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Podcasts from Confluence Investment Management LLC, featuring the periodic Confluence of Ideas series, as well as two bi-weekly series: the Asset Allocation Bi-Weekly and the Bi-Weekly Geopolitical Report (new episodes posted on alternating Mondays).
Welcome to the Confluence Investment Management Bi-Weekly Geopolitical Report for 5/27/2025. I'm Phil Adler. The US attention paid to Greenland, which has created headlines recently, should not be ignored by investors. Confluence Associate Market Strategist Daniel Ortwerth joins us today to discuss why Greenland matters. Daniel, I was surprised to learn that the onset of the Trump administration is not the first time The US has offered to buy Greenland from Denmark.
Phil Adler:Could you give us the history?
Daniel Ortwerth:Sure, Phil. It was 1946. World War II had just ended, and the stark reality of the Cold War was just beginning to emerge. As US leadership began to consider the geographic implications of a prolonged confrontation with the Soviet Union, the importance of the Arctic region became immediately clear. If you look at a map of the world with the North Pole in the center instead of the usual way we look at it with the Equator running through the middle, you can see that the Arctic sits right between North America and the expanse of Asia that the Soviet Union occupied, and going over the pole is the shortest path between the two.
Daniel Ortwerth:So with the revelation that we were probably entering a prolonged confrontation with the Soviets and an appreciation of the strategic value of having military presence in the Arctic. President Truman offered to buy Greenland from its owner, Denmark, barely a year after World War two ended. Although Denmark refused, it did enter into secret agreement with The US formalized in a 1951 treaty that allowed The US to develop military bases in Greenland and conduct operations there. This military cooperation continued throughout the forty year Cold War. So when president Trump offered to buy Greenland during his first term in office, citing national security reasons, he was really just reprising an old theme.
Phil Adler:Daniel, the first characteristic of Greenland that you explore in this week's report is its military value. What is it about Greenland's geography which makes it a compelling military asset?
Daniel Ortwerth:Again, if you look at a map of the world from the top, as one might say, with the North Pole in the center, certain things should really grab your attention. The first is the sheer expanse of Russian coastline in the Arctic. Russia has more than half of the measurable coastline in the region, and nearly half of all longitude lines extending from the North Pole southward hit land somewhere in Russia. This is a commanding presence. Meanwhile, The US's geographic presence in the Arctic is limited to Alaska, which is relatively small in terms of coastline and relatively far from the Pole.
Daniel Ortwerth:Amidst this picture, Greenland stands out. Not only is it large, but it is the closest landmass to the pole itself, and it has a considerable amount of usable coastline for military and naval purposes. You could say that Greenland is a sort of Arctic high ground usable as both shield and launch point in a military confrontation.
Phil Adler:Well, only recently has the general public been privileged to understand more fully Greenland's importance to The US during the Cold War. What stands out to you about the role of Greenland in the Cold War?
Daniel Ortwerth:Phil, two things stand out to me. The first is how extensively we used Greenland, and the second is how secret some of it was kept. With Denmark's cooperation, The US established an airbase called Thule, well up the Northwest Coast Of Greenland. That base was a key node in a constellation of outposts called the Dew Line, that's distant early warning, that ran all along the Arctic edge of North America, each one equipped with special sensors to detect Soviet missiles coming over the pole. Among those outposts, Tule was easily the farthest north, the closest to the Soviet Union, and it was intended to serve as a tripwire.
Daniel Ortwerth:If Tule went offline, it might mean an attack was underway. Also, The US built a 10,000 foot long runway at Tule with all the associated infrastructure necessary to support strategic bombers such as the b 52, and we regularly rotated bombers through the base to demonstrate our capability and our will. Now those things were mostly not secret, but other things were very secret. Only recently has it come to light. Deeper inland from Tule, The US built an underground, or should I say under ice, installation called Camp Century that was designed to stage medium range ballistic missiles.
Daniel Ortwerth:Camp Century included an extensive set of tunnels and living quarters capable of supporting a nuclear missile base much closer to the Soviet Union than anything else we had.
