Tag Archives: Russia

Finnish foreign policy and Russia (shortly)

Last November, I wrote this:

I suppose that if significant amounts of people start turning up at the border with Russia, Finland may have to adapt its policy regarding Russia, since given the policy of keeping asylum seekers out it would need co-operation on the Russian side.

In today’s Helsingin Sanomat, there is an article about how the new border agreement between Finland and Russia came about. The core seems to be that no citizens from other EU-countries can pass the border in Salla or Raja-Jooseppi anymore into Russia (temporary measure though, 180 days). The article notes (my translation):

From the end of last year to the beginning of this year around 1760 asylum seekers arrived into Finland across the Russian border. The flow of asylum seekers suprised Finland, because earlier Russia prevented access to the border for those migrants that had moved without proper papers.

Finland tried to negotiate about this issue for months through civil servants, ministers and the President. Both Finland and Russia emphasised all the time that it would be a bilateral solution, not at the EU-level – regardless of the fact that Finland’s border is the outer border of the EU and the Schengen-area.

The article says that it is unclear whether there will be any resistance to this agreement from the EU, but that is because the EU is so focused on the situation in Greece.

All in all, my hunch from November was not quite unrealistic. Finland does need the co-operation of Russia on this issue and if somehow deviating from agreed EU-policy is the price to pay, then it appears that Finland has done so.  Thus, I feel I was correct in predicting a change in Finnish foreign policy regarding Russia.

Maybe I should pick up my original Masters’ studies subject again (EU and Foreign Policy).

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Is Finnish foreign policy on Russia in for a change?

Yesterday I wrote a short blog on asylum seeker routes. The thing that piqued my interest was the statement by EASO director Robert Visser, who stated in Dutch newspaper Trouw, that “Since a few weeks, Finland gets remarkable amounts of asylum seekers [through Russia]”.

In Finland, reports are focused on Tornio, which is situated between Sweden and Finland at the end of the Gulf of Bothnia. So far, I have heard little about border crossings at the Salla or Raja-Jooseppi stations. This article states that this year, so far, only 12 asylum seekers have crossed the border in Raja-Jooseppi (in Northern Lapland) although the authors are wondering whether the situation would develop like in Norway (Storskog).

So this means that EASO has more information, or that they are simply wrong.

But suppose the informed estimate is correct and asylum seekers are travelling through Russia to Finland (or Norway), what questions does that raise for Finnish foreign policy? (I leave aside the question of probably extremely harsh winter circumstances in Russia).

Given that apparently the Finnish foreign ministry has a campaign in the near Middle East trying to discourage people from coming to Finland, I would think that the Finnish government would not be very happy if large groups of people start arriving in Northern Finland. The question then is: what kind of co-operation is there between Finland and Russia on information sharing regarding asylum seeker movements?

Personally I think current Finnish policy regarding asylum seekers is counter-productive and not just, but that is not relevant for now. Since my guess is that asylum seeker flows will seek the route of least resistance, I suppose that if significant amounts of people start turning up at the border with Russia, Finland may have to adapt its policy regarding Russia, since given the policy of keeping asylum seekers out it would need co-operation on the Russian side.

This would have quite big implications for the EU also. Finland’s economy was kind of sacrificed with the sanctions on Russia, and the conflict between the EU and Russia about Ukraine may have implications for this Syria asylum seeker issue as well. It is not written in stone that Russia will help in this (i.e. trying to stem the flow) unless it can get some kind of lessening of the sanctions.

Although I obviously have no data to back this scenario up, I am sketching a possibility. It may or may not come true, or in another way, but increasingly the crises that the EU faces become interconnected. And as in the past, Finland is again between Russia and the West. I hope and trust that the Foreign Minister and his civil servants have the knowledge and skills to successfully navigate this crisis.

Finland: what is its competitiveness?

The Finnish economy is not doing well, regardless of the better-than-estimated growth. Politicians, business representatives and also labour unions talk about Finland having become uncompetitive, especially relative to Germany. This is commonly expressed through a comparision of the (Real) Unit Labour Cost developments. Especially the wage increases in the sectoral collective bargaining rounds of 2007-2008 are frequently blamed for Finland’s downfall.

Recently, I have read all kinds of literature related to trade diversification, export performance and such. It was also nice to discover this website, which can provide a wealth of insight. Basically my thought for this post is: If Finland is so uncompetitive, this must somehow show up in the data. Another issue is: Finland is frequently mentioned as very competitive and high-tech, such as in this article, but does this show up in Finland’s exports?

