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Iceland: From crisis to hotspot, 10 years on from the financial crisis

Jack Torrance
Iceland is having to look at new ways to expand its economy as growth in the number of tourists, many of whom visit the Blue Lagoon, begins to slow - AFP

On the mossy, volcanic tundra of Iceland’s Reykjanes peninsula, Orf Genetics’ glass and metal greenhouse stands out like a sore thumb. 

Inside, tens of thousands of barley plants will be carefully tended for 90 days before being sent down the road to the sparsely populated country’s capital Reykjavik for processing.

The fodder crop was a staple in the Icelandic diet centuries ago and has made a comeback in trendy restaurants in recent years, but these plants aren’t for eating. 

They have been genetically modified to contain growth factors, a type of protein whose uses vary from skincare products to sweeteners and stem cell research. 

Orf isn’t typical of companies in a country whose economy is built on fishing, aluminium smelting and more recently tourism. But it is exactly the type of enterprise Iceland’s government is keen to encourage as it looks to make better use of its traditional industries and national resources to find more sustainable avenues of growth 10 years on from its crippling financial crisis.

Orf Genetics grows GM barley in its greenhouse on the Reykjanes peninsula

Iceland was among the worst countries hit as global banks and investment firms went into meltdown in 2008 and 2009. 

Having been deregulated earlier in the decade its three big banks, Landsbanki, Kaupthing and Glitnir, had got fat on foreign debt that allowed them to grow their assets to ten times the value of the country’s GDP. When nervous overseas lenders began to call in what they were owed, they came crashing down. 

“Things got really sour,” says Bjarni Benediktsson, Iceland’s finance minister. “They say that banks can get too big to fail, in our case the banks were too big to save. There was just absolutely no chance even if we wanted to try to bail them out.”

Some senior bank bosses ended up in prison and a series of angry demonstrations in Reykjavik led to the resignation of the then prime minister Geir Haarde. 

The country took an IMF bail-out and imposed capital controls and GDP plunged sharply, by 6.5pc in 2009 and another 3.5pc the following year. 

Iceland's fisheries are among the most bountiful in the world

But the downturn didn’t last long. The value of the Icelandic krona halved, boosting exports and kicking off a tourism boom that drew in millions of visitors keen to scale glaciers and volcanoes, bathe in the milky-blue warm waters of Blue Lagoon and try exotic delicacies such as hakarl, a fermented shark dish usually accompanied by the local tipple brennevin. 

Annual tourist numbers grew more than fourfold as more people visited Iceland in the seven years to 2017 as did in the 62 years hence, according to research by Arion Bank. 

That has fundamentally changed the shape of Iceland’s economy, meaning that tourism exports are now worth more than aluminium and seafood combined. 

But while tourism helped Iceland get back on its feet, the sector can only grow so big without causing problems. Locals complain of congested roads and high property prices as homes in Reykjavik are used as Airbnbs to make up for the lack of hotel rooms in the busy summer months. 

They say that banks can get too big to fail, in our case the banks were too big to save

Bjarni Benediktsson, Iceland's finance minister

The Federation of Icelandic Industries estimates there is an infrastructure spending shortfall of £3bn, equivalent to 10pc of GDP. 

Having soared by 40pc in 2016, growth in tourism numbers is finally beginning to slow down, not least because of the surging value of the krona, which has left British tourists shelling out £10+ for a beer in most of Reykjavik’s bars. 

Blue Lagoon hopes to maintain momentum by focusing on very well-off travellers, recently opening a luxury hotel with its own private lagoon whose rooms start at 144,000 krona (£1,000) per night. But the government is under no illusion that Iceland will need to find new areas to excel at if it wants to keep growing. 

“We have fish, we have energy and we have tourism,” says Thordur Hilmarsson, who heads the state-backed agency Invest in Iceland. “We need more in order to stabilise the economy.” 

Iceland exports

That’s not to suggest Iceland’s traditional strengths won’t have a role to play, however. 

You can spot Iceland’s geothermal energy plants from miles away, as plumes of stream creep over the crests of hills, adding gloom to an already moody landscape. Drawing nearer, pipelines begin to sprout out of the ground, carrying thousands of litres of boiling hot water from space age-looking wellheads to the power stations themselves, where they will be used to power turbines that feed into the country’s electricity grid and heat fresh water that is piped to people’s homes. 

Iceland isn’t the only country with geothermal energy, but it is able to exploit it to a much greater extent than anywhere else because of its location on top of a gap in the earth’s crust, that allows molten magma to seep into the ground below. 