Phil Adler:Daniel, the maps in your report demonstrate the major buildup by Russia of military installations across that country's vast section of Arctic territory. But I was surprised to learn that China too has Arctic aspirations. How is China intending to accomplish these?
Daniel Ortwerth:At its northernmost point, China is 900 miles south of the Arctic Circle, so it must get rhetorically creative and develop partnerships with countries actually situated in the Arctic. To that end, China has published official documents in which it refers to itself as a near Arctic state and states its ambition to become a polar great power by 2030. A 02/2018 Arctic policy white paper asserts that developments in the region have a vital bearing on China and lays out Beijing's vision for utilizing the region's natural resources and shaping Arctic governance. Although China's Arctic efforts thus far have taken the form of scientific research, the organization conducting these activities, the Ministry of Natural Resources, also directed the research that provided critical technical support for China's controversial construction and demilitarization of artificial islands in the South China Sea. Its work in the Arctic mirrors those activities.
Daniel Ortwerth:As a next step, China has sought to partner with Arctic countries in investment projects wherever possible, kind of a northern belt and road initiative. Whereas countries targeted for investment of this type had previously been receptive to these investments. In more recent years, Finland, Sweden, Norway, and Greenland have all rejected Chinese offers. Only Russia has continued to proceed with these joint investment projects.
Phil Adler:You make the point in your report that Russia seeks to expand its Arctic influence not only for military purposes, but to help ensure its economic future. The first thing that comes to my mind is the possibility of extensive mineral and energy deposits, but you say that global trade is an even greater attraction. First, how is global warming changing the playing field?
Daniel Ortwerth:Well, Phil, historically, very little freight traffic has flowed through the Arctic region due to ice coverage for most, if not all of the year. However, climate change is gradually expanding the area that is ice free during the summer and lengthening the period that it remains remains so. The coverage of sea ice was relatively stable from 1979 to February, but has since receded by nearly 50%, making the Arctic increasingly viable as a shipping route. This change is drawing strong interest across the range of countries that have a potential stake in using these routes as well as those along whose shores those routes lie.
Phil Adler:So are northern trade routes already being used more extensively?
Daniel Ortwerth:Yes, Phil. They are. 2024 saw record shipping volumes along the Russian Arctic Coast. Now most of this is Russian traffic, especially oil and gas bound for East Asia, but it does include other types of cargo going both east and west, and it has begun to include non Russian shipping. Volumes along the Canadian Arctic Coast are also on the rise, albeit at a slower pace, but they are involving a greater variety of ship types, cargoes, and countries.
Phil Adler:And what advantages do these northern trade routes promise?
Daniel Ortwerth:Phil, these routes are significantly shorter than traditional ones, such as those that use the Suez And Panama Canals. The two main ones gaining attention are called the Northwest Passage and the North East Passage, also known as the Northern Sea Route. The Northeast Passage runs along the Arctic Coast of Russia between the Atlantic And Pacific Oceans and is generally considered to be under Russian ownership. The Russians have been using this route for decades with the help of icebreaker ships. It has until recently been closed to foreign ships, but now the Russians want to open it and are hoping that it will eventually compete with the Suez Canal as one of the most popular shipping routes.
Daniel Ortwerth:The Northwest Passage is a series of possible shipping routes running through the Canadian Arctic Archipelago, also connecting the Atlantic And Pacific Oceans and claimed by Canada. Depending on specific destinations, the Northeast Passage is 30 to 40% shorter than the traditional route going through the Suez Canal, and the Northwest Passage cuts 40 or more percent off most routes using the Panama Canal. Shorter distances mean less transit time as much as ten or fifteen days and lower shipping costs, fuel.
Phil Adler:And how does Greenland figure into the development of these trade routes?
Daniel Ortwerth:Greenland sits right alongside the eastern entry to the Northwest Passage. In keeping with the old adage that possession is nine tenths of the law, geographic position could prove key to controlling and using these shipping lanes. As such, the group known as the Arctic five, Canada, Denmark, Norway, Russia, and The US have a strong natural advantage as the only countries with territory and shoreline in the Arctic region. Among these five, Denmark has the most tenuous position by its ownership of Greenland. As a far flung possession that is already largely self governing but thinly defended, the island is potentially a prime target for any global player that might seek to exert influence or even try to pry it loose from Danish rule.