Regarding the first question:

Export destinations of Finland (1995-2012)

Export destinations of Finland (1995-2012)

The top export destinations of Finnish exports are Sweden, Germany and Russia (followed by the Netherlands, UK, USA and China). That is the ‘macro’ picture. If you look at those individual countries, you will see completely different ‘export packages’.

Finnish exports to Germany (2012)

Finnish exports to Germany (2012)

Half of what Finland exports to Germany is either paper goods or metal goods (this can be steel plates, zinc, nickel, iron pipes etc.). Machines account for nearly 18% of exports. These are typically machines for the German industry to make things (e.g. paper machines, processing machines, lifting machines, …) but it also includes telephones, electrical transformers and electrical motors.

For Finnish exports to Sweden the picture looks quite different:

Finnish exports to Sweden (2012)

Finnish exports to Sweden (2012)

Mineral products is the category code for e.g. oil-based products, like petroleum and refined petroleum. Chemical products also include medicaments.

Finally, exports to Russia look like this:

Finnish exports to Russia (2012)

Finnish exports to Russia (2012)

Again, chemical products, phones, computers and other machinery are a large part of exports, but Russia is also a significant market for Finnish dairy products.

To make the picture complete, I provide a list of the Top-40 export products from Finland (in 2012), in terms of export value (in US$), see below. What I find striking, is that in terms of the classification used by Cafiso (2009) there are only a few high-tech export products in the top-40,  and the top-6 features ‘traditional’ industry products, as in relatively low-tech. In terms of export value, the Finnish paper industry is far from being history.

When we go back to the first question – does Finnish uncompetitiveness show up in the data? – it depends what you look at!! Here are the graphs fror the top-3 products:

Kaolin Coated Paper exports

Kaolin Coated Paper exports

Refined petroleum

Refined petroleum

Stainless steel

Large Flat-rolled Stainless Steel

Strange to say maybe, but depending on the destination and the product Finnish competitiveness does not look too bad. Yes, the start of the Great Financial Crisis is visible in the data in 2008-2009 and from 2011 European demand for two of the three products here is in decline. But that doesn’t mean that Finland is uncompetitive – German exports of stainless steel and kaolin coated paper also declines, especially in Europe.

I think one of the most relevant lessons of these sketches is that in Finland the industries that produce the top-40 products are typically very capital-intensive.  It may be true that Finnish Real Unit Labour Costs are higher than in Germany, but does it matter? Storm and Naastepad (2015) conclude that for Germany (and other industrialized countries) trade is not very sensitive to changes in Real Unit Labour Costs.

This overview of some of the aspects of the Finnish export industries has implications for the labour market relations and what issues are emphasised (either by labour unions, the state or employers). I hope to write more about that in a later phase.

 

1
Refined Petroleum $7,571,937,492.43 10.06%
2 Kaolin Coated Paper $5,546,692,160.65 7.37%
3 Large Flat-Rolled Stainless Steel $3,188,856,875.23 4.24%
4 Uncoated Paper $1,896,120,674.00 2.52%
5 Sawn Wood $1,578,749,613.50 2.10%
6 Sulfate Chemical Woodpulp $1,554,623,680.00 2.07%
7 Packaged Medicaments $1,402,117,640.52 1.86%
8 Electrical Transformers $1,397,459,014.12 1.86%
9 Telephones $1,213,812,358.00 1.61%
10 Excavation Machinery $1,141,698,501.29 1.52%
11 Broadcasting Equipment $977,911,850.49 1.30%
12 Papermaking Machines $874,822,111.30 1.16%
13 Machinery Having Individual Functions $821,263,336.80 1.09%
14 Electric Generating Sets $809,612,169.02 1.08%
15 Medical Instruments $789,197,173.22 1.05%
16 Electric Motors $707,507,667.19 0.94%
17 Other Construction Vehicles $652,354,778.80 0.87%
18 Raw Nickel $648,832,883.17 0.86%
19 Raw Furskins $619,987,425.28 0.82%
20 Raw Zinc $602,721,172.66 0.80%
21 Uncoated Kraft Paper $596,906,691.21 0.79%
22 Stone Processing Machines $574,838,607.82 0.76%
23 Plywood $570,319,551.66 0.76%
24 Cellulose Fibers Paper $557,917,828.69 0.74%
25 Cars $529,368,714.55 0.70%
26 Refined Copper $526,786,902.13 0.70%
27 Rubber Tires $522,128,649.04 0.69%
28 Valves $512,834,686.85 0.68%
29 Lifting Machinery $500,867,236.02 0.67%
30 Ethylene Polymers $495,928,852.51 0.66%
31 Passenger and Cargo Ships $456,775,890.54 0.61%
32 Other Uncoated Paper $430,972,171.17 0.57%
33 Electric Motor Parts $428,195,865.56 0.57%
34 Low-voltage Protection Equipment $423,857,644.83 0.56%
35 Flat Flat-Rolled Steel $421,897,577.90 0.56%
36 Coated Flat-Rolled Iron $415,547,511.74 0.55%
37 Special Pharmaceuticals $415,278,848.27 0.55%
38 Computers $411,008,464.22 0.55%
39 X-Ray Equipment $404,066,790.60 0.54%
40 Tractors $401,011,453.94 0.53%

