Putin Beats EU as Finland Rediscovers Soviet-Era Trade: Economy

Finland, which lost its biggest trading partner when the Soviet Union collapsed, is now pegging its export recovery on Russia.

Sprawled over nine time zones, Russia has once again emerged as a destination for the Nordic nation’s exports and a source of imports. Trade has more than doubled and investment flows from Finland to Russia have jumped eightfold over the past decade.

With Finland’s erstwhile powerhouse Nokia Oyj on the ropes after losing the smartphone battle and the euro area experiencing its longest recession, companies peddling everything from cheese to forestry equipment to real estate ventures are finding growing markets right on their border in the world’s largest energy exporter. The development underscores a post-crisis shift away from Europe and toward economies buoyed by more growth potential.

“It’s become more pronounced in the past few years that Russia has provided stability amid volatility in many of the other main markets,” said Jaakko Laurila, who heads the Russian unit of Ponsse Oyj, a maker of harvesters and cranes used to handle timber. “Russia has become even more important.”

Increasing trade and investments eased the impact of the euro area’s debt crisis on Finland, which has endured two recessions in four years. The development has also helped improve ties between Finland and Russia, neighbors who share a 1,340 kilometer (833 mile) border and, at times, a troubled history.

‘Growth Outlook’

Finnish exports to Russia have grown 143 percent in the past decade while direct investments rose eightfold to 3.2 billion euros ($4.3 billion), according to the Bank of Finland. About half of Finnish exports are to the European Union, unchanged in the past 10 years, while Russia’s share of Finnish exports has risen to 10 percent from 7.5 percent.

“As Europe’s economic growth slowed and the economy plunged into a recession, Russia continued to grow,” Seija Lainela, an economist at the Bank of Finland Institute for Economies in Transition, said by phone. It’s attractive for companies “because of its large size and growth outlook.”

Companies that are expanding eastward include Valio Oy, Finland’s biggest dairy company, which sells cheese and yogurt. Kesko Oyj, Finland’s biggest listed retailer, has opened 37 stores in the country and YIT Oyj, its biggest residential builder, is constructing almost 10,000 apartments and gets a quarter of its revenue in the country.

‘Frosty Night’

This growth is helping rebuild what Finland lost on a frosty night on Dec. 25, 1991, when the Soviet Union ceased to exist and Mikhail Gorbachev stepped down.

While trade between the countries began centuries earlier, it intensified after 1945, following two wars and as Finland was forced to pay reparations in the form of trains, ships and machinery. That laid the foundations for much of Finland’s metal industry, which evolved to service Soviet five-year plans. Textiles were another staple.

Then trade plunged in 1992 after the Soviet Union fell apart. Russia’s share of Finnish exports fell to a peace-time low of 2.8 percent from as high as 26.7 percent in 1982.

One change since Soviet times is that the goods Finland sells to Russia are also now viable in other markets.

‘Much Healthier’

“We sold in the Soviet Union products that might not have been bought elsewhere, such as textiles and footwear,” Lainela said. “When the Soviet Union collapsed, trade in those goods vanished along with the industries. The current situation is much healthier.”

Russia’s economic potential and market structure, as well as its proximity all add to the nation’s appeal as a trade partner, according to Markku Kotilainen, an economist at the ETLA research institute in Helsinki.

“Globalization and urbanization are late in Russia and consumers’ spending patterns are shifting,” he said. “Niches form in the market. The fact that Finland dominates foreign direct investments between the countries is due to the technological know-how we have,” he said.

Finland is betting it can boost its economic ties with Russia without succumbing to political pressure that’s being exerted on other neighbors such as Ukraine.

Russians’ direct investments in Finland have grown 72 percent over the past decade to 583 million euros, according to the Helsinki-based central bank.

Political Concessions

Markku Kivinen, professor at the University of Helsinki and the head of its Russian research institute, said Finland’s EU membership helps shield it from attempts by Russia to exert influence.

“Finland’s in the EU and pays global market rates for its goods,” he said. “It’s entirely different now than during the Cold War, when the economy was politics. Ukraine’s problem with Russia on the gas markets has been that it has paid less than global market prices and has been forced to make political concessions.”

Finland lacks the oil and supplies of neighbors Russia and Norway and has harnessed most available hydro-power. Last year, 68 percent of its energy imports came from Russia, including all of its natural gas, according to Statistics Finland.

Finland must now contend with slowing growth in Russia, as the past decade’s boom ebbs. Gross domestic product will expand at an average pace of 2.5 percent through 2030, the Russian Economy Ministry said this month. That compares with an average annual rate of 7 percent during Vladimir Putin’s first spate as president from 2000 to 2008.

The Finns still say the pros far outweigh the cons.

“It would be a great economic risk to Finland to not tap the resources in Russia,” Kivinen said. “We need to promote even more investment in Russia so that Finland’s relative position doesn’t weaken.”

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