Finnish economy adapting to a new reality
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Russia-Ukraine War has a big negative impact on Finnish economy, which is the most exposed Nordic country measured by value of foreign trade.
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Finnish companies have already begun to adapt to a situation where Russia as a market is insignificant. Material sourcing flows elsewhere and some production will be transferred from Russia to Finland.
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We see downside risks to our 2022 GDP forecast of 2.8% of 0.5-1.0pp, but uncertainty is large. Exports are hit and higher inflation slows down recovery in consumption.
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Finland shares a long border with Russia. Geopolitical risk is apparent, but we see only a small risk of military escalation on Finnish border. NATO membership has become a more popular option in surveys.
The Russia-Ukraine War has a big impact on the Finnish economy, which is the most exposed Nordic country measured by value of foreign trade. Russia was Finland's fifth largest export market in terms of the value of goods exports in 2021. Russia's role in imports has been even greater, especially due to the import of oil and natural gas. Russia has played an even bigger role in the past, but its importance shrank significantly after the occupation of Crimea in 2014. The economic connections between the countries are significant in other ways as well, as many Finnish companies operate in Russia and Russian tourism has been a big source of revenue for the Finnish travel industry and retail trade. However, these connections have also declined in recent years, with many companies closing down in Russia. Ukraine's direct importance to the Finnish economy is small, but the war has indirect effects trough global markets in raw materials such as grains. Inflation will be higher for longer also in Finland.
Finnish companies have already started replacing Russian material with other sources. Urals crude oil is being replaced with North Sea Brent. Russian timber is being replaced by domestic sources. In both examples companies continue to operate, but with higher costs and possibly lower profit margin. On the other hand, prices for sawn materials may rise without Russian competition. The degree of adaptation is more challenging for companies that have significant production or other operations in Russia or Ukraine. Several factories in Russia have been closed already, also without a pressure from sanctions. In some cases, these closures are permanent and may imply additional investments in Finland or somewhere else in the West. Accelerated implementation of renewable energy and other energy related projects, attention to defense spending as well as investment into civil crisis preparedness could boost investment. On the other hand, uncertainty and political considerations could put some commercial investment plans on hold. This applies for example to the Hanhikivi nuclear power plant, which is based on a Russian reactor and is one third owned by a Finnish subsidiary of Russia’s Rosatom.
Author
Danske Research Team
Danske Bank A/S
Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.
