Finnish hopes for fragile growth hit by Ukraine crisis

HELSINKI, March 24 Mon Mar 24, 2014 10:38am EDT

HELSINKI, March 24 (Reuters) - Russia's takeover of Crimea has put Europe in an economic quandary, and Finland may be getting squeezed the hardest of all western European countries.

Finnish politicians support Europe Union unity in action against Russia in its conflict with Ukraine. But they are uneasily aware of how sanctions would backfire against Europe's and especially Finland's economy.

A tenth of Finnish exports are sold to Russia, and they were already slipping as Russia's economy slowed and the rouble weakened. Now fears abound that harsh EU sanctions would hit the Finnish economy hard when it can least afford it.

"Russia will certainly respond to sanctions, which would have a major impact on Finnish companies and economy," President Sauli Niinisto recently told Finnish media.

Bank of Finland Governor Erkki Liikanen sang from the same sheet, saying that the Finnish economy had already been hurt and that sanctions should affect all EU countries the same.

Finland and Russia share a 1,340-km (840-mile) border and a long, contentious history. Russia ruled Finland from 1809 to 1917, and the countries fought two wars within World War II. They negotiated an armistice in 1944 and a final peace treaty in 1947. Finland maintained a cordial - and largely profitable - relationship with Russia throughout the Cold War.

Now Finland is one of just three euro zone economies to keep a triple-A credit rating, but it has recorded a trade deficit for the past three years, after 20 consecutive years of surpluses. Europe's downturn has weighed on exports from its machinery, paper and shipping industries.

The economy suffered a further blow as Nokia lost its dominance of the mobile-phone market. Last year, it agreed to sell its phone business to Microsoft.

Russian consumer wealth provided a rare bright spot for many Finnish companies, until last year. Then the Russian economy took a turn for the worse and the rouble weakened, discouraging Russians from buying Finnish products. The Crimean crisis could make things a lot worse.

"For the Finnish economy, this uncertainty is arriving at a very bad time," said Danske Bank economist Pasi Kuoppamaki. He has trimmed his forecast for Finland's 2014 growth to 0.5 percent from 1.1 percent previously.

EXPORT WOES

In 2009, Finland's exports to Russia were cut nearly in half by the global financial crisis. Those exports were worth around 5.5 billion euros last year, and falling demand could reduce them by a quarter this year, economists say.

"An escalating crisis would cut Finnish export growth by 3 percentage points and gross domestic product growth by 0.8 percentage points in 2014," Liikanen told a government briefing on Monday.

Mere uncertainty has made exporters jittery.

"Sanctions, if they concerned our sector, would cause huge problems for us," said Jens Osterberg, the chief at family-held Petsmo Products, which sells machinery for making animal feed.

Adding to export woes, fewer Russians are likely to visit Finland as the weak rouble erodes their buying power. Russians, by far the biggest group of tourists to Finland, brought 1.2 billion euros into the country last year.

"Business has slowed, that is clear. There seem to be less Russian customers," said Sergey Ananiev who heads retailer Rajamarket which caters mainly to Russian tourists. "The exchange rate has had an impact."

The weakened business prospects add to the problems of Finland's six-party government, which on Monday began talks on its budget for the next three years.

INVESTMENTS ON HOLD

Many Finnish companies have sought Eastern growth by stepping up investments. Russian business has also expanded in Finland.

State-owned Rosatom recently agreed to build a nuclear reactor in Western Finland and take a stake in the 4 billion to 6 billion-euro plant.

In another high-profile deal, Gennadi Timchenko and Boris Rotenberg - both close allies of President Vladimir Putin and targets of recent U.S. sanctions - last year bought a sports arena in Helsinki and a 49 percent stake in an ice-hockey team.

Any new projects are now expected to be put on hold.

"Large investments in both directions will be put on ice," said Kari Liuhto, an expert at Russian business at the University of Turku. "Business executives do not want to do anything before Russian political risk is clearer."

Companies with the biggest Russian exposures, such as utility Fortum and tyre maker Nokian Renkaat , have already been hit on the stock exchange. Retailer Stockmann hinted it could change its Russia strategy.

For now, Finland seems certain to lose from the conflict.

"One can only hope that the situation gets resolved in a peaceful manner," Rajamarket's Ananiev said. "One can only hope." (Editing by Larry King)

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