Iceland’s Arctic Awakening

By Heidar Gudjonsson and Egill Thor Nielsson

Vilhjalmur Stefansson (1879-1962), an Arctic explorer and anthropologist born in Canada to Icelandic parents and later a U.S. citizen, represents in many ways the internationality of today’s Arctic. Over half a century after his death and a century since his first Arctic expedition, the Harvard-educated proponent of a vibrant Arctic is being redeemed.

Stefansson understood that human capital is an indispensable asset to prosper in the occasionally harsh living conditions that Arctic communities face. These societies are highly dependent on prudent utilization of their natural resources, both terrestrial and maritime. His message was that the ways of local inhabitants should be respected while encouraging international players to take part in the enormous opportunities offered by a fruitful Arctic, which he dubbed as a place where America, Europe, and Asia come together.

Iceland, the world’s oldest democracy and the site of the world’s northernmost capital, is an excellent case in point of Stefansson’s vision that an outward looking modern society with high living standards and excellent infrastructure can be developed in the Arctic. Stefansson was decades ahead of most his contemporaries, although reservations of the “friendly Arctic” still largely remain today. Iceland’s recent Arctic awakening underlines the region’s international importance, especially in context with game changing long-term global trends such as higher purchasing power, climate change, technological advantages, demography (rising), natural resources (scarcity), and globalization (increasing). 

Isolated or in the middle?

Some still see the Arctic as isolated and subsequently irrelevant, but that could not be farther from the truth. 88 percent live north of the equator, and global trade more or less reflects this fact. In the Northern Hemisphere, the shortest distance between the continents is often over the Arctic, making the Arctic strategically important.

A case in point is the cargo at Ted Stevens Airport in Anchorage, Alaska, which serves as a hub for transport of goods between Asia, Europe, and the United States. Anchorage, a city of 300,000 inhabitants, within a state of 700,000, has one of the five largest cargo hubs in the world.  Iceland’s Keflavik International Airport, located in Reykjanes, a town of 14,200 inhabitants on the outskirts of Reykjavik, has seen a steep rise of passengers the past decade, from 1.6 million in 2004 to over 3.8 million in 2014. Such growth is rare for airports in the western world. Almost three times more passengers travel through Keflavik airport than actually visit Iceland itself, equivalent to almost the total Arctic population. These two airports benefit from their central northern hemisphere locations in the Atlantic and Pacific Oceans.

Excellent networks have been established to and from Iceland for people and cargo through the initiatives of local private companies. In 2014, both Icelandair (aviation) and Eimskip (shipping) had direct connections to all eight Arctic states. Vilhjalmur Stefansson’s almost century-old vision of a “Polar Mediterranean,” where trade flourishes and economic opportunities are taken up by Arctic inhabitants, is now being realized through the daily operations of Icelandic seafood, energy, and transportation companies.

Route maps of Icelandair and Eimskip, illustrating how they capitalize on Iceland’s central North Atlantic location

Moving forward

Iceland has especially rich sources of high-quality protein (seafood), renewable energy (geothermal and hydro), and clean drinking water; as well as a pristine natural beauty that draws nearly one million tourists, three times its population, to visit the island annually. Last year, tourism became Iceland’s largest contributor of foreign currency earnings for the first time, and it will become increasingly important to find a good balance between industrial development and environmental protection in the future.

Iceland has an abundance of power. The local population uses around 10 percent of the renewable electricity produced. The rest is bought by international heavy industries from Canada (Rio Tinto), the United States (Alcoa and Century Aluminum), and China (Elkem). There are also potential oil and gas discoveries in Icelandic waters, close to Jan Mayen. Two licenses are active for exploration and production with Canadian and Chinese companies holding majority ownership, and acting as operators in the venture companies involved. 

There is definitely room for improvement in Iceland’s resource-based sectors, as is argued in an excellent report from McKinsey & Company, Charting a Growth Path for Iceland (2012). It highlights the importance of value capture from Iceland’s scarce resources and higher productivity, especially in the power industry and tourism, while Iceland’s fishing industry is the best example of a sector that has achieved both high labor and capital productivity.

In order to realize its potential, the way forward for Iceland will be to seek international best practices and to focus on long-term world trends, such as rising demography and prosperity. This way, it is possible to look beyond the cyclical movements and mood swings of commodity markets that may not reflect future energy and food needs of the Earth’s 2050 projected 9.6 billion and increasingly urban inhabitants.

Cooperation is essential

The utilization of natural resources and infrastructure projects in the Arctic are very capital-intensive, which limits the possibilities for locals to go at it alone, and technical know-how is also limited in these new areas. History tells us that utilizing the fishing stocks around Iceland and Greenland became effective only after international cooperation came about. With international cooperation, the local populations were able to build a world-class fishing industry. Scottish brothers set up a business in Hafnarfjörður in the early 20th century and hired Icelanders onto their boats. Icelandic companies now export both products and knowledge to other countries.

Local participation is essential for healthy economic development, but locals cannot manage the entire process. A responsible approach is needed, where locals participate with international companies and secure the transfer of knowledge into their society. It would be irresponsible toward future generations, since it is by starting to harvest our resources now that we can upgrade our infrastructure and pass along those benefits to all.

