Nordic governments have, in recent years, moved away from interpreting their relations with China in terms of ‘opportunities’ in favour of ‘risks’. It echoes a broader Western tendency to securitize relations with China, stemming from geopolitical factors – notably, the U.S.-Sino rivalry and China’s close relations with Russia – economic ones, such as China’s global export and investment strategies symbolized by the Belt and Road Initiative, and value-based ones with an ideological focus on the authoritarian nature of the Chinese regime and human rights concerns. Thus, the Nordics have been aligning themselves more with policies adopted by their closest international partners, the United States and European Union, even if they have sought to avoid a confrontational stance towards China and opposed any ideas of ‘decoupling’ from it. I will discuss here Icelandʼs role in this process by focusing on how a policy of engagement has increasingly been influenced by that of disengagement or, in EU jargon, ‘de-risking’ with respect to China. Sino-Icelandic relations have been associated with Chinese influence-peddling in the North, whether in the form of geopolitical or economic expansion. As I show, while there was genuine Icelandic interest in forging economic ties with China after the 2008 global financial crisis, it was not sustained due to internal and external factors. Western interpretations of the bilateral relationship, however, have tended to project it as being static, ignoring the significant changes that have taken place since the early 2010.

In the absence of an East-West confrontation in the 1990s and the 2000s, Iceland, a major Western geostrategic asset during the Cold War, grappled with the question of how to guard against the abandonment of an allied Great Power, the United States, and to respond to rising powers, such as China. Iceland’s initial overture to China was motivated by an economically driven hedging bid – in a time of deep uncertainties – following the collapse of its banking system during the Financial Crisis. What made it easier for Iceland to pursue such a policy without external interference was the absence and non-engagement of its traditional patron, the United States. Having unilaterally ended, in 2006, its long-standing military presence in Iceland, it saw no reason to serve as a guarantor of Iceland’s economic stability as it had done for periods of time during the Cold War. Spurred by material necessity, Iceland’s aim was not to abandon pre-existing relationships with Western states – or to put less emphasis on its close ties with the other Nordic countries or fellow European Economic Area (EEA) and NATO members – but experimenting with non-Western ones and supplementing old ones.

Thus, during the financial crisis, Iceland approached Russia, unsuccessfully, for emergency aid (after being turned down by Western countries) before receiving an IMF bail-out. It then applied for a full EU membership (which was subsequently abandoned), while simultaneously looking to China for economic and trade opportunities, resulting in a currency swap agreement in 2010 and the conclusion of a Free Trade Agreement (FTA) in 2013. The FTA between China and Iceland was, however, far more limited in scope than those concluded between China and countries such as New Zealand, Australia, or Switzerland because it did not cover investments. Chinese investments in Iceland have, in fact, been few and, with one unremarkable exception, not defined as a Foreign Direct Investment (FDI). A different and more menacing geopolitical perception of Sino-Icelandic economic relations was later created by the broadly circulated, if hugely embellished, claim by a U.S. think thank that Chinese investments in Iceland were estimated at 5.7% of GDP from 2012 to 2017. No major investments took, in fact, place in Iceland during this period or after. In another instance of misinformation, it was suggested in 2018 that China was intent on buying two ports in Iceland. Such a plan were never broached with – or presented – to the Icelandic government.

What significantly motivated Iceland’s engagement with China was its foreign policy emphasis on the Arctic as a source of future economic potential, which had become part of its crisis response strategy. It generated ideas about enlisting China in exploring the economic prospects of the transpolar shipping route, with the participation of other potential partners, such as the EU and the United States, and with Iceland serving as a transport hub due to its central location in the North Atlantic. It was, however, a utopian project, which had no chance of being implemented in the prevailing conditions. Hence, the Chinese continued to focus on the Northern Sea Route, which was consistent with their political and economic cooperation with Russia. Apart from Iceland’s strategic location, China’s reciprocal interest in the bilateral relationship was undoubtedly partly motivated by broader Arctic aspirations, such as its application for – and subsequent admission to – the Arctic Council as an observer, which all the Nordic countries supported. Based on a science-focused framework agreement with Iceland, the Chinese also agreed, in 2012, to finance the construction of an aurora observatory, which was later expanded, under a new name, into other areas such as solar-territorial interaction, climatology and glaciology. It later aroused U.S. suspicions that the scientific facility, which is still not fully operational, could facilitate dual-use research with intelligence and military applications in the Arctic. To be sure, all scientific data is accessible to Icelandic scientists, and in an effort to depoliticize the project, there have been overtures to Japanese, British, and French scientists to take part in it. Yet, apart from lingering political doubts, the financing of the research facility was bound to raise questions since it did not involve Icelandic matching contributions. This had made the Icelandic government reluctant to do anything that might be interpreted as supporting the project in a radically different geopolitical landscape than in the early 2010s.

