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Nordic Region: Finland Eyes to the east

The possible economic impact of Russia’s annexation of the Crimea is causing concern among Finnish investors. While investors see the sanctions posed on Russia as minor, they expect recent rouble depreciation and weakening stock markets to affect the Finnish economy.

Russia is a key export market for Finland and an important market for the tourism sector. Sales to Russia make up more than 9% of all exports, while Finland is the second most popular travel destination for Russians after Ukraine. Russian tourists and holiday home owners play a significant role in the retail sector in eastern Finland, because most of the 5,500 properties owned by Russian nationals are holiday homes in that part of the country.

The mutual pension insurance company Etera has invested some €53m of its total portfolio – about 1% – in Russia. Its holdings consist of some €9m in equities, €24m in bonds and approximately €20m in property.

Jari Puhakka, CIO of the €5.6bn firm, says all Etera’s investments in Russia have been made through funds. “If the crisis in Crimea continues or grows, what is more important than direct investments in Russia is the possible spill-over effect to domestic and European investments. Even if the situation were resolved without imposing more significant sanctions on Russia, the events in Crimea have created long-term insecurity among investors,” he said.

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Puhakka also comments on Finnish-Russian trade relations, saying that a drop in tourism from Russia, because of a weaker rouble, would most affect Finnish retailers and property markets. “This is just an example of the risks in the current setting,” he said.

Ilmarinen Mutual Pension Insurance Company has also invested a minor part of its portfolio in Russia, according to its CIO, Timo Ritakallio. “Political risk in investing in Russia has become notable and that is why the market is not attractive from the viewpoint of an institutional investor,” he says. “The crisis in Ukraine and the weakening prospects of the Russian economy affect Ilmarinen’s portfolio, mostly through Finnish listed companies with operations in Russia.”

Taaleritehdas is a Finnish investment company managing €2.8bn, of which approximately €50m is invested in Russian listed and unlisted equities. Many of the firm’s customers are Finnish pension funds and pension insurance companies.

Visa Manninen, its director of emerging markets, points to the weaker performance of emerging market investments overall in the past 12 months, but to even weaker performance in Russia because of the crisis in Crimea. “In the current business culture, the corporate sector in Russia cannot make proper long-term plans, and this really eats up Russia’s attractiveness in the eyes international institutional investors. The issues that really hit investor appetite in Russia are the overall insecurity in corporate life, which is demonstrated by state intervention, as happened in the case of electric utility price caps and the takeover of oil company TNK-BP by Rosneft,” he says.

This is not the full picture, Manninen qualifies. “There are many companies in the services and consumer sectors, that have demonstrated very determined and successful development of the business and are likely to do so also in the future,” he adds.

In 2013, Russian GDP stood at 1.3%, undershooting forecasts, due to a tangible slowdown in domestic demand. There was a steep decline in fixed capital investments of state enterprises and state consumption slowed.

The Russia team at the Bank of Finland expects growth of the Russian economy to slow down further this year despite a pick-up in global economic growth as the events in the Crimea will cause investors to postpone investments.

“Imports will take a slight dip. In 2015 and 2016, we do not expect the oil price to rise, but growth in Russia will pick up slightly as the global economy continues to revive,” the bank stated in a report published the week after the annexation. “As long as the effects of the Crimean events stay contained, the economy should still grow about 1.5% per annum in 2015 and 2016. Import growth should run at a couple of per cent per annum. Output growth may become constrained by the capital stock and low productivity gains due to weak fixed capital investments,”

Puhakka says his fund is prepared to face further weakening of the Russian economy: “If necessary, Etera can sell its equity and fixed income investments in Russia. In addition, we can reduce the investments which are strongly reliant on Russia,” he says.

“On the other hand, we did cut down on both of these risks last year – direct investments in Russia and investments that can be affected by developments in the Russian market,” Puhakka continues. “So the more important question is how a potential escalation of the situation would affect global equity markets. But again, we also reduced our equity risk considerably last year, so the situation is very much under control.”

Manninen says Taaleritehdas is reacting to the situation by selling and buying according to market developments. “We have received a lot of inquiries from concerned investors. We are reacting on the crisis by both selling and buying, following how this all affects different sectors in Russia,” he says.

“Valuations have come down but prospects for many Russian companies haven’t changed much yet. Some consumer sector companies, for example, still expect growth to reach even 20% this year. In many sectors in Russia, the issue at stake is more to gain market share rather than the overall sector growth. The upcoming weeks will show the direction this conflict will take both politically and economically.”

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