TEMPO.CO, Jakarta - Russia is among the top ten suppliers of petroleum products to Indonesia. The demanded resource will be also delivered by the relatively new yet promising Northern Sea Route (NSR). The NSR will expand Indonesia's opportunities in terms of sea route diversification and further strengthen the country's position in the Asia-Pacific region.

Asia-Pacific region rapidly developing and needs active trade

The Asia-Pacific region (APR) is enormously important in the global context, as it includes such countries as Japan, Australia, China, India, and Indonesia. Major economic centres are situated here; the region is also characterized by a significant concentration of trade and professional organizations — over 1000. The most prominent of them are ICCA, Pacific Community, ASEAN, APEC, Pacific Basin Economic Council, Walhi. The region is home to more than half of the world's population, and the International Monetary Fund estimates that in 2024 the GDP growth rate of APR countries will reach 4.2%.

The demand for resources is also growing. Thus, the APR consumes 35% of the world's oil. According to the International Association of Oil & Gas Producers, this indicator has increased by one third over the past decade. High demand requires active cooperation in building relations with other countries. And the trade sector is looking for new routes to optimize shipping costs.

Over the past 10 years, the global transportation and logistics landscape of the APR has expanded significantly. Transport corridors such as China–Europe and China–Central Asia have appeared along with the Trans-Caspian International Transport Route, the International North–South Transport Corridor, the New International Land-Sea Trade Corridor, the Northern Sea Route, etc.

Indonesia — a maritime logistics leader

Indonesia is one of the leading economies in the region, entering the world's top 20 countries in terms of economic growth: in 2022, its GDP grew by 5.31% to $1.3 trillion. Due to the country's geographical position — it ranks seventh among countries with the longest waterways — and with its ambition to become “the world's maritime axis” Indonesia cannot ignore logistical changes. On the contrary, it is eager to take full advantage of the opportunities that open up in this regard.

Indonesia is interested in maintaining its leading position in the Asia-Pacific economy and leverages all opportunities to ensure a stable flow of commodities both in and out of the country. This is further facilitated by its participation in a number of associations, such as APEC, OPEC, and ASEAN. Multimodal routes for European and Chinese goods have been laid to Indonesia, which makes it possible for Indonesian products to enter new foreign markets.

In 2022, the country shipped 26.1% more goods worldwide than in 2021. Mineral fuels, including oil, are among the most significant export goods. In 2022, their exports amounted to $71 billion (24.3% of the country's total exports). Coal also remains popular. By the end of April 2023, sea exports of Indonesian coal exceeded 170 million tons, which is 32% more than in the same period last year.

Further development of the global transport infrastructure will enable Indonesia to diversify the sea routes and further strengthen its position in logistics and the economy of the region as a whole.

One more stable route

Today Indonesia produces less oil than it needs: the country's oil consumption has already grown from 1,400 million barrels per day in 2020 to 1,585 million barrels in 2022. And, as the 2022 report of the Directorate General of Oil and Gas states, meeting this demand requires oil imports. Russia has the potential to become one of the key suppliers of raw materials to the country. From January to August 2023, the Russian Federation exported $259 million worth of petroleum products to Indonesia. Last year, the trade turnover between the countries increased by more than 50%.

Indonesia pursues a “free and active” foreign policy, putting its own interests at the forefront. President Joko Widodo told the Financial Times that Indonesia is considering buying oil in Russia, and Minister of Tourism Sandiaga Uno informed that Indonesia was offered Russian oil at a 30% discount. Indonesia may actually start purchasing Russian oil, so it will be necessary to organize competent and stable logistics between the countries.

The bulk of supplies can be transported via the Suez Canal. But Russia is able to offer an additional and fairly stable route for merchant vessels — the Northern Sea Route (NSR). Its length is approximately 5,600 km; the route runs along the northern coast of Eurasia, connecting Europe, Russia, and the ATR countries. China and India, the strongest global economies in the Asia-Pacific region, have already shown interest in the NSR. It is quite reasonable: for example, the distance from St. Petersburg to Beijing along the NSR is 7,300 km, while the route between these two cities via the Suez Canal is 11,200 km long.

