Small states in 'Big Power' games

Nowadays it is China.

The Chinese are all over the island. In 2015 Iceland became the first country in Europe to sign a trade agreement with China, mainly to boost the export of Icelandic fish.

With loans from the Asian Development Bank, Icelandic companies are helping to develop a geothermal industry in China. Since 2010 there have been several currency swaps between both countries.

In 2018 both opened an Arctic Science Observatory in the north of the island. In the same year China invited Iceland to join its Belt and Road initiative.

There is only one case in which Iceland is known to have said no.

That was in 2011, when a Chinese property tycoon wanted to buy a huge plot of land in the east of the island to build a golf course. The area was close to a harbour. Fearing it could be turned into a military port or airport one day, Reykjavik refused.

Inspired by his country's recent geopolitical somersaults Baldur Thorhallsson, an Icelandic political scientist, wrote a book called Small States and Shelter Theory; Iceland's External Affairs.

It's a case-study about a small country that is eternally looking for protection but never finds it - not permanently, at least. Each time when geopolitical shifts occur, the country has to start all over again.

After five centuries of foreign domination, Iceland obtained independence from Denmark in the 1940s. It immediately began to seek shelter again, and found it with the US.

It also nurtured close ties with Denmark, Norway, Sweden and Finland. During the Cold War the international system offered small countries some degree of protection against the domination of large countries.

For decades this worked well. Long enough, in any case, to give Icelanders the illusion they were safe.

Then, in 1989, the Berlin Wall came down. Beyond the idea that capitalism had triumphed and that the rest of the world would now become democratic, many Icelanders initially had no clue what the consequences of this would be.

That suddenly changed in 2006, when the US announced the closure of the first military base in Europe - the one in Iceland. The island didn't even have a defence budget.

From one day to the next, Icelanders felt vulnerable again and started looking for shelter once more. Small countries, argues Thorhallsson, are more vulnerable than large ones - politically, economically and militarily.

They are not only likely to be hit by crises and attacks but, more crucially perhaps, they are totally on their own when it comes to cleaning up afterwards.

Banking on Iceland

This became clear when, in 2008, the financial crisis hit. Iceland, with its oversized banking sector and lax oversight, was heavily affected. Most banks and companies went down, bankrupting the state in the process.

In the old reflex, Reykjavik asked the US for help – in vain.

It then turned to Nordic neighbours and the European Free Trade Association (EFTA), of which is it a member, for assistance. But nothing obliged those countries – all of whom have found shelter inside or in very close relationship with the EU - to provide for financial solidarity.

Then, Iceland applied for EU membership.

This didn't go well either. Iceland refused to subject its fisheries to EU rules. Moreover, Brussels sided with Dutch and British depositors in Icesave, an Icelandic bank that had gone bankrupt, supporting their demand for compensation by Iceland.

Reykjavik took this very badly.

The message of all this was inevitable: small countries in a geopolitically shifting world are on their own. This is the price of sovereignty - as the British are discovering, too.

Iceland has trouble trusting the EU since the Icesave affair. But it is a member of Nato and EFTA. With its Nordic neighbours it patrols airspace, organises student exchanges and works on cybersecurity.

It is reaching out to the UK, the other lone wolf on the edge of Europe, with whom it has just formed a defence alliance. But somehow little Iceland, with just 365,000 inhabitants, looks more interested in this than the UK.

During the financial crisis, the first countries offering loans to Iceland were Russia and China.

A fine choice for a country that places itself in the Western camp. Disbursal of an IMF loan was initially blocked by the UK and the Netherlands, who demanded compensation for Icesave depositors first.

Svein Harald Øygard, a Norwegian who presided the Icelandic Central Bank in that period, says that although the Icelanders had created the mess themselves, the British and Dutch behaved "like a pack of wolves".

It was at this stage that China came into the picture. Slowly it started to fill the void the EU left behind.

After the initial trade agreement there have been several Chinese initiatives that the Icelandic government has engaged in: tourism projects, green energy, polar shipping and scientific research.

Chinese investment constituted almost six percent of Iceland's average GDP over the past five years.

Reykjavik even helped China to get a seat in the Arctic Council, as an observer. With Russia rapidly stepping up its interest in the arctic, the Chinese move raised eyebrows all over the region. China published an Arctic policy in 2019.

Is Iceland repeating the same mistake again: over-reliance on one big ally? Resenting this Chinese involvement, the US has suddenly shown a renewed interest in Iceland.

Secretary of state Mike Pompeo came to Reykjavik last year, thanking the government for "rejecting" China's offer to join Belt and Road. But Iceland has not rejected that offer – it is under consideration.

"Iceland won't be neglected anymore," Pompeo said. But somehow this doesn't sound like shelter. It sounds more like great power competition, in which small states can be crushed – especially when they're all on their own.