Sunday, August 17, 2008

Russo-Finnish Trade: A Research Proposal

I have been having an interesting Usenet conversation on the subject of economic relations between Finland and Russia in the postwar period. The facts almost everyone agrees on are:

Finland started by paying Russia a large sum in "reparations."

Thereafter trade was conducted as barter, with an accounting system to keep track of which country owed how much to which. Russians provided Finns with raw materials, especially oil, at a price said to be somewhat below the current world price. Finns provided Russians with a variety of manufactured items--it isn't clear how the prices were determined. No money was actually supposed to change hands. At the end of the period, when the Soviet Union collapsed, it turned out that the Soviets owed quite a lot to the Finns; Russia has now paid off the debt.

The obvious conjecture, given the reparations, the relative strength of the two countries, and their previous history, is that the trade was a form of disguised tribute, that the Finns were paying off the Russians not to attack them. Several people in the conversation, however, who claimed to be familiar with the facts--Finns and an American long resident in Finland--claimed that it was the other way around. The Russians provided the Finns oil at below market prices and accepted low quality manufactured goods from the Finns at prices higher than they could have sold them for elsewhere.

In the course of the exchange, three different explanations were offered for this pattern of trade:

1. The Russians were bribing the Finns to provide them political support. Finland was the one democratic and capitalist country that was in some sense an ally of the Soviet Union; the relation could be used by the Soviets as evidence of their interest in peaceful coexistence.

2. The Russians were constrained by their own ideology in ways that either made them relatively indifferent to the real terms of the exchange or made it hard for them to trade with other capitalist countries and so forced them to accept the terms they could get from the Finns.

3. The Finns were smarter than the Russians, or at least understood trade better, and so tricked the Russians into trading on terms favorable to the Finns.

Of these explanations, the first strikes me as plausible, the others considerably less so.

The project I am suggesting is to figure out, on net, whether the exchange was profitable for Finland at the expense of Russia, profitable for Russia at the expense of Finland, profitable for both, or a loss for both. The Finns seem sure that it was in the economic interest of Finland, perhaps in the political interest of Russia, but they did not offer a lot of evidence. The trade and the terms were arranged government to government, providing lots of opportunities to fudge the figures. In particular, it was possible for the Soviets to accumulate a substantial interest free debt, as they eventually did. It is claimed that that happened only late in the relationship. It is also claimed that the people concerned were surprised when they discovered how much the Soviets, on net, owed--which suggests that nobody had been keeping very careful track of it.

The hardest part of project, supposing one could get data on what each side delivered to the other when, would be pricing the goods--figuring out what they would have sold for elsewhere.

[Anyone interested in the Usenet exchange can find most of it at with this search.]


5 Comments:

At 4:45 AM, August 18, 2008, Blogger Daniel A. Nagy said...

From what I remember, the most visible part of this trade in the Soviet Union (I lived in Leningrad at that time) were not manufactured goods but agricultural produce: eggs, various milk-products and other edible stuff. The only manufactured good that I remember to have been sold in large numbers were doorlocks; a considerable portion of Leningrad's doorlocks were (and still are) Finnish-made.

In Finland, they licensed several Russian designs; the Finnish-made versions were generally superior to those made in the USSR: Lada Baltic cars and Kalashnikov assault rifles come to mind. I have no idea how the licensing fees have been determined.

There was significant high-tech export from the USSR to Finland as well: the Loviisa nuclear power-plant and all the stuff that kept it running. As far as I know, Finland was part of the East-European electric power grid, so electric power was exported and imported both ways depending on load conditions.

Also, there was some cooperation in shipbuilding: Finland built large hulls for the USSR, while Leningrad's shipyards sold various small vessels (e.g. Meteor hydrofoils) to Finland.

Of course, there might have been a large trade in non-consumer goods, which was not visible for the average person.

 
At 4:48 AM, August 18, 2008, Blogger Daniel A. Nagy said...

My general perception was that Finland was sort of a hole in the Iron Curtain through which most of the East-West trade was passing. It was immensely profitable for Finland, that's for sure. But I suspect that it was vital for the USSR as well.

