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Eastern European Markets
NEWS RELEASE
September 28, 2006

Finland’s economic relations with Russia must be systematically developed

Russia is the fastest growing market close to Finland. It offers attractive growth potential for Finnish enterprises. Operating with and within Russia clearly improves the global competitiveness of Finnish enterprises, and the Russian market provides numerous opportunities for Finnish business. Finland has been able to exploit the huge potential of Russian markets well.

Simon-Erik Ollus and Heli Simola, Economists from the Bank of Finland Institute for Economies in Transition (BOFIT), discuss the impact of Russia on the Finnish economy in their report entitled Russia in the Finnish Economy. Published in the Sitra Reports series, the report reveals that the impact of Russia is not all positive, and hat there are a number of worrying elements that need to be tackled effectively.

– Finland’s competitiveness in the Russian market is not as good as the statistics would suggest. We need to take active and decisive measures to root out the negative effects brought by commercial activity. In this way, Finland and Russia could maximise the mutual benefits to be gained from the economic co-operation between the two, says Simon-Erik Ollus.

Russia provides jobs for 50,000 Finns

The total employment effect of economic activities related to Russia is roughly 50,000 people or 2% of the employed, and corresponds to the employment effect of a medium-size branch of industry in Finland.

According to the report’s authors, the biggest employment effect was that of goods exported from Finland to Russia. Exports to Russia alone provided jobs for 34,000 persons in Finland in 2004. Transit traffic through Finland to Russia is also a significant employer, providing nearly 4,000 jobs. The overall number of employees in Russian-owned and managed companies in Finland is approximately 8,000 persons.

Moreover, Russia is one of the most important markets for Finnish travel and construction services. It is estimated that 11,000 persons are employed in service exports and Russian tourism, according to the report.

A quarter of Finnish exports to Russia are re-exports

Trade between Finland and Russia has flourished throughout the present decade and Russia has re-emerged as being among the most important trading partners for Finland. In 2005, Russia’s share of Finland’s total foreign trade was 12%, and in terms of trade turnover, Russia was Finland’s second biggest trading partner, second only to Germany.

– Russia was in 2005 the largest export market for Finland, but the growth in Russian exports is partly due to re-exports, that is, goods imported to Finland instead of being produced there, says Heli Simola.

According to estimates, at least one-quarter of Finnish goods exported to Russia is in fact re-export, which creates little added value to Finland. Re-export concentrates on technology and consumer goods, the demand for which has increased rapidly in Russia, but which are not manufactured in Finland.

– Re-exporting is, however, a global phenomenon, so there is no drama to it, but it does give a slightly distorted view of how rapid the growth of Finnish exports to Russia has been and of the Finnish markets shares in Russia, Simola says. But even excluding re-exports, Russia has been the fastest growing export market for Finland.

Goods lose one-third of their value at the Finnish-Russian border

Double invoicing still seems to be common in Russian trade. The discrepancy between Finnish export and Russian import statistics was nearly 60% in 2005. The discrepancy was the second largest, and considerably larger than the average for other EU countries, which is 40%. The exceptionally high discrepancy is partly explained by re-exports, since re-exported goods are usually recorded in Russian customs statistics as imports from the original country, not from Finland. Therefore, correct comparisons must be made from statistics in which re-exports are excluded.

– But even if re-exports are excluded from the statistics, the discrepancy between Russian and Finnish statistics is roughly one-third, which probably reflects the amount of double invoicing at the border, says Ollus.

The estimate that approximately one-third of the value of exports is lost at the Finnish–Russian border is backed up by several estimates made by the Russian and Finnish customs authorities.

– Double invoicing seems, however, to have decreased slightly during the 2000s. It is generally associated with consumer electronics and other valuable consumer goods, says Ollus.

A quarter of all Russia’s imports go through Finland

The volume of transit traffic has grown rapidly since the 1990s, and Finland has become a significant value transit goods corridor to Russia. An estimated one-quarter of all Russian imports went through Finnish territory in 2005 either as transit freight or exports. Finland’s competitive advantages in transit freight to Russia are its proximity to Northwestern Russia and its reliable, safe and efficient logistics systems.

According to Ollus, the transit freight corridors competing with Finland are continually honing their competitive edge, so Finland should invest in developing its infrastructure in order to retain its position and maximise the positive income effect.

Unlike in eastbound traffic, the Finnish share of outbound transit freight from Russia is small, only some 4%. The impact of transit traffic on the Finnish economy is two-fold: on the one hand, it burdens the Finnish traffic infrastructure, but on the other hand, its employment and income effect is significant, particularly for Southeastern Finland.

Finns invest in Russia because of the local market potential, not to outsource cheaper labour

Finnish investments in Russia took off properly only after the 1998 crisis, and over the past few years, the increase in investments has accelerated. In 2005, one-tenth of foreign investments by Finnish industry were made in Russia.

– Finnish firms have invested in Russia mainly for production aimed at local markets rather than for outsourcing cheaper labour. After all, labour in Russia is already more expensive than in many other countries, and labour costs have in the past few years grown faster than inflation, and transporting goods across the border is still difficult, says Simola.

The investments of Finnish firms in Russia have also contributed to the competitive advantage of Finnish companies and have clearly been profitable: they have gained returns on most of their investments made in the 2000s.

Russians as entrepreneurs and tourists in Finland

The number of companies under Russian ownership and management in Finland has increased considerably over the past few years. The number of such companies was approximately 2,000 in spring 2006, and for example in the Kotka–Hamina region, as many as one in ten new enterprises registered in 2005 were owned by Russians.

Russian companies are concentrated in Southwestern Finland and the Helsinki metropolitan area and deal mainly in trading and transportation, that is, in Russian trade and transit traffic. These firms are mainly quite small, but have created jobs for Russian immigrants and Finns and help increase Finland’s tax revenue.

In service trade, Russia has risen to be amongst the most important markets for Finland. Construction and travel services, in particular, have shown a rapid increase in the past few years.

In 2005, Russians paid nearly 1.7 million visits to Finland, and almost 400,000 visas were issued to Russian citizens. The total travel receipts from Russian tourists in Finland exceeded that from other nationalities.

For further information
Bank of Finland Institute for Economies in Transition (BOFIT):
Simon-Erik Ollus, economist, tel. +358 40 524 8226, simon.ollus@bof.fi
Heli Simola, economist, tel. +358 10 831 2834, heli.simola@bof.fi
Sitra’s Russia Programme:
Maaret Heiskari, Executive Director, tel. + 358 50 431 1650, heli.heiskari@sitra.fi

www.sitra.fi


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