August 1998

      Russian crisis throws a shadow over Finnish economy

Having witnessed the collapse of the Soviet Union, with its dire economic impact on the Finnish economy, the Finns were holding their breath as the new Russia slumped into its next economic crisis. The effect on Finland will be significant but not overwhelming, as Jarkko Juselius found out.

The Finnish economy is stable and cannot be blown off course by the devaluation of the Russian rouble. This was the instant reaction by the Finnish Prime Minister Paavo Lipponen, when interviewed immediately after the rouble’s devaluation. Lipponen gave his reaction at the time when the government had finalised its budget for the following year. This will be Finland’s first balanced budget for many years. Accordingly, the government does not need to borrow more money next year to cover expenditure.

The Finnish economy is surging ahead this year with unusual speed. The forecasts mention figures like 4.5-5.5% for this current year. There are signs of a slow-down, though, which makes the devaluation of the rouble one more headache. However, the architects of the budget stress that they took the Russian and Asian economic uncertainties into account when they prepared the forecasts for next year. The Russian devaluation did not come as a surprise to the Finnish experts.

The Russian share of Finnish exports is about 7%. Its value last year was over FIM 15 billion (about £1.7m). Exports to Russia have been growing fast while official statistics show imports to Finland holding steady. According to an unofficial estimate by the Bank of Finland, the weakening of the Russian rouble may reduce income from exports by several hundreds of millions of marks, and at worst by FIM 1 billion. Customs statistics rank Russia as Finland’s fourth most important trading partner after Germany, Sweden and Britain. Economic experts say that the devaluation of the rouble weakens the position of all exporters alike. In other words, Finland is not in a worse position than any other country.

The sector that is likely to be the hardest hit by the devaluation is the Finnish food industry, whose exports to Russia are 40 per cent of the total. The industry's spokespersons have been guarded in their response. "There will be a serious slump in the near future but we believe that towards the end of the year exports will recover," commented Pekka Hämäläinen, the Managing Director of the Food Industry Association. Among the biggest exporters is the Raisio Group which is known internationally for its colesterol-lowering Benecol margarine. Their representative said that they are monitoring the situation: "Russian customers have reacted calmly to the devaluation."

In addition to the food industry, the export of textile and consumer electronics industries will inevitably suffer. However, no-one in these industries has been willing to go public about their concerns.

Finnish forest industry exports to Russia have been small, accounting for only 2.5% of the total but there is speculation that paper and board exports will feel the pinch. On the positive side, though, as the price of Russian timber falls, Finnish companies can replace the relatively expensive Finnish timber with imports from across the eastern border.

For a long time, the Finns have been concerned about the surge of Russian transport companies onto the Finnish markets. Already 60% of the transit traffic to Russia via Finland is operated by Russian freight companies and the devaluation of the rouble may well strengthen this trend. This would be less than desirable not least because the badly maintained Russian lorries are involved in accidents almost daily.

As for tourism, the devaluation of the rouble will reduce the number of Russian visitors to Finland, at least temporarily. Last year, Russian tourists spent about FIM 3 billion in Finland with the bulk of the money remaining in Helsinki. The contraction of the tourist industry will have regional effects: last year for example, the Russians spent no less than FIM 500 million in the small but modern town of Lappeenranta, which was recently chosen as the site for a Taiwanese microchip assembly plant. Wealthy inhabitants of St. Petersburg like to have their luxury cars serviced in this south-eastern town. The devaluation of the rouble will mean a reduction in revenue for both the commerce and service sectors in eastern Finland.

Jarkko Juselius is a political correspondent working for the Finnish Broadcasting Company.

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