Report: Economic effects of Russia sanctions and counter sanctions expected to be limited
Government Communications Department

Report: Economic effects of Russia sanctions and counter sanctions expected to be limited

"Although the restrictive measures of the EU and other countries and Russia’s import ban will have significant effects on the outlook of certain companies and sectors, their direct effects on the overall economic activity of Russia and its trading partners will be minor, however," is the assessment of a report delivered today to the Government.

On 18 August 2014, a meeting of Permanent Secretaries of Government ministries established a working group to assess the economic effects of the EU’s Russia sanctions and Russia’s counter sanctions by the time of the budget session.

The report published today by the working group states that Russia’s economic growth has already slowed for reasons independent of sanctions since 2013, and this has been reflected in Finland’s economic development.

In early August, Russia imposed an import ban on foodstuffs. As a result, Finland’s food exports to Russia will fall to less than a quarter of the normal situation. The biggest direct impact is on the dairy sector, says the report.

Weak forecast for the Russian economy

The assessments the Ministry of Finance and the Bank of Finland on Russia’s economic development are similar.

The Economics Department of the Ministry of Finance forecasts that Russia’s GDP will decline by 1% and its imports by 9% this year. Next year, growth is expected to be zero. The Bank of Finland’s Russia forecast to be published later will, as matters stand, be slightly brighter.

According to the Economics Department’s analysis, the cumulative direct impact of Russia’s import ban on Finland’s GDP will be around 0.1% and on unemployment very marginal. The weakening of Russia’s growth will reduce Finland’s total output in 2014–2015 by a total of around one half of one per cent and will increase the unemployment rate by the end of 2015 by around 0.2 percentage points relative to the December 2013 forecast. The effects will be included in the forecast prepared as the basis for the budget proposal (to be published on 15 September 2014).

According to Bank of Finland analyses, Russia’s import ban will reduce Finland’s total output this year directly by around 0.1%; according to the Government Institute for Economic Research (VATT), the corresponding figure is 0.01%. When the general weakening of Russia’s economic development is taken into account, the Bank of Finland estimates that the negative impact on growth will be around 0.2% this year.

No decisive impact on the Finnish economy

The working group also published a risk scenario in which the Russian economy declines sharply from the second half of 2014 to 2016 and imports fall by third relative to their 2013 level. Even according to the risk scenario prepared by the Economics Department, the slowdown of the Russian economy would have no decisive impact on the overall picture of the Finnish economy. In the risk scenario, Finland’s GDP would decline cumulatively by around 1% relative to the baseline scenario by 2016.

“I would emphasise that this risk analysis is a truly far-reaching in terms of its assumptions,” says Director General Markus Sovala, who chaired the working group. “The probable development of Russia has been taken into account in the forecast to be published by the Economics Department in September.”

The Ministry of Finance, the Bank of Finland, the Ministry of Employment and the Economy, the Ministry of Agriculture and Forestry, the Ministry of Transport and Communications, the Ministry for Foreign Affairs, the Prime Minister’s Office and the Government Institute for Economic Research have participated in preparing the report.

Further information:

Director General Markus Sovala (VM/KO, Chair), tel. +358 40 761 2723
Senior Adviser Markku Stenborg (VM/KO, Secretary), tel. +358 295 530 124
Permanent Secretary Erkki Virtanen (TEM), tel. +358 295 063 502
Unit Director Mika Kuismanen (VM/KO), tel. +358 295 530 021
Head of Research Iikka Korhonen (Bank of Finland), tel. +358 50 387 5763
Head of Forecasting Juha Kilponen (Bank of Finland), tel. +358 50 387 5756
Director General Veli-Pekka Talvela (MMM/RO), tel. +358 295 162 150
Research Director Juha Honkatukia (VATT), tel. +358 295 519 413