In some ways, there could be friendlier climates for business. Norway has no sun for months at a time, winter temperatures plummet to -40C and when the port freezes, everything must be air freighted in from the northern reaches of the country 1000 kilometres to the south. But for those who see an opportunity in braving the Arctic desert, strict environmental policies and a human population that is outnumbered by polar bears, the Svalbard archipelago offers a unique business landscape.
Though the archipelago, stretching up to 81 degrees north in latitude, is usually thought of for its scientific value, natural resources extraction, both on land and in the sea, has long played a part in its economic annals. For more than a century after its discovery by William Barents in 1596, commercial whaling ransacked the whale population in the area. This culminated in the eradication of the bowhead whale from Svalbard’s waters, a loss that factored in the environmental restrictions set by the Norwegian government in the 20th century.
After 1700, Russian hunters and trappers focused on products based on the animals found on land. Polar bear, walrus, reindeer and arctic fox were all hunted. Norwegian hunters arrived in numbers in the mid-19th century, as did the first scientific expeditions. Svalbard became a location for Arctic exploration as well as hunting and by 1900 mineral deposits had been found. Although many attempts were made to extract metals, only coal mining was successful and some continues today.
Treaty of Svalbard
The mining boom led to the creation of permanent settlements, such as Longyearbyen, founded by the American John Longyear in 1906. The territory was officially a no-man’s land, and was ceded to Norway by the international Treaty of Svalbard in 1925. The treaty stipulated, among other things, that Norway as a whole could not benefit from any tax revenue generated in Svalbard, although it could be used to maintain services and administration in the archipelago. Also, only citizens of countries that have signed the Treaty of Svalbard are allowed to engage in business, and do so on an equal footing with Norwegians.
Although mining declined in importance in the second half of the 20th century, tourism has become the one of the main economic drivers. At the same time, recognition that the unique environment found on the archipelago needed to be protected led to a series of laws that cover everything from construction to hunting to transportation. Cruise ships must register their stops in the area and some coasts are off limits.
Because of the rules, a fragile environment exists that is attracting more and more tourists. “We had 60,000 tourists visit in 2006, and half of them came via cruise ships,” says Rune Bergstrom, head of the environmental section of the office of the Governor of Svalbard. “Through proper management, Svalbard can handle double that number.”
Developing the infrastructure to handle the increasing number of tourists is complicated. Construction plans must take the permafrost into account, not only for the building, but also for the utilities that connect to it. “All of our waste has to be packed and sent to the mainland for processing, which is not too high a cost because the ships that supply the islands were often fairly empty,” says Mr Bergstrom. Energy consumption, especially during the months of total darkness and bitter cold, can be quite high. Land is expensive, too. Likewise, the rent for a flat in Longyearbyen, with its 2000 residents, is comparable to that in Oslo.
One firm to take a novel approach to the rigours of building in the Arctic is the SAS Radisson hotel corporation. The dormitory for the US Olympic team for the 1994 Winter Olympics in Lillehammer, Norway, was transported to Longyearbyen and the hotel was created from this core. The Radisson SAS Polar Hotel is billed as the world’s northernmost full-service hotel.
Svalbard was too remote for most mining and scientific endeavours to ship equipment back to the mainland economically, and items from pre-1945 activity are strewn across some old staging areas. Thirty-five locations, including the site of the docking mast for the airship Norge, which Roald Amundsen captained in the first undisputed success in reaching the North Pole, are registered as historic sites.
Mining still takes place, with Norwegian and Russian companies operating in the area. The three mines that are currently open produce almost 3.3 million tonnes of high-grade coal per year – though Russian activity has declined greatly and the mining town of Pyramiden has been abandoned.
An environmental impact assessment is required before any new commercial activity is allowed and sometimes the sticking points are less than obvious. For instance, a Russian company interested in reopening a coalfield with a new face has its primary problems not below ground, but with the environmental impact of the road that would have to be built to make the site accessible.
Although environmental considerations are put first, the Svalbard governorship considers itself business friendly. For instance, no count is kept of the number of foreign-owned businesses. “For us, it’s all about the activity and the nature of the business. For instance, we have 15 tourism companies here now, including Italian and German firms that are long-established,” says Hanne Margrethe Ingebrigtsen, legal adviser to the governor.
Besides handling the increasing number of tourists, these companies also supply logistics, guides and other services for scientific and polar expeditions in the area.
Business life on Svalbard does have its advantages. Taxation is relatively low and Norway’s VAT does not apply there, for example. When deliveries to Longyearbyen arrive by sea, retail prices for products decrease. The difference is large enough that residents are required to use ration cards for alcohol in an effort to prevent smuggling back to the mainland. Visitors must show receipts for purchases and be prepared to pay VAT above minimum quantities of items when entering Norway’s regular taxation zone. Nonetheless, beer, Nordic sweaters and trekking gear are popular purchases on the island.
The tax advantages once led to another activity that echoed the free-wheeling days of the turn of the 20th century. “Since the Treaty of Svalbard stipulated that Norway should not gain from the benefits of any hoped-for bonanza, especially in mining, businesses here are not taxed by greater Norway,” says Ms Ingebrigtsen.
“However, we’ve had some companies try to set themselves up in a manner that turned this into a tax haven. We’ve closed the loopholes and companies registered here must now be resident in Svalbard.”
While Svalbard enjoys its unique status in Norway, unifying the legal framework of the Arctic region as a whole is something that would greatly benefit the administration of the archipelago. Currently, a patchwork of regulations prohibits ships from sailing from one area to another, in part because of the different fuels that are allowed in different areas.
“The challenge for us is to get the same regulations in Greenland, Iceland and Alaska,” says Mr Bergstrom. However, the continued shrinking of the polar ice cap may make circumpolar cruises under the midnight sun a physical reality before they become a regulatory one.
Bringing more tourists to Svalbard is seen as an essential part of safeguarding the Arctic environment. This must be coupled with ensuring tourism is seen through the lens of a local knowledge base, both for cruise operators and guides. “If people don’t come here in numbers and see the bears and the area, and we’re talking about higher income people who have some influence, how can we expect them to be concerned?” Ms Ingebrigtsen ponders.