Iceland has been a proponent for extending international cooperation to all Arctic stakeholders, including those outside the region. The Arctic has become global in the sense that engagement by non-Arctic states has surged over the past few years. This can be seen in investments, scientific investigations and conferences exclusively focused on the Arctic. Such events, hosted in 2014 by and for scientists, policy-makers, business people, indigenous people, and civil society took its participants to locations as diverse as Ottawa, Anchorage, Akureyri, Rovaniemi, London, Gdansk, Arkhangelsk, Singapore, and Shanghai.

Despite this surge of interest, economic activity has not always been quite as bullish. The World Economic Forum, in a 2014 report titled Demystifying the Arctic, estimated the Arctic region’s current annual economy at roughly $230 billion. This amount is lower than the GDP of seven of the eight Arctic states individually, with Iceland’s $14.6 billion GDP being the only exception, and merely a fraction (0.31 percent) of the $74.9 trillion Gross World Production. However, taking global trends and the Arctic’s strategic geographical position into account, this figure is bound to rise in the future and once again success will occur when opportunity meets preparation.

Now, all G8 economies are represented at the Arctic Council, the region’s highest-level intergovernmental forum, and the BRICS are following suit, with China and India leading the way. Both multilateral and bilateral international cooperation will remain key in Arctic affairs, and it is essential for a small state such as Iceland not to be too dependent on one single partner.

Choosing your partners wisely

Iceland has relatively good relations with all countries, including the world’s largest economies. With great economic opportunities ahead, it is important to identify who are the right international partners for years to come. In many respects, the most beneficial manner of cooperation will be found toward the North and East, with Greenland and East Asia promising the largest development opportunities, while established partners in North America and Europe will remain vital in terms of economic, security and political interests.

Iceland, along with Greenland and the Faroe Islands, established the West Nordic Council in 1985. The parliamentary forum between the three countries is one of the oldest pan-Arctic multilateral cooperation mechanisms. The Council has recently recommended that the three national governments increase their Arctic policy cooperation and establish a West Nordic free trade area to strengthen the regional economy and export capabilities to global markets.

The Nordic countries are Iceland’s closest partners, and pulling together with its closest neighbors to reap the benefits of Arctic developments will be crucial for Iceland. Together, the Nordic countries make up a critical mass of 26 million people with a total GDP of $1.68 trillion and a world ranking of six in per capita income. Their strategic position in the European Arctic makes the Nordic countries important players in Arctic affairs. Iceland has been a member of the European Free Trade Association since 1970 and part of the European Economic Area since its establishment in 1994. The vast majority of its products are exported to Europe.

Large powers, small Iceland

The historic bonds between Iceland and the North American countries are very strong. Between 1870 and 1914, over 15,000 Icelanders immigrated to the New World, which was a significant proportion of a population of less than 100,000 at the time. While most European emigrants chose the U.S. as their final destination, the vast majority of Icelanders preferred Canada. The Icelandic diaspora in Canada has stimulated increased cultural and economic cooperation between the countries, including in the seafood sector, and Icelandair now has direct flights to Vancouver, Edmonton, Toronto and Halifax, largely thanks to the initiative of a “Western Icelander”.

Moreover, Iceland, a founding member of NATO, has had an on-going bilateral defense agreement with the U.S. since 1951, and the U.S. military had a presence in Iceland from World War II until 2006. Iceland was the highest per capita recipient of aid under the Marshall Plan, and the U.S played a key role in building Iceland’s modern-day infrastructure, including Keflavik Airport in 1943. The U.S. and Canada are considered as Iceland’s long-term allies and many would relish increased Arctic cooperation westwards.

Russia is more of a puzzle. Iceland is on relatively good terms with Russia, especially compared to most other NATO members. However, all three West Nordic countries, namely Iceland, Greenland and Faroe Islands, were excluded last August from Russia’s year-long ban on imports of food and agricultural products from western countries. In the short term, this opened opportunities for Icelandic companies to increase their market share, but in the long term, sanctions on trade between countries will hinder progress. Once again, Iceland is in the middle, which is favorable when the prospect is one of increased trade in the region but much less so when it is one of conflict.

Iceland’s most discussed Arctic partner is China. The two have enjoyed enhanced Arctic cooperation in a relatively short period of time, following the signing of a Framework Agreement on Arctic Cooperation between the two governments in April 2012, which provides a platform for economic and scientific cooperation. For example, Iceland both lacks the resources to build a state-of-the-art aurora observatory and an icebreaker for scientific investigation in the North Pole region, while China, a non-Arctic country, could neither conduct aurora observations from home nor sail to the Atlantic Arctic without having a port of call. Arctic partnerships built on similar foundations of mutual benefits are also feasible with other Asian countries.

Experience of dealing with international partners is scarce in many parts of the Arctic, but is abundant in Iceland. Its most lucrative economic opportunities lie in servicing the Atlantic Arctic, increasing regional economic productivity, and mutually beneficial cooperation with international partners, especially given the plentiful northern resources and the demand for energy, food, and fresh water, for example from Asian markets.

The Arctic can play an important role in the world’s future economic development, and it would be irresponsible of local inhabitants not to react. The opportunities are vast and Iceland, with other small Arctic societies that have developed relevant capabilities over the centuries, will have to pull together in creating robust knowledge-driven and value-creating service centers to weather the Arctic push.

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Heidar Gudjonsson is Chairman of Eykon Energy and Vodafone Iceland. Egill Thor Nielsson is Executive Secretary of the China-Nordic Arctic Research Center and Visiting Scholar at the Polar Research Institute of China. Opinions are their own.