Finland: Doomed Without Russia

Finland: Doomed Without Russia

The Deutsche Bank analysts sound alarm. In the second quarter of this year the German economy shrank by 0, 2%. It happened for the first time since 2012. It makes reconsider the plans for the second half of the year. Before the forecasts predicted a modest growth by 1, 9% in 2014. 

Only last year the opinion prevailed that Germany managed to get the European economy out of recession. It went up by 0.7% in the first quarter of this year. The worsening of relations due to the crisis in Ukraine and blind compliance with the Washington’s anti-Russia policy have brought to naught all the previous optimistic forecasts. As the Wall Street Journal reports, the revival of eurozone was too fragile to remain stable under the weight of outside shocks and geopolitical tensions. France faces stagnation and Italy has entered recession. According to Peter Vanden Hut, economist at ING, high growth rates could be expected in the second half of the year, if it were not for geopolitical tensions. Vanden Hut believes that this factor continues to have a negative impact on business sentiment and undermines domestic economy in the eurozone. 

The political steps taken by Washington and the European Union evoke great concern among businessmen who can lose the enormous and dynamic Russian market. But Brussels cannot admit mistakes and change the policy: the inertia of mentality and the grip of Euro Atlantic solidarity are too strong. The EU leadership is testing the ground to see where it stands with Russia. That was the main purpose of Finish President Sauli Väinämö Niinistö’s visit to Russia. He met Russian President Vladimir Putin in Sochi on August 15. The talks could be seen as a cautious attempt of the European Union to ease tensions in the relations with Moscow. «We have contacted our Western partners, and they have shown understanding of this meeting», the President said. «I hope we will be able to start an open and honest discussion. I do not consider myself a great peacemaker but I believe it is highly important to open a dialogue». 

It would not be an exaggeration to say that this is a matter of survival for Finland. The country occupies a special place in the relations between the European Union and Moscow with 10% of Finish exports going to Russia. According to Russian Federation of food industry, Russia accounts for about 25% of Finland’s agricultural production exports. The processed foodstuffs make up a large part of it while two thirds of agricultural products export to Russia falls on dairy. The sanctions imposed by Russia may cost Finland around 400 million euros. 

The structure of economic relationship makes Finland tied to Russia more closely than other European Union states. According to Finland’s Chamber of Commerce the food embargo regime will affect almost every second Finish company – 47%. 

The energy sanctions planned by the West may hurt the Finish economy even more. Russia remains Finland’s largest source of imports and the second largest trade partner for the country’s exports. The vast majority of imports from Russia - over 80 percent – are energy commodities. About 70% of the energy consumed by Finland comes from Russia. Actually it accounts for all supplies of mineral coal, crude oil and natural gas. Meeting his Finish counterpart, President Putin noted that Russia remains Finland’s number one trade and economic partner.

No wonder Prime Minister of Finland Alexander Stubb was the first European Union leader to openly warn about the negative consequences of worsening relations with Russia, «This has the potential - and I stress potential - to become economic crisis 2.0», he told reporters, adding that the indirect impact of the sanctions could be significant for Finland. Looks like he did not exaggerate. The Finish economy has been shrinking for the last two years. Experts mention the slump in electronics and paper production. The Finish Finance Ministry was cautious enough predicting economic growth of 0, 2%. But if the slump will hit agriculture and energy sector the country’s economy will simply crumb. 

Panic is rampant in Finland. Valio is a well-known Finish brand. It has already announced that the manufacture of its products destined for Russian export is halted. According to Pekka Laaksonen, the Valio’s CIO said the sanctions are a heavy blow for the company with almost 90% of Valio Russian market sales being imported from Finland. 

The cooperation with Moscow goes deep down in history and it has seen glory days. As far back as 1908, three years after Valio was founded, Finland (being part of Russian empire) started butter sales to Russia. Russian emperor Nicolas II liked it and soon the company became a supplier of His Majesty's Imperial Court. In 1914 it opened an office in St. Petersburg. In the days of Cold War Valio was the only supplier of dairy to the Soviet Union besides the countries-members of COMECON (the Council for Mutual Economic Assistance). In 1980 this Finish company was an official and the only dairy supplier during the Moscow Olympics. 

Until recently Valio exported half of its production to Russia. The two world wars and the Cold War have failed to eliminate what the Brussels’ strategists are trying to do away with now as their understanding of history and contemporary trade-economic relations is sliding down to the level of Wild West cowboys. 

The leadership of the European Union let it know that no compensation is planned to make up for Finland’s losses. The country may face a political shock. According to the Financial Times, the sanctions imposed on Russia by the European Union and the retaliatory steps taken by Moscow give rise to speculations the incumbent government is heading for a defeat at the general elections in April 2015. 

Pasi Sorjonen, an economist at Nordea who recently published a note called «Depression Is Here», says the economy could contract for four consecutive years from 2012-15. «It seems that getting back to the GDP volumes of 2008 will take 10 years. It’s like a double recession», he says.

The Financial Times cites Prime Minister Stubb saying the situation is similar to the 1990s when Finland faced a deep financial crisis before the rise of Nokia. 

The daily also quotes Jukka Tarkka, a former MP and historian specializing in postwar Finland, who says the chance of snap elections in the autumn is a possibility. «Mr. Stubb’s first big task is to try to help the leader of the Social Democrats stay alive», Tarkka said.

The emerged hardships hit many more countries besides Finland. Experts of Denmark's largest bank Danske said in their report devoted to consequences of the crisis in Ukraine for the European economy. «The escalation of trade war is unbearable for the European Union».