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In 2023, NSR freight traffic amounted to 36.254 million tons vs. 7.47 million tons in 2016. Indonesia cannot ignore this factor if it intends to keep its position as the maritime transportation leader in the Asia-Pacific region.

According to Halldór Jóhannsson, Arctic Portal.org Executive Director, due to the growing economic importance of South East Asia, it is highly likely that the Northern Sea Route will be an increasingly important transport route in the years and decades to come. The Arctic infrastructure has been improved in recent years and this positive development leads to the opening of more business opportunities for all potential users of this additional global maritime route.

Russia has made the Northern Sea Route one of its priorities in the Arctic. Its world's only nuclear icebreaker fleet helps to overcome the NSR ice conditions. The plan for transforming the NSR into an international shipping artery covers many areas from developing the cargo base, transport infrastructure and fleet to ensuring the safety of navigation along the NSR.

International businesses, primarily Asian and Middle Eastern companies, show considerable interest in the transit potential of this route. For instance, in December 2023, the NSR’s infrastructure operator Rosatom and the largest Dubai port operator DP World signed an agreement of strategic cooperation in the global market. As reported by Reuters, under the agreement, the companies intend to create a global logistics operator in order to reinforce the logistical integration of BRICS members with partner countries.

Another important issue is ecology

The growth of Asia-Pacific economies is accompanied by an intense anthropogenic impact on the environment. In Indonesia, the transportation sector (25%) is the second largest source of greenhouse gas emissions after the energy sector (43%). The emergence of new international routes should facilitate the “unloading” of widely used sea corridors.

It is also important that starting in 2024 foreign exporters of goods to the EU will be obliged to compensate for harmful atmospheric emissions when their ships enter the region's countries. Thus, the Emissions Trading System (ETS) will cover CO2 emissions from all large vessels entering EU ports, including ferry operators like DFDS.

To ensure a smooth implementation of the ETS, shipping companies will be granted a transition period. In 2024, they will buy quotas for 40% of their total emissions. This figure will increase to 70% in 2025 and eventually reach 100% in 2026.

Since Indonesia is an active exporter, including of raw materials, the country's authorities pay close attention to this issue. From January to May 2023, overall imports of Indonesian commodities to the EU increased by 45% compared to the same period last year. At the same time, the transportation of goods from Russia to Indonesia via the NSR makes it possible to save on payments for greenhouse gas emissions under European ETS.

Nevertheless, not only Europe is concerned with environmental problems. Russia is actively developing special programs and digital tools for the Arctic. For example, Rosatom regularly evaluates the current state of the environment in NSR waters as a part of the joint project with Lomonosov Moscow State University Marine Research Centre (MSU MRC). This careful monitoring ensures that the intensification of navigation does not harm the environment.

The state of the sea route is monitored by vessels operating in NSR waters. Scientists collect and analyze a vast volume of information in order to track the environmental situation and identify the maximum levels of environment burned along the ship routes. The project relies on new digital services for measuring the shipload, detecting hydrocarbon pollution, calculating the carbon footprint of the vessels, and identifying the breach of protected areas. All this is in line with the interests of Indonesia, which advocates environmentally friendly transportation as long as it is profitable and stable.

“Russia has significant potential in the field of ecology in the Arctic zone,” notes Ivan Petrov, Professor at the Financial University under the Government of the Russian Federation, Full Member of the Academy of Mining Sciences. “And the current regulatory framework allows us to implement industrial and transportation projects only in strict compliance with environmental requirements.”

Smart choice and response to emerging challenges

The energy sector is an essential element of any state's economic activity, while a reliable and affordable energy supply is a driver of Indonesia's economic growth. Amid the events that affect the global logistics system stability on the one hand and the country's high demand for energy resources on the other, shipping security and sustainability have become obvious priorities. In this regard, the NSR can serve as a unique new route with great potential for cooperation in the field of transit freight traffic.

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