Icelanders descended on the centre of Reykjavik in 2008 to protest the government's handling of the financial crisis

“Here we are blessed – we drill fairly shallow wells and we get very high temperature, high pressure [water],” says Auður Nanna Baldvinsdottir of Landsvirkjun, the national energy company. “If it wasn’t for geothermal, I don’t think we could live here with the quality of life that we have.”  

Geothermal contributes around 29pc of Iceland’s total electricity usage, which combined with the power from its hydroelectric dams means it is the only country in the world whose electricity is totally renewable.

In fact Iceland has much more energy than it actually requires to power its homes and domestic businesses. It can’t export this abundant electricity (at least for now – talks occasionally surface about running a power cable to the UK). 

So instead between the Sixties and 2007 the government lured three North American aluminium companies, Alcoa, Rio Tinto Alcan and Century Aluminum, to open smelters on its shores, which between them consume a whopping 70pc of its electricity output. 

They have brought a solid flow of cash and high-skilled jobs with them but there are concerns the island’s infrastructure and environment would struggle to cope with any more.

We have fish, we have energy and we have tourism. We need more

Thordur Hilmarsson, Invest in Iceland

“I don’t think there is space for another aluminium smelter in the near future,” Benediktsson says. “What we would like to see is more diversity in terms of the businesses that come here that are energy intensive.” 

That includes companies like Orf, whose greenhouses are kept at a toasty temperature year round by geothermal heating. 

Most of its plants, which are grown in volcanic ash instead of soil because it contains less bacteria, are used to produce a protein called epidermal growth factor. 

Some of that is sold to stem cell researchers but the majority ends up being used as an ingredient in the company’s Bioeffect skincare products, which are manufactured domestically but shipped out to high-end department stores including Harrods and Liberty of London where they are sold for £100+ per bottle, generating £50m of annual sales.   

With the high value of the krona, it’s “not the optimal location for manufacturing”, admits Frosti Ólafsson, Orf’s chief executive, but “as a cosmetics brand with the strong scientific element in our story, it is very important to have Iceland as part of our image”. 

Iceland has an abundance of geothermal energy

Another industry lured in by Iceland’s energy supply is data centres, which look after other companies’ computer servers. Verne Global is headquartered in the UK but chose to put its 200,000 sq ft data centre at Keflavik, the former Nato base which is also home to Iceland’s main airport. In other countries the cost of cooling can account for around half a data centre’s energy costs, Verne’s Styrmir Hafliðason says, whereas in Iceland they need only open a grate in the wall and suck in the chilly air from outside. 

“Iceland has that perfect equilibrium for running and maintaining data centres,” he adds. 

The good conditions have attracted users of cryptocurrencies such as Bitcoin, which take vast amounts of power to “mine”. 

But while Verne caters to those in one of its vast, noisy data halls, it is keen to grow its premium “tier three” service, which has been used by the likes of BMW and Volkswagen to design cars and simulate the effects of wind and crashes.

Iceland is perhaps most famous for its seafood. Its fiercely-protected fisheries are among the world’s most bountiful, providing 1.2m tons of cod, whiting and other species last year, and supporting tens of thousands of jobs both at sea and in numerous processing plants. 

But Thor Sigfusson thinks the industry could be “so much better”. He started Iceland’s Ocean Cluster, an incubator above a former fish market by the harbour in Reykjavik’s up-and-coming Grandi district that provides space and occasionally investment for entrepreneurs looking to turn bits of cod into more premium products. 

His “Silicon Valley of white fish” is home to companies making everything from fish leather shirts and wallets to collagen powder, fish skin wound dressings and premium “extra virgin” cod liver oil. 

“Sadly we’re meeting so many fishermen who take the fillet and throw the rest of the fish away”, he says. “From one cod we can maybe get $12 for the fillet. But if we use the whole round we can get $3,500 for each cod.” 

If it wasn’t for geothermal in Iceland, I don’t think we could live here with the quality of life that we have

Auður Nanna Baldvinsdottir, Landsvirkjun

So far the companies are mostly in their early stages but the cluster has attracted the attention of two of the country’s big fish processors, Visir and Thorbjörn, who chose it to house Alda, a joint venture producing collagen-infused lemonade. 

Kerecis, another Icelandic company that makes wound dressings from fish skin, has landed work with the US Department of Defence. 

“When we started, so many academics told me it’s great that you’re trying but the fact is, our growth isn’t going to come from seafood,” says Sigfusson. 

“But I thought to myself why should that be the case? Of course we’re not going to catch more, but we can do much more with less.”