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Central bank chief: Russia's isolation will particularly hit economy in eastern Finland

Economic and business impacts of the "new Iron Curtain" will be particularly felt around eastern Finland, Olli Rehn tells Yle.

Olli Rehn in his hometown of Mikkeli. Image: Markku Tuhkanen / Yle

Russia's isolation from the West, prompted by international outrage over its invasion of Ukraine, will particularly affect the economy and development in Eastern Finland, according to the Bank of Finland's governor, Olli Rehn.

"The brutal and illegal war of aggression that Russia launched has massively disrupted Europe's economy," he said, adding that high energy costs were draining consumers' purchasing power.

Rehn spoke with Yle ahead of a symposium held in his hometown of Mikkeli, in the Etelä-Savo region, located in the eastern part of the country.

"A new Iron Curtain was created when Russia isolated itself from the world economy, and it will be particularly reflected in the economy and prospects around Eastern Finland," he said.

According to the central bank chief, the effects of the situation on Finland should be considered especially in terms of cross-border trade and energy.

As a result of sanctions, Finland has been forced to find alternative sources of liquid natural gas (LNG), coal, and electricity following cutoffs from Russia.

Energy solutions

"On the energy side, Finland's situation is not as bad as in many other countries. Domestically, we have lots of renewable energy and nuclear power. An effort was made to ensure security of supply by using various energy sources and different production methods," he explained.

In terms of LNG, Finland improved its situation by setting up LNG terminals and making plans to boost supply via the Balticconnector pipeline across the Gulf of Finland in Estonia.

The overall impacts on trade are bleaker, he said, as commerce with Finland's eastern neighbour was already halved in 2014 following Russia's annexation of Crimea.

Nevertheless, before the latest invasion of Ukraine, trade between Russia accounted for around five percent of Finland's exports. This number, however, has dwindled dramatically, according to Rehn.

"It's affecting quite a few sectors in Finland," he said. "This especially applies to eastern and southeastern Finland. It is important to seek solutions to problems in those areas, including [solutions] from the state," he said.

The Finnish Government has appointed a working group to consider and address the new economic situation facing the affected region.

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Economy and security

Eastern Finland's economy was already hampered by the Covid crisis which almost completely stopped the flow of Russian tourists into the area.

"We need to strengthen trade with other parts of the world and consider how we can create momentum in Eastern Finland's economy by making investments in education and business endeavours," he said.

In terms of household economies affected by Finland's changed situation with Russia, Rehn said that tax relief is not really a viable solution.

"Generally, the view of economists is that in such situations, general tax reductions are not very effective and are very expensive for public coffers," he said, adding that other government-led targeted measures could be a more justifiable option to ease the economic pinch felt by consumers.

The central bank boss also said that Finland's pending Nato membership will likely reduce reluctance of risk often felt among foreign investors.

"In this sense the economy and security go hand-in-hand," Rehn said.