Ilargi: Europe Teeters On The Edge

http://www.nakedcapitalism.com/2014/08/ilargi-europe-teeters-edge.html

As often, Ilargi strings together a lot of things that I had on my mind as well. It is important to remember that this mess started with power play by the EU in Ukraine…

Russian sanctions, sanctions against Russia and the Finnish economy

There is a lot of sabre-rattling in international politics. First, the US and EU tightened sanctions against Russia and now Russia retaliates with a set of sanctions of its own. One sanction which is under consideration still is the closing of Russian airspace for flights over Siberia (e.g. to Japan).

Another measure being considered is banning flights over Siberia by European carriers bound for Asia, Medvedev said. The government in Moscow already barred Ukrainian flights from crossing Russia to Georgia, Azerbaijan, Armenia and Turkey, according to Medvedev.

The Finnish economy has significant interests in Russia – not only in terms of import and export but also in investments, such as in the paper industry. As this report from the Finnish Customs shows, export to Russia amounts to 10% of total exports, and imports show an even larger share. So Finland is vulnerable here – the import ban could (in my simple understanding) amount to roughly 1/3 of all Finnish exports to Russia (oil products, chemicals, food, see figure 6 in the document).

For individual companies there are risks too: the measure that is considered above would be extremely harsh on Finnair. Finland has a competitive advantage for flying to Asia (because of its location and the shape of the earth the route is shortest from here).

Furthermore, although Finland is not quite dependent on Russian oil or gas, still the industry uses quite a lot of it and this is a reason why Finland’s trade balance with Russia has been in negative territory for some time already (see report and this post).

The current Ukraine crisis is perhaps a watershed for Finnish international relations since through the sanctions it is now indisputably in the camp of the EU – for better or worse. In any case, it is probably not what was wished for, regarding the state of the Finnish economy.

 

Finnish competitiveness, trade balance and wrong-headed economic policies

[For more on Finland’s exports, see here. The data is until 2012 but as I tell here in Finnish, the picture has not changed much except that machine exports to China started to decline around 2012)

It seems the rest of the world finally starts to acknowledge Finland’s problems. On the one hand, it is vital to see what the problems are, but it is just sad that Finland has ended up in this ‘trap’, as Bloomberg calls it.

Those ‘in the know’ – to which I include myself, have known about this situation for quite a long time. Indeed, while originally I started this blog to write in English about the Finnish paper industry and industrial relations, I quickly moved to the impact of the eurocrisis.

Unfortunately to say, in my view there is a much longer story to what Bloomberg writes and it does very much relate to the euro. Nokia and the Finnish paper industry are in a way ‘collateral damage’. There are potentially many ways to explain the ‘slide downwards’ and especially on the centre-right and in business circles many blame high wage costs (and/or unit labour costs). These do have impact of course, but only (and especially!) in relation to Germany’s policies during the period 2000-2007, broadly. Another issue, which is entirely hidden from the discourse is the relevance of profit margins. In perfect competition (which especially in Finland does not exist) (marginal) profit tends to zero. But in the context of an economy with a relatively small number of big players – e.g. the paper industry but domestically also supermarket/retail chains – where the companies are on the stock exchange, the profit margin matters a lot and very roughly speaking one way to keep the profit margin steady is to cut other costs.

So if we accept this basic mathematical fact, it follows that in a ‘quarterly report economy’ companies would aim for quick profits in whatever way rather than for long term investment, at least domestically. And in this context, there is also a big difference between investing in Europe or domestically (which may be less profitable, given weak demand) and elsewhere in the world.

