Russia has amassed a large buffer fund that it believes will survive the crisis. At the same time, per capita economic output is shrinking and real wages are dragging on.
Russian president Vladimir Putin confirmed the fears of the world early Thursday morning, and ordered his army to attack Ukraine. The attack has major human and economic consequences.
HS has been closely following the offensive development of Russia over the years. This story explains the state of the economy of Russia, which started the war.
Russia has a huge “war”
Russia has amassed for himself, in all silence, a great treasury. The country has accumulated oil and gas revenues in buffer funds, which could mitigate the impact of lost export earnings.
Professor at the University of Turku School of Economics Kari Liuhdon According to Russia, the value of Russia’s reserves was nearly $ 200 billion at the end of January, in addition to which the country has more than $ 600 billion in foreign exchange reserves.
Exports of natural gas are a major source of income for Russia.
The stated reason for raising buffer funds has been to hedge against oil price fluctuations.
Professor of Environmental Policy in Russia Brother-Pekka Tynkkynen They also see another role in the Alexander Institute.
“One reason is that they serve as a guarantee system for the geopolitical goals of Vladimir Putin’s regime. If there is a tight spot, Russia will have a buffer. For the same reason, Russia has tried to be debt-free, ”Tynkkynen told HS at the end of January.
Read more: In silence, stuttering Russia has amassed a coffers with which it will endure the crisis
Russia’s per capita GDP has shrunk
Russian the attack is based on deplorable economic development. Russia’s GDP is one of the largest in the world. According to the World Bank, Russia’s gross domestic product (GDP) in 2020 was more than $ 1,483 billion, the 11th largest in the world.
However, relative to the population, GDP is remarkably small, at only about $ 10,126. It is illustrative that, for example, Finland’s GDP per capita is almost five times higher than in Russia.
Since 2010, Russia’s per capita GDP has shrunk by about $ 550, while in Finland it has grown by more than $ 2,300.
Read more: Russia’s deteriorating economy may be one explanation for the country’s defiance: “A sense of inferiority combined with despair is a dangerous combination.”
Russia’s median salary has remained the same for 10 years
Russian the central bank is in the hands of professionals and operates like a normal central bank. The data produced by the country’s statistical institute can be relied on, at least in essence.
Of course, Russian economists are not untouched or isolated from the rest of society. There are clear limits to freedom of debate: the position of President Vladimir Putin and the current political system cannot be called into question.
The central bank is not really independent either, because Putin’s Russia does not have institutions that are independent of those in power.
However, the central bank has been able to pursue its own, professional policy because of its support for Putin. Putin, like central bankers, sees prudence in fiscal and monetary policy as a virtue.
Precautionary is also reflected in the huge reserves that Russia has raised from its oil revenues. Some experts think it’s crazy to keep in funds an amount equivalent to 12 percent of GDP when the state is virtually debt-free.
The strength of macroeconomics is not reflected in the daily lives of most people. Real disposable income is still at the level of 2012, last year the median salary was less than 400 euros. The low level of wages is only partly explained by the gray economy.
However, the Ministry of Finance and Putin are reluctant to use their reserve funds, although there is a lot of talk about various investment projects. Putin has saved money in preparation for Western sanctions. However, the ministry knows that the money will be stolen when it is released.
Public investment is important in Russia, as the lack of the rule of law and corruption hamper private investment.
The share of the state in the economy has grown so significant that the system can be called state capitalism. However, the lack of reform threatens to reduce long-term economic growth to well below 2%.
Read more: In Finland, it is worth feeling the Russian economy closing
Elevated euro exchange rates in St. Petersburg on Friday.
The ruble has collapsed
Ruble has weakened historically against the dollar and euro. On Wednesday, for example, one dollar received a maximum of almost 90 Russian rubles. For example, in January 2020, one dollar received just over 60 rubles. The data is based on the data of the information service Refinitiv.
The ruble is also historically weak against the euro, according to Forex statistics. One ruble received about 0.011 euros on the ruble on Thursday.
The weakening currency will benefit oil and gas companies that trade in dollars. So the rich get richer.
“Wealthier local people are also transferring their funds from Russia to the West,” said Aktia’s portfolio manager. Patrik Moring on wednesday.
Ordinary people, on the other hand, become impoverished as their purchasing power weakens as the price of imported goods becomes more expensive.
In Russia, inflation was 8.7 per cent in January and the central bank raised the key interest rate to 9.5 per cent in February. At the same time, income development in Russia has been modest.
However, the rise in interest rates has not had a positive effect on the value of the ruble, indicating political risk, Moring said.
