Finland’s economy suffers from effects of the Ukraine crisis

Finland’s economy suffers from effects of the Ukraine crisis

The situation in Ukraine is creating a dangerous standoff between Russia and the West, and Finland’s economy and security are suffering as a result.

With a 1,300-km long border separating them, it is no surprise that a major priority for Finland is to maintain a sustainable relationship with Russia. At the same time, it is also important for Finland to promote strong ties with the rest of Europe, and one of the fundamental factors of Finnish decision-making is its European Union membership.

In general, Finland has managed to keep this balance remarkably well. Even during the Cold War decades, Finland found ways to successfully integrate with the European project without upsetting the Soviet Union. For instance, instead of joining the European Free Trade Association (EFTA), certain aspects of which would have strained ties to the East, Finland negotiated a special agreement in 1961 aptly named FINN-EFTA.

The Financial Times even recently suggested that Finland’s past experience can be used as a model in the Ukraine situation. However, circumstances have changed to the point that Ukraine’s own decisions are shadowed by big-power politics. Russia is engaging in a binary tit-for-tat struggle with the U.S. and EU, while Ukraine is shakily seeking to minimize tensions.

Simultaneously, Finland is suffering from the worsening ties between Russia and the West. Russia accounts for almost 10% of Finnish exports, and Russian investment and tourism are important injections to the Finnish economy. An obvious consequence of the Ukraine crisis is that it has weakened the Russian economy and depreciated the ruble, having an immediate impact on Russia’s economic relations with Finland.

In turn, Finnish companies in Russia, excited about an expanding Russian market, are now unsure of their future revenue. Russian tourists to Finland are also spending less, and the West’s targeted sanctions are even affecting Russian ownership in Finland. The timing of such losses is particularly bad – Finland is struggling to restructure its economy after the shocks of the Eurozone crisis, and the IMF has already lowered its estimates of Finnish growth in 2014 to 0.3%.

As a result, EU sanctions against Russia have become a hot topic in Finnish domestic politics. Increasing sanctions against Russia will be painful for Finland in two ways: it will further obstruct its own bilateral economic ties with Russia, and it may spark retaliation from Russia aimed at the EU.

With European Parliament elections in May and Finnish parliamentary elections in April 2015, Finnish parties are taking a strong stance on sanctions. The broad six-party coalition government suffers from internal disagreement at a time when it is debating sensitive government budget reforms, and the oppositions’ eurosceptic Finns Party argues that Finland should focus more on relations with Russia than abiding by crippling EU decisions.

But what would happen if Finland did decide to focus on its own bilateral relationship with Russia and ignored honoring EU sanctions? Despite this being more or less legally impossible, it would undeniably be met with severe criticism from other European countries and the United States. Finnish soft power in promoting democracy and human rights around the world would also suffer a heavy blow. Nevertheless, Finland can still try to put significant brakes on any future sanctions.

Apart from the seemingly lose-lose position Finland faces with EU sanctions, there is obviously also a security dimension. The Ukraine crisis evokes more and more Cold War-reminiscent behavior from all sides, and the fragile situation could very well escalate in unpredictable ways. Russia’s actions have spurred calls for NATO action in the Baltic countries, and if NATO were to take action, it would certainly be met with a mirrored response from Russia. This sort of a scenario is in no one’s interest, least of all Finland’s.

On the other hand, Russia is conducting military exercises close to the Finnish border. Even though these drills are a routine occurrence, the fact that there are suspicions of Russian plans to expand into Eastern parts of Ukraine does little to ease Finnish anxiety. For example, though Finland is not a member of NATO, polls show an increase in Finnish support for NATO membership.

If Russia suffers, so does Finland. This is why it is in Finland’s best interest to find a swift and peaceful resolution to the Ukraine crisis as soon as possible. The long-term damage of the crisis has yet to reveal itself, but any increase in tensions will severely jeopardize both Finnish economic growth and security.

Luckily, Finland is not alone in its ambition for stability. Notably, EU countries such as Germany are having a hard time swallowing the potential impacts of issuing sanctions, and the EU is hesitant to provoke a Russia-induced energy shortage. The interim Ukrainian government has made praiseworthy moves in calling for a demilitarized zone in Crimea and ruling out involvement in either NATO or the Russian-backed CIS.

With any luck at all, the UN secretary-general Ban Ki-moon’s visit over the weekend will further promote a rapid, diplomatic solution. Indeed, if Finland hopes to preserve its delicate balance between East and West, something good has to happen soon.

Categories: Economics, Europe

About Author

Karl Sorri

Karl has gained global experience working at the Transparency International Secretariat in Berlin, the Political/Economic Section of the U.S. Embassy in Helsinki, and as a freelance journalist. Karl holds an MA in Politics from the University of Glasgow and an MSc in International Relations from the London School of Economics.