the existing economic model reinforces reliance on extractive industries, here especially oil and gas. In this way, the response to a changing external environment was to reinforce one existing regional model of economic development and place it on par with aims of national interest protection. As per the current economic policy, resource-based development can be expected to define economic life in Arctic Russia for decades to come. This fits well with the short-term objectives of Russia’s current ruling elite, especially the President, and serves to bolster legitimacy.

Recent official statements in October 2021 indicate that the longer-term objectives may be different, with a greater urgency attached to preparing Russia for energy transition, as well as to mitigating climate change. Nevertheless, the projects discussed here seem likely to proceed in some form. This paper shows, however, that a priority from the top is a necessary component of any policy change, but not a sufficient one for implementation. Economic actors will have to be mobilised and incentivised for policy delivery. Beyond the limits of this paper, incentive structures will differ among industries. Also within industries, incentives matter differently to different companies, due to differences in systemic importance and privileges. The privileges available to one company when accepting developmental obligations would not necessarily be obtainable to all its peers.

As illustrated by the case study, in the longer term it is difficult to deliver on regional development in a cost-effective way. The combination of high priority and fiscal incentives enables systemically significant companies to lobby their preferred projects, and possibly engage in competitive rent-seeking. In the case discussed here, this met with resistance from the Finance Ministry, to limit the potential revenue shortfall for the state. However, the lobbying, and the response, also speak of the lack of a discussion of the wider equities and broader policy choices involved. The Finance Ministry’s role is confined to contain a run on incentives for particular policies, which here contributed to the result of a special economic zone in the Arctic. Companies lobby their interests, finding support among other state actors. Enlistment, accordingly, is a particularistic mode of implementation, where systemically important actors are brought onboard if the political priority is sufficiently high and therefore supplemented by incentives. As the systemically important actors are highly privileged and the system rests on the premise that they remain so, potential wider consequences and costs of implementation are not politically relevant.

Acknowledgments

A previous version of the paper was discussed at a Rusecopol workshop in January 2021, and I am grateful to all workshop participants, Mark Galeotti, Janis Kluge, Ekaterina Schulmann, Andrei Yakovlev, and Jardar Østbø, for their comments and suggestions. Thank you also to Kåre Dahl Martinsen for comments on a previous version of this paper.

Disclosure statement

No relevant financial or non-financial competing interests to report.

Additional information

Funding

This work was supported by the Research Council of Norway (Norges Forskningsråd), grant number [288428] under the NORRUSS Pluss call.

Notes

1. The Arctic Zone is defined in presidential decrees from 2014, 2017 and 2019. The 2014 decree included Murmansk oblast, Nenets AO, Chukotka AO and Yamalo-Nenets, select municipalities in Komi Republic, Sakha Republic (Yakutiya), Krasnoyarsk krai, and Arkhangelsk oblast, and islands and territories in the Arctic Ocean. The 2017 decree added three municipalities in Karelia. The 2019 decree added eight municipalities in Sakha Republic, bringing the total there to 12.

2. Federal Law No 132 (2012) defined the NSR as the waters between Novaya Zemlya (Karskie vorota) to the Bering Strait (Providence Bay), including the Kara, Laptev and East Siberian Seas. The NSR is part of the Northeast Passage, which includes the Barents, Pechora and Bering Seas.

3. Rosneft is Russia’s largest company by turnover (2020), and a vertically integrated oil and gas producing company. It is majority-owned and controlled by the Russian state, with BP holding a minority stake.

4. Gazprom is Russia’s second-largest company by turnover (2020) and majority state-owned. It dominates Russia’s natural gas sector with an export monopoly for pipeline gas.

5. Novatek specialises in LNG and condensate production, is based in Yamalo-Nenets, and ranks 16^th among Russia’s largest companies by turnover (2020). It is privately owned, with the French IOC Total a minority owner.

6. Author’s calculation based on statistics from the Russian Finance Ministry.

7. Lukoil, which is privately owned, is Russia’s third largest company by turnover (2020).

8. This equalled roughly 79.7–127.4 billion US$ of investment and 41.4 billion US$ of tax discounts (26 June 2019 exchange rate). The 2.6 trillion rubles’ tax breaks equalled 13.02% of projected revenue in the 2019 federal budget (of 19.969 trillion rubles).

9. Nalog na dobychu poleznykh iskopaemykh, NDPI.

10. For the Samotlor field, Russia’s largest, a 35 billion rubles annual tax break for 10 years from 2018. The total over 10 years corresponded to two percent of projected revenue in the 2018 federal budget (at 15 trillion 182 billion rubles). For the Priobskoe field, Rosneft sought a 460 billion rubles tax break from 2020.

11. Chukotka, northern parts of Krasnoyarsk krai and Yakutiya-Sakha.

12. Outside specially protected areas such as national parks and reserves (Articles 5–1). Roman Sidortsov discusses environmental assessment processes in Arctic oil and gas development (Sidortsov, 2019, p. 136‒137).