Read more: Russia’s threat is costing the country: the stock market has completely collapsed in a short time and the weakening of the ruble is punishing ordinary people
In addition Households that have invested in the Russian stock market are losing their wealth.
Overall, Russia’s actions in Ukraine and in international politics will be very costly for its own market and, in the longer term, for Russian households, according to a senior economist at the Bank of Finland. Heli Simola on wednesday.
Thursday’s attack, on the other hand, also hit the richest oligarchs. Russia’s key stock market indices melted completely, while at the same time the value of the assets of Russian billionaires melted less than a total of $ 39 billion a day.
However, some of the money recovered on Friday, as the Moex index, for example, rose 20 percent after Thursday’s collapse.
Read more: Russian oligarchs lost nearly $ 40 billion in one day as Putin’s troops flooded Ukraine
Read more: London has been a major money laundering for Russian oligarchs – the distribution of “golden visas” costing more than two million was stopped only last week
Impact on the Finnish economy
To Finland Russia has been a close and important trading partner. Sanctions and possible counter-sanctions affect Finnish companies, exports and imports.
According to customs, the value of exports from Finland to Russia was EUR 3.4 billion in January – November last year. The value of all Finnish exports was EUR 61.4 billion, ie Russia’s share was just over 5.5 per cent.
Russia’s importance as Finland’s trading partner has waned. In 2008, Russia accounted for 11.6 per cent of Finland’s total exports of goods.
Exports to Russia have not recovered from the sharp decline that began with the financial crisis. Researcher at the Institute for Business Research (Etla) Birgitta Berg-Andersson According to the report, Russia’s share of Finland’s exports of goods was still 10 per cent in 2012. The figures of just over 5 per cent have remained the same since 2017.
“In terms of exports, Russia is now less important to Finland if we compare it 10–15 years earlier.”
Read more: The West imposes harsh sanctions on Russia, Russia’s response is vital for the Finnish economy – “The effects are impossible to calculate”
Finnish companies are failing in Russia
More a large Finnish company has left Russia even before Russia’s attack on Thursday. For example, Posti has said it will sell Itella’s Russian business. Neste, on the other hand, has sold its Russian service station to a Russian oil company.
Ownership of Neste stations in Russia has been transferred to the Russians. Picture of St. Petersburg from January 2020.
At the beginning of February, at least YIT considered the sale of its Russian operations.
Finnish Lujabetoni recently announced the sale of its business in Russia.
At the same time, there are many companies on the Helsinki Stock Exchange with high Russian risks. Of the major companies, Nokian Tires, Fortum and Finnair have the most significant direct risks to Russia.
Read more: The West imposes harsh sanctions on Russia, Russia’s response is vital for the Finnish economy – “The effects are impossible to calculate”
Read more: CEO of Unum, owned by Fortum: The situation in Ukraine causes “deep unrest”, the company has a wide range of risks in Russia
State Fortum, a majority-owned energy company, owns gas and coal-fired power plants and solar and wind power in Russia. Fortum says it is Russia’s largest producer of wind power.
Fortum’s subsidiary Uniper is also linked to Russia in many ways. Uniper owns gas and coal-fired power plants in Russia and is a co-owner of the Nord Stream 2 gas pipeline across the Baltic Sea.
On Thursday, Fortum said the Russian attack would have virtually no effect on its operations in Russia.
Nokia Tires is perhaps the most closely tied to Russia on the Helsinki Stock Exchange. The Russian plant is the largest and most efficient of the company’s plants, accounting for almost 80 percent of Nokian Tires’ tire production last year.
A special series of events was seen on Friday when the news agency Reuters reported that Nokian Tires would move its production out of Russia. However, the company denied the matter to HS.
Nokian Tires has a factory in Seouloski, Russia. Picture from 2005.
Russia closed its airspace to British airlines on Friday. If a similar ban hits Finnair, the state-majority-owned airline will soon be in big trouble.
“The cornerstone of Finnair’s strategy is the company’s geographical location, which enables the fastest connections in the growing aviation market between Asia and Europe,” says Finnair in its 2020 annual report.
Right now, that geographical location seems as much a risk as a competitive advantage.
Russia or Ukraine are not the number one destinations for Finnair’s flights, but Russia is nevertheless a vital partner for Finnair’s operations. Finnair wants to grow especially in scheduled traffic in Southeast Asia, and then the most direct route will cross Russia.
If Finnair lost its overflight license in Russia, it would mean a blow to the company’s business that is almost comparable to an interest rate crisis.
The company’s communications were told on Friday that the situation and possible new decisions will be monitored on an ongoing basis.
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