Denis Davydov: Finnish companies should be prepared for increased uncertainty and risks due to sanctions against Russia
– Current economic and political sanctions against Russia, as well as Russian countermeasures, make the business environment more volatile and less predictable, which has negative effects on any business dealing with the Russian market, Davydov says.
According to news reports on Tuesday evening, European Union foreign ministers have reached an agreement on new sanctions against Russia. These sanctions are in response to Russia's decision to recognise the independence of Ukraine's separatist regions. The sanctions will be targeted at Russian banks and individuals.
The EU is also prepared to introduce further sanctions at a later stage if Russia continues to escalate the crisis. The EU may later extend sanctions to a range of economic activities and technology exports. Germany has also decided to put the “Nord Stream 2” gas pipeline project on ice.
– As Russia is a relatively large energy exporter, the EU and particularly Finland, which is in close geographical proximity with Russia, may experience additional costs if sanctions are tightened. In this case, Finnish companies would probably want to be prepared for periods of greater uncertainty and risk, which would affect their business decisions, says Davydov.
Russia-related sanctions had a disproportional impact on European companies
Davydov published a research paper last year, which examines the effect of sanctions on businesses, together with Assistant Professor Jukka Sihvonen from the Aalto University and Senior Adviser Laura Solanko from the Bank of Finland. The study shows that Russia-related sanctions caused difficulties for one in six firms during the first year of sanctions. Using artificial intelligence, the study analyses annual reports of more than 3,000 companies from 35 different countries during 2014 – 2017. The researchers analysed firms' sentiment towards sanctions and the context in which sanctions were mentioned.
– We observe that Russia-related sanctions had a disproportional impact on European companies.
The study found that Russian companies were most strongly affected by sanctions, but that the impact was also particularly significant in Austria, Jersey, Cyprus, Finland, Estonia and Germany.
– We noticed that Finnish firms were relatively more negative in their discussions of sanctions than firms from other European countries.
According to Denis Davydov, the impact on Austrian and Cypriot companies is explained by tight foreign direct investment (FDI) links with Russia. Finnish, Estonian and German companies, on the other hand, have close trade relations with Russia.
– Some Finnish companies have a significant business exposure in Russia and that is why we spot them among the most pessimistic about sanctions.
The first wave of sanctions in 2014 significantly increased business uncertainty, according to Davydov. However, the study found that over time, mentions of sanctions in annual reports have declined.
– This suggests that European and Finnish firms have been able to adapt to the sanctions regime and find ways to minimise the effects of restrictive measures on their businesses.
The newly imposed sanctions bring more material for research. Denis says that he will continue his research on sanctions. In addition, a new version of his earlier article has been accepted for publication in the high-ranking journal Post-Soviet Affairs.
Davydov, Denis; Sihvonen, Jukka & Solanko, Laura (2021) Who cares about sanctions? Observations from annual reports of European firms. BOFIT Discussion Papers 5-2021. Bank of Finland. http://urn.fi/URN:NBN:fi:bof-202104201183
Denis Davydov, University of Vaasa, tel. 029 449 8468, denis.davydov (@) uwasa.fi
Davydov, Denis; Sihvonen, Jukka & Solanko, Laura (2021) Who cares about sanctions? Observations from annual reports of European firms. BOFIT Discussion Papers 5-2021. Bank of Finland. http://urn.fi/URN:NBN:fi:bof-20210420118