Phil Adler:Turning to natural resources, are there current real opportunities in the Arctic, or should they be viewed as far off?
Daniel Ortwerth:Well, Phil, we are mostly talking about oil and gas here. Even though the Arctic is estimated to possess 13%, that's 90,000,000,000 barrels of the world's undiscovered conventional oil resources and 30% of its undiscovered conventional natural gas resources. And even though warming temperatures are making those resources relatively more accessible, we are still talking about a very harsh climate. We are still talking about an extraction effort whose costs and dangers are higher than most other efforts at lower latitudes. Now the Russians are used to operating in this environment, and they are working hard to develop their Arctic oil and gas.
Daniel Ortwerth:But, otherwise, I think this might be a far off opportunity. With oil prices at low levels and rising production in other parts of the world, this resource play might incubate until and unless market conditions change. Still, the oil market is extremely hard to predict, and we don't really know just how much the warming trend will change the prospect of Arctic exploration. The day might come when we witness a race for Arctic oil.
Phil Adler:Daniel, you view the competition in the Arctic as another sign of the global fracturing, which is likely to result in more defense spending and long term lead to higher interest rates and the threat of inflation. Are there more positive outcomes from this competition that we should be aware of as investors?
Daniel Ortwerth:Phil, the potential counterweight to the effects of global fracturing is the possibility of a changed global seaborne shipping market. The traditional routes already much longer and more costly have recently suffered disruptions due to drought constricting the Panama Canal and Houthi attacks on shipping in the southern approach to the Suez Canal. Meanwhile, as we said before, both the Northern Sea Route and the Northwest Passage are reporting increasing volumes. If this becomes a sustained trend, it will reduce transportation costs for a range of customers, buoy global trade volumes, and add to global economic growth. In this scenario, we would expect the shipping companies serving the traditional routes to suffer from lower revenues, but we would expect the largest customers whose cargo travels the longest routes, especially companies in the manufacturing and consumer discretionary sectors to benefit from reduced input costs.
Daniel Ortwerth:Just as an example, think of all of those consumer goods made in East Asia and exported to Europe and North America. If the cost and time needed to transport those containers full of toys and clothing items goes bound down by 20 or 30 or 40%, that will result in better profits for the companies who sell those items and lower prices for those who buy them.
Phil Adler:Daniel, as we begin to wrap up here, the new administration elevated the importance of Greenland with its statements about buying or annexing it. Couldn't we accomplish national goals by simply strengthening our current treaty with Denmark?
Daniel Ortwerth:Good point, Phil. In response to president Trump's recent overtures, the government of Denmark has reminded him that the 1951 treaty allowing The US to build and use bases in Greenland is still in force. I think the message for investors is that there is more than one way to find a path forward that works. Once the dust settles on the politics and the rhetoric, we will probably see some sort of solution that involves an increased role for Greenland and possibly the Northern trade routes.
Phil Adler:Last question. Confluence investment management does pay a lot of attention to the influence of geopolitics on investment strategy. Would you say Greenland is a major front geopolitically?
Daniel Ortwerth:It would be more accurate to say that the Arctic region as a whole is becoming an increasingly major geopolitical front due to its geographic position between competing global powers, its increasingly viable role in global trade, and its increasingly accessible resources. Still, with all the attention that Greenland is getting and with the appreciation we have gained from our research for this report, I think it is fair to say that Greenland is an important piece on the Arctic chessboard.
Phil Adler:Thank you, Daniel. The title of this week's report is Why Greenland Matters. You can find a link to the written report which presents some resource and military oriented maps of the Arctic on the Confluence website, ConfluenceInvestment.com. Our discussion today is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice, and this information does not constitute a solicitation or an offer to buy or sell any security.
Phil Adler:Our audio engineer is Dane Stole. I'm Phil Adler.