Finns worried about backlash to Russian sanctions

Helsinki — After backing the European Union in expanding sanctions against Russia, Finland is now regrouping to consider what it describes as the disproportionate fallout of the crisis on its own economy.

No other euro nation is as exposed to the aftermath of the crisis in Ukraine as Finland, trade figures for the single currency bloc show. Prime Minister Alexander Stubb last week underscored the need for "solidarity" in the EU, making clear he expects any measures to "treat EU members similarly. If the impact isn't equal, we'll consider what kind of solutions we will seek."

The 28-nation EU has repeatedly struggled to speak with one voice, from how to handle the debt crisis and most recently with its economic response to the political turmoil at its eastern border. Finland already has a proven track record of successfully carving out special rights within European accords. During the sovereign debt crisis, Finland was the only country to seek and obtain compensation for its contribution to bailouts in the form of collateral.

"It creates an image of a country that engages in politics very much from its own perspective rather than a common European point of view," Pasi Kuoppamaeki, chief economist at Danske Bank in Helsinki, said by phone. "Of course, many others do that too."

In a counter-move to western sanctions, President Vladimir Putin slapped import bans on an array of foods last week, compounding the economic pain for Finland of faltering Russian demand and a weaker ruble. With 14 percent of Finland's trade coming from Russia, those developments are exacerbating the Nordic country's efforts to exit its second recession since 2008.

"I hope the sanctions aren't broadened," Stubb told reporters on Friday. "This isn't a trade war."

Yet some groups in Finland's parliament say the economic measures taken are just that. The opposition euro-skeptic The Finns party, the third-biggest in the legislature, wants Stubb to compensate businesses by providing extra funds to the nation's export-guarantee programs, according to an Aug. 8 email.

Opposition Center Party chief Juha Sipilae asked Stubb to clarify whether the government will push the EU for compensation, according to an Aug. 7 statement.

Finland has a longer border with Russia than the other 27 EU members combined. It supported the sanctions because "it wants to be in the EU's core," Kuoppamaeki said. "Finland may have disagreed with the means, but it's had to go along with others."

Yet Finland isn't alone in pointing to the uneven fallout of the sanctions against Russia. Poland needs to apply "as soon as possible" for EU compensation to local growers hurt by Russia's import ban on fruits and vegetables, Economy Minister Janusz Piechocinski said Aug. 5. Lithuania will assess potential losses and may seek compensation from the EU, it said Monday.

The prospect of an internal squabble over which countries deserve economic compensation may weaken the EU's ability to strike accords, said Danske Bank.

"It makes decision-making slow and geared toward compromise," Kuoppamaeki said. "Compromises are not always the best solution - it makes politics volatile."

The EU's common agricultural policy includes possibilities for compensation and any recompense to European farmers for lost sales will be looked at in the longer term, European Commission spokesman Frederic Vincent said Aug. 7. EU globalization funds, with an annual budget of $200 million, have also been used to help countries deal with job losses.

Finland sent 10 percent of its exports to Russia last year, and imported 18 percent from the country. Its total trade volume with Russia of 14 percent even exceeded that of former Soviet states, and now euro members, Latvia and Estonia. The euro-area average trade with Russia in 2013 was 3.4 percent. About 5 percent of Finland's goods exports to Russia are now banned, according to the Bank of Finland.

Finnish cooperative dairy producer Valio, which accounts for more than 85 percent of the food exports from Finland now banned by Russia, said last week it's halting all production for sales there. Finland exported 400 million euros in food to Russia last year. Other industries are also suffering.

Wholesaler Oriola-KD, paint maker Tikkurila and house builder YIT have all reported falling demand in Russia. Nurminen Logistics Oyj said last week its net sales will decline this year as sanctions cut rail transport volumes. Department-store owner Stockmann and retailer Kesko bear the brunt of slowing economic growth as Russians spend less.

Finnish corporate debt is showing signs of the strain. The yield on Oriola-KD's 7 percent perpetual junior subordinated bonds rose to 6.48 percent last week, its highest since February. Stockmann's 3.375 percent 2018 notes yielded 3.75 percent, compared with a low of 3.43 percent in February.

Russia's increasing economic isolation couldn't come at a worse time for Finland, which had pegged its recovery hopes to a rebound in exports. Gross domestic product contracted for a second quarter in the three months through March, while unemployment reached 9.2 percent in June, compared with 7.8 percent a year earlier.

A number of analysts are already advising investors to steer clear of Finnish government debt. UniCredit Bank AG recommends shorting Finnish 10-year notes and instead buying debt sold by Italy and Germany, equally weighted. HSBC Securities Inc. advises its clients to sell Finnish 10-year bonds and buy similar-maturity Belgian debt instead.

Finland's options in dealing with the sanctions may be limited, according to Danske Bank.

"It may be difficult to show how much of the weakness in the Russian economy that impacts Finland is something that Finland should be compensated for," Kuoppamaeki said. "Russian import bans do hit some companies very hard, but the right address from which to seek compensation for those losses is Russia."