Finland: In the eye of the geopolitical storm

The energy impact on Finland is modest. Finland is not so reliant on Russia as a power source because it gets a large amount of its energy from renewables and nuclear sources. That leaves its dependence on natural gas quite limited – in fact it’s only 6% of total energy in Finland, well below the 24% average for the eurozone. That 6% comes largely from Russia though, so the halting of the Russian gas supply in May does not come without consequence. While the Finnish gas supply has remained uninterrupted for the time being, prices have of course been increasing, adding to the purchasing power squeeze that the Finnish economy is experiencing.

In terms of total exports, the Finnish economy has also taken just a modest hit from sanctions on Russia. Yes, nominal exports have fallen to the lowest reading since the late 1990s – so volumes have dropped even more dramatically – but trade with Russia is not huge for Finland anyway. In recent years, exports to Russia made up about 5-6% of total exports, which has currently dropped to 2%. Total exports have continued to grow rapidly though and growth has actually accelerated since March. As total exports remain well above pre-pandemic levels, Finnish competitiveness is performing quite well for the moment and the hit from sanctions on Russia is therefore not visible in the aggregate data.

Of course, the Finnish economy will not remain unscathed. Finnish central bank governor Olli Rehn recently said that the Eastern Finnish economy, which is directly connected to Russia by land border, is set to experience significant fallout from the conflict in Ukraine. Meanwhile, surging inflation is also impacting the Finnish consumer significantly. Consumer confidence has – in line with most of Europe – plunged to recessionary levels. Businesses are also becoming more pessimistic as both global and domestic demand are set to weaken over the second half of the year.

Still, the Finnish trend output indicator for April showed healthy economic growth at the start of the second quarter. Like the rest of Europe, it looks like the longer-lasting inflation impact on the economy will materialise later, making economic contraction in the second half of the year a strong possibility.