 
At 3:44 PM, August 18, 2008, Anonymous tobbic said...

I'm not a expert on this issue but I'm a Finn so I thought I leave a comment.

Bilateral barter trade was closely connected to the general management of Finland-USSR relations.

In 1948 Finland and USSR entered to the Agreement of Friendship, Cooperation, and Mutual Assistance. (http://en.wikipedia.org/wiki/Finno-Soviet_Treaty_of_1948)
This tied Finland closely to USSR: 1) If attack on USSR through Finnish territory, Finland will resist together with USSR assistance
2) Finland cannot join alliances directed against USSR (read NATO)
3) In return Finland secured a mandate of independence in relation to USSR.

The bilateral barter trade between Finland and USSR started in 1950 (13.6.1950) with 5-year trade agreement formed between Finnish prime minister Urho Kekkonen and Stalin. This was personal move by Kekkonen because Finnish President at the time, J.K Paasikivi, had written (in his diary) that he thinks that trade between Finland and USSR should not be extended. (And earlier in 1949 these bilateral trade negotiations were cut off political reasons. It seems USSR was not satisfied with the current prime minister Fagerholm).
It can be argued that Kekkonen used bilateral barter trade as a political tool to secure more power to himself as a man supported by the USSR. The barter trade was continued later on and extended by Kekkonen (when he was the president).

Bilateral trade was an extension of Agreement of Friendship, Cooperation, and Mutual Assistance. It had economic, domestic policy and foreign policy motivations for both countries.

Finland primarily exchanged manufactured goods to oil, natural gas and wood. In Finland it has been long taught that Finland was the economic winner in this trade. The myth that Finland got oil from USSR at significantly lower prices than market price has been falsified: Neste Oil Oy (company that formerly managed the oil importing from USSR) has released data which shows that in general the oil was delivered at at the world market price and sometimes below the market price (http://www.taloussanomat.fi/energia/2008/01/09/neukkuoljy-ei-pelastanutkaan-suomea/2008730/12)
I suppose trade was beneficial to the state sponsored Finnish firms involved in it (low risk investments guarenteed by the USSR). But I doubt that it was beneficial to the ordinary tax payers. Also, to my knowledge, when USSR started to accumulate deficit in these transactions, this loan was interest free and very good deal for USSR (taking inflation in to account).

The bilateral trade agreements allowed USSR to control Finnish foreign policy and domestic policy. The bilateral trade employed over 100 000 people in Finland accounted 17-25% of Finnish foreign trade. It offered USSR a means to manage political developments in Finland to a direction which it favored. It seems that Finnish president Urho Kekkonen who was the architect of these treaties in the Finnish side used USSR trade ties to wedge more political power to him and his allies (my opinion). Also, many of the most influential Finnish businessmen were involved in the trade with USSR and were dependent on that fact that the USSR and KGB viewed them favorably (for otherwise they would be shortly dismissed). This further increased the USSR influence to Finnish foreign and domestic policy.

To Finland trade offered a way to keep the USSR happy and set limits to its involvement in Finnish matters. Also, it can be argued that Finland was capable to get good prices of inferior quality exports to USSR because of privileged status and closed nature of USSR economy.

So USSR maintained strong influence on Finnish politics through this pattern of trade and also secured some economic benefits (e.g the loan). It seems Finnish politicians and other power figures used this trade to secure more political power to them and their allies. There were benefits to privileged business man in state sponsored ventures. It was a means for Finland to contain USSR influence and slowly ascertain new degrees of political freedom to Finland.

(I suppose my view is contrary to the public opinion in Finland which asserts that the trade was economically very beneficial to Finland.)

 
At 5:17 AM, August 19, 2008, Blogger Anton said...

This is a good read on the subject:

Finnish-Soviet Clearing Trade and Payment System: History and Lessons. The PDF document in particular is worth reading.

 
At 9:16 AM, August 19, 2008, Anonymous Douglas Knight said...

If Finland was supplying low marginal cost manufactured goods to Russia at a discount from the market rate, it's not clear that this is Finland giving Russia money; it could be price discrimination.

 

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