(There are of course many exceptions to this view – think of UPM-Kymmene, which greatly expands a pulp mill. But as Statistics Finland reported private investments have decreased, and in the pulp and paper industry the domestic investment has declined for a long time already, to quite a large extent to be replaced by foreign investments (which is true for many big Finnish firms). )

The main evidence I see in this regard, is the declining current account surplus. Here, at the site of the Bank of Finland you can see the development of the current account (and trade) balance for Finland since 1998. Earlier, I made a graph based on Eurostat data of the same development – although only goods – but with (probably) a different methodology. It looks like this:

Finland Goods Exports Balance

In the story which attributes a large part of the Eurocrisis to the imbalances within Europe, this is a good development, as it restores a bit of balance. But in the end Finland is a small player in this – the Netherlands and Germany are much more relevant.

But to return to the argument – the Finnish current account balance, and in particular the trade balance has weakened. The question is: why? Finland, in my view, has initially gained a lot through the favourable dollar/euro exchange rate, in which phase many Finnish companies (in particular the forest industry companies) could make investments abroad at a favourable moment. I have written about this in my dissertation regarding the paper industry. There it was simply a continuation of the fact that the domestic markets were ‘ready’ – no more consolidation could happen without the competition authorities interfering. Although this process had already started in the 1990s, nonetheless domestic investment declined even more now.

From 2003 onwards however, the exchange rate has been more unfavourable for Finland (and other euro-countries). Finland’s main trading partners are Russia, Sweden, Germany and China, all of with which Finland has had a trade deficit in 2012. Finland does have a trade surplus with the USA and the UK – regardless of the exchange rate. It is a topic for further research to find out what is imported from where, but Russia is at least mostly responsible for oil/gas and timber for the paper industry. Sweden also accounts for a lot of raw materials, including chemicals, and China exports many things to Finland (and the rest of the world). But on balance, still, Finland imports more than it exports. This is a graph with the major trade partners (excl. China):

Data by ULJAS/Finnish Customs

Data by ULJAS/Finnish Customs

The hard-to-see yellow line indicates Russia. My quick-and-dirty take on the “Finland’s wage costs are higher than Germany’s” is this: even though Finland’s unit labour costs have increases relative to Germany’s, and also Finland’s relative exchange rate within the eurozone has gone worse, this has not significantly affected trade with Germany. Basically, from 2003 onwards Finland has had a fairly stable trade deficit with Germany. But the deficit with Russia has worsened much more, while the trade balance with the USA and UK may have improved.

So what is really happening here? Why the obsession with Finnish wage costs? Finland always presents itself as competing with Germany on high-quality goods. But it can’t be (entirely) the issue of labour costs, because that picture looks like this:

RULC

Yes, Finnish unit labour costs have risen faster than Germany’s since 2007, but regardless of this, the trade balance with Germany has not significantly weakened. The trade balance with Russia nonetheless DID start to weaken around this time. So my take is that the whole competitiveness debate (at least in Finland) is based on completely the wrong indicators: the weakened trade balance doesn’t have to do with Finland becoming less competitive relative to Germany but has a lot to do with trade with Russia. And the following graph shows why. It shows the value (in euros) of imports of various categories of products (in the CN-nomenclature used by the EU).

Source: ULJAS/Tulli.fi

Source: ULJAS/Tulli.fi

So where does the worsened trade balance with Russia come from? Simple – a huge increase in the (euro) value of mineral fuels.

In terms of the Bloomberg story, where does that leave us? Unfortunately, in the light of the data presented here the conclusion must be that the Finnish government and the labour market organisations (very much including the unions) are looking at the wrong solution for the wrong problem. Aiming for wage moderation is simply not going to help with this problem of rising Russian energy prices. There may be a difference in relative labour costs between Finland and Germany, but as the graphs above show, it is unlikely that even similar labour costs would improve the trade balance with Germany.

So all that talk about improving competitiveness and getting exports going again: fine, but it doesn’t relate to the major problem Finland seems to have – which is a large fuel bill. And to me it sounds rather unreasonable to try to solve this problem by taking on wages – as these affect domestic demand also. And I have shown earlier, it seems that for a fairly long time, domestic demand has kept Finland floating.

The question of increasing investment is important, but it does not necessarily relate to the current crisis, especially Finland is still seen as one of the most innovative countries, thanks to its infrastructure, highly educated work-force and IT-qualities. If we combine these issues with the problem then now would be a very good time for Finland to make a transition to the Green economy/Green technology – something which is already happening in the pulp and paper industries.