Another attempt, in 2013, at expanding bilateral economic cooperation was the involvement of China’s National Offshore Oil Corporation in oil exploration in Iceland’s Exclusive Economic Zone (EEZ) together with a Norwegian state-owned company and a private Icelandic one. The tripartite project was, however, seen as being economically unfeasible and was later scrapped. Similarly, a plan by a Chinese real estate tycoon to purchase land in northeastern Iceland – comprising 0.3% of the country’s total territory – to develop a tourist resort  failed to materialize in 2013. The notion of using one of the most barren parts of Iceland to develop such a scheme sounded farfetched, raising suspicions of hidden Chinese agendas. The bid was eventually turned down on legal grounds, even if political motives were decisive. Finally, there was much international speculation, bordering on the conspiratorial, about a Chinese connection to the Arctic Circle Assembly – launched in 2013 by former Icelandic President, Ólafur Ragnar Grímsson – which has become the largest annual international conference on Arctic affairs. It was interpreted  by some as serving the geopolitical interests of the Chinese because of the founder’s inclusive global Arctic philosophy, which contrasted with the more exclusive regional one espoused by the eight Arctic states, including Iceland. It was even erroneously suggested that the timing of the initiative had something to do with the Sino-Icelandic FTA or the oil exploration deal. The same applies to unsubstantiated claims about the initiative being financially supported by China or Russia. The Arctic Circle Assembly is first and foremost a personal legacy and nation branding project, with the former President himself playing a central and controlling role in developing its agenda and running it.

Framing the nature and scope of Sino-Icelandic relations exclusively in terms of geopolitics in the North Chinese can lead to exaggerations. Such a one-dimensional approach is usually informed by an ideologically fixed “strategic competition” narrative, involving the United States and China, with little or no room for third party agency or stakes. It reflects the tendency to transpose actions that were taken in 2012–2013 – when engagement with China was part of a normalized economic discourse of ‘opportunities’ – to the present, when it has been politicized as risk-laden due to geopolitical repolarization pressures. Most of the bilateral projects that were launched in the aftermath of the Icelandic financial crisis have had a mixed record, with notable failures, such as the land purchase attempt, the oil exploration deal, and the transpolar hub idea. Some interpretations of the bilateral relationship dealing with the FTA, which has only had a modest impact, and the Arctic Circle project had more to do with political fiction than facts. The one cooperation project that is still alive involves the Arctic science observatory, which is mired in controversy due to the political sensitivity surrounding it and because of Chinese refusal to finance repeated cost overruns.

What needs to be stressed is that after Iceland’s far quicker than expected economic recovery, the material incentive for it to become involved with China lessened. Hence, Iceland preferred to sticking to its traditional political and economic ties with the West. Moreover, when faced with renewed U.S. interest after Russia’s annexation of Crimea, Iceland became part of a return to a Cold War-style balancing policy. Beginning in 2016 – or only a decade after it closed down its military base in Iceland – the United States has been gradually reestablishing a military presence in the country. The U.S. motivation is, however, not only about responding to a belligerent Russia but also about reducing the influence of China in the North. As a member of a Western club, Iceland’s conformist behaviour within it has, to a large extent, been reaffirmed after a period of a hedging experimentation stemming from a hiatus in  Western political and military interest and from the effects of the most serious, if short-lived, financial crisis in its post-war history.

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This article gives the views of the author, and not the position of the China Foresight Forum, LSE IDEAS, nor The London School of Economics and Political Science.

The cover image of the 2019 Artic Circle Meeting in Shanghai by Arctic Circle is licensed under the CC BY 2.0 licence, via Flickr.