The Varða Briefing #2: Moving out of the "low-tension" zone

Hello,

In today’s edition we look at how Iceland is moving out of its “low-tension” comfort zone: NATO expectations rising, climate and digital risks edging further onto the security agenda, sanctions being tested in court, and the US guarantee looking a little less automatic. Against this backdrop, we open with a short note on Varða’s public launch before turning to developments in Reykjavík.

In late November, Varða formally launched its public-facing work. We commissioned an independent analysis of Iceland’s new security and defence policy from Charlie Edwards at the International Institute for Strategic Studies (IISS) and presented it in a series of briefings, including a closed roundtable with officials and experts. If you or your organisation is interested in a briefing on the new policy, get in touch and we’ll be happy to set one up.

Varða has also opened its public channels – a new website and LinkedIn page – where we’ll share analysis, events and short updates as our work develops. This newsletter, the website and LinkedIn will be the main places to follow what we’re doing.

During a 27 November visit to Reykjavík – his first as NATO secretary general – Mark Rutte endorsed the government’s plan to raise defence and resilience spending to 1.5% of GDP by 2035, calling it “enough, for now,” while stressing that the alliance “needs more from Iceland” and describing the country as NATO’s “eyes and ears” in the North Atlantic. What will actually count toward the 1.5% target, and how additional spending will be allocated, remains to be defined in Reykjavík and in ongoing NATO work on capability targets.

Rutte’s visit coincided with a NATO-funded package of up to ISK 10bn (around EUR 70m) to expand fuel storage and build a new quay at Helguvík by the Keflavík airbase. Foreign minister Þorgerður Katrín Gunnarsdóttir used the announcement to underline that Iceland is no longer a low-tension area, saying the investment reflects a changing threat environment and that more allied warships are likely to call “simply to increase visibility here in the North Atlantic,” given that “there is a significant threat from Russia and it has not diminished in this area.” She called the project “hugely important to ensure security and defence in the High North” and said it shows that Icelanders are “worthy allies within NATO.”

Iceland’s 2026 draft budget raises the foreign ministry’s security and defence line from ISK 8.9bn to about ISK 10.4bn, an increase of roughly 17%. This line, around 0.2% of GDP, reflects only the MFA-managed share of security spending; relevant expenditures remain scattered across other ministries and agencies. Iceland nevertheless remains well below the 1.5% of GDP target for 2035, with current expenditures estimated at ~0.7-0.8% according to sources. At today’s GDP levels, the benchmark Iceland needs to achieve would imply annual security- and defence-related spending in the range of ISK 75–80bn.

Support to Ukraine remains a key driver within this envelope: since Russia’s full-scale invasion in 2022, Iceland has committed about ISK 13.3bn in total support, roughly half of it defence-related (including via the Danish model for Ukrainian defence industry), and the 2026 budget keeps assistance broadly in line with current levels.

Reykjavík District Court has upheld Iceland’s first use of Russia-related trade sanctions against domestic machinery maker Vélfag, rejecting the company’s attempt to unfreeze assets and seat majority owner Ivan Nicolai Kaufmann as chair. Kaufmann has said he will appeal the ruling, including to European courts if needed.

The case turns on whether a hurried 2025 share sale genuinely severed Vélfag’s ties to Norebo, the Russian fishing conglomerate owned by oligarch Vitaly Orlov and on the EU sanctions list for its role in the shadow fleet and attempts to undermine European stability, or whether, as the foreign ministry contends, the transaction was a sham and effective control remains with sanctioned interests. RÚV reports that the ministry holds information linking Kaufmann to the FSB.

The case is a welcome signal of the authorities’ willingness to enforce sanctions and shows effective cooperation between the Ministry for Foreign Affairs, the Central Bank and Arion Bank, which froze Vélfag’s assets. At the same time, it has clearly been difficult for the government: foreign minister Þorgerður Katrín Gunnarsdóttir has described it as “a complicated case, a difficult case for many reasons. I have in fact not experienced comparable pressure for a very long time, or generally not in my political career,” while declining to say where that pressure came from or how it manifested.

Iceland drew global attention (Reuters, CNN) after climate Minister Jóhann Páll Jóhannsson requested that the potential collapse of the Atlantic Meridional Overturning Circulation (AMOC) be formally discussed by both the Cabinet and the National Security Council. This follows growing scientific concern and high-profile warnings, including an open letter presented at the 2024 Arctic Circle Assembly.

Jóhann Páll Jóhannsson says the discussion should lead to a coordinated push on worst-case preparedness, including disaster planning and risk mapping. For now, however, it remains unclear what this will mean in practice: there is no published national threat or risk assessment or publicized process on what happens if and when a phenomena is brought to the NSC and political ownership of next steps has yet to be clarified.

The new US National Security Strategy, with a softer line on Russia and sharp criticism of Europe, has sparked concern in Reykjavík that NATO cohesion – and thus Iceland’s outsourced defence model – may be entering a new phase. Analysts argue that this makes it necessary for Iceland to have a serious conversation about the reality of its supposedly “rock solid” security relationship with the US, a concern echoed at Varða’s recent roundtable, where the only mention of US relations was whether that relationship could be trusted.

Foreign minister Þorgerður Katrín Gunnarsdóttir has sought to reassure, calling the strategy “a political document” and stressing that “there is nothing in it that says the defence or security interests of Iceland are threatened,” while also warning that US support for far-right parties that want to weaken the EU is “not in Iceland’s interest” because “it is in Iceland’s interests that Europe is strong.” Pawel Bartoszek, chair of the Foreign Affairs Committee, likewise emphasises continuity, arguing that Iceland’s bilateral defence agreement with the US still rests on clear mutual interests – Iceland receives protection from the world’s largest military power, while the US secures a strategically located North Atlantic hub – and on shared democratic values, even as he notes that sovereign states are bound to be sceptical when outsiders signal preferences in how they should be governed. 

On 18 November, a multi-hour Cloudflare outage knocked several key Icelandic websites offline, including RÚV, Alþingi and the Government Offices, prompting fresh questions about Iceland’s digital resilience. Commenting on the outage, cybersecurity expert Anton Már Egilsson (Syndis) said it highlighted how dependent Iceland is on foreign service providers and how quickly services fail when a single node or provider goes down. The episode adds momentum to emerging debates about Iceland’s comparatively limited digital sovereignty and how to strengthen it.

If you’ve made it this far, thank you. We’re still adjusting scope and depth, so any feedback on length, focus or missing topics is very welcome – just hit reply! If you are interested in deeper briefings on these or other topics, do reach out.