Finland’s Economy: War’s Dark Shadow 🇫🇮📉

World News

Finland cut its Russian energy imports and closed the shared border in the aftermath of the Ukraine war, erasing approximately €12 billion in trade and significantly deepening the nation’s existing deficit. Already strained by increased defense and welfare spending, Finland’s deficit has surpassed the EU’s limit of 3% of gross domestic product (GDP). Last week, the European Commission, the bloc’s executive arm, ordered Helsinki to develop a credible plan to address this budget shortfall. The Commission projects Finland’s deficit will reach 4.5% of GDP in 2025, while the country’s debt burden is expected to rise to 90% of GDP next year – a nearly 50% increase since 2019. This situation has been compounded by longstanding fiscal challenges, including the economic fallout from the collapse of mobile phone maker Nokia, a former driver of growth. Furthermore, high welfare costs and a dramatic rise in defense spending, coupled with the severe economic shock of severing energy and trade ties with Russia due to the war in Ukraine, have exacerbated these difficulties. Bilateral trade between Moscow and Helsinki reached €12.71 billion in 2021, representing 4.3% of the Finnish economy. However, by the first three quarters of this year, trade had plummeted by nearly 93%. The situation was further complicated by Finland’s decision in late 2023 to close its eastern border, citing security concerns and Russia’s tactics regarding weaponized migration.

Cross-border shopping and tourism nearly overnight impacted Finnish border regions significantly. According to the Bank of Finland, the country’s central bank, over 2,000 Finnish firms exported to Russia in 2019, a figure that had fallen to approximately 100 by the end of 2023. Facing escalating threats from the Kremlin, including disinformation campaigns and airspace violations, Finland has dramatically increased defense spending, rising from €5.1 billion in 2022 to over €6.2 billion in 2024, now representing more than 2.3% of GDP. The NATO member has committed to pushing military spending toward 3% by 2029.

When questioned about the potential impact of the Ukraine war on Finland’s finances, and whether it would have led to an unsustainable deficit requiring additional EU scrutiny, Lauri Holappa, Executive Director of the Finnish Centre for New Economic Analysis (UTAK), responded to DW with, “Maybe. It’s possible.” He added, “Without the invasion, we could have allocated those increased defense spending inputs to more productive uses.”

The confluence of heightened military expenditure, the collapse of bilateral trade, and the near-total loss of Russian tourism has created significant economic pressure. This situation could have forced the Finnish government to accumulate greater debt, particularly given the already rising debt burden. Prior to the war, approximately one-third of Finland’s energy supply originated from Russia, leaving the country vulnerable when those supplies were disrupted, with higher energy prices significantly increasing Finland’s oil costs.

Nordic countries, notably Finland, were able to rapidly diversify away from Russian energy sources, though this shift occurred at significantly higher costs. According to Statistics Finland, Finland’s oil import expenses jumped by 109%, reaching over €6 billion in 2022. Furthermore, Finnish exporters successfully adapted to the disruption of non-energy trade with Russia, maintaining output and employment levels, as noted by Simola. Nuclear power plays a crucial role in Finland’s efforts to reduce its reliance on Russian energy, according to the Bank of Finland’s Kivisto. “Rough estimates suggest that adjustments – encompassing tax increases and public sector reductions – of approximately 3% of GDP, or €9–10 billion, will be required over the next 5–10 years,” Kivisto stated. However, economists caution that strict fiscal rules risk hindering the growth necessary for the country. “With around a third of our workforce dependent on government funding, constant fiscal consolidation creates considerable uncertainty and a fear of potential cuts,” explained UTAK’s Holappa to DW. This uncertainty has dampened consumer confidence, preventing a full recovery in domestic consumption despite wage growth and lower interest rates. “If we now impose strict austerity measures alongside rigid fiscal rules, there’s a significant risk we won’t be able to regain our growth trajectory,” Holappa added. These concerns carry particular weight for a nation consistently ranked among the world’s happiest, despite ongoing fiscal challenges.