Oil-rich Russia pays off Soviet debt to Finland ahead of schedule
Bank of Finland estimates Finland to be Russia's largest creditor in relative terms
By Katri Kallionpää
Who would have believed that Russia could pay its debt back to Finland - and ahead of schedule no less!? It would have had until 2020 to do it.
Just a few years ago it seemed that the debts would fall on the shoulders of the Finnish taxpayer.
Fifteen years ago it was even harder for Finns to visualise how the mighty Soviet Union was shown to be penniless, owing a small country like Finland more than EUR one billion.
The Soviet Union was undoubtedly in debt to others as well, owing Germany a sum of money that was many times as high. Nevertheless, if the debt is measured in proportion to the population of the country in question and the size if its national economy, the Soviet debt to Finland was the largest in the world- according to the Bank of Finland, three to four what the Soviets owed to other Western countries.
Nevertheless, in a couple of weeks Russia will pay off the final EUR 222 million of Soviet debt, even though it could have waited until 2020 to do so. It will also deliver about EUR 30 million euros worth of equipment to Finnish research institutes and universities.
The pleasant surprise is the result of the rise in the price of oil, which means that Russia now has plenty of money. "Russia is acting rationally. The payment of debt is sensible use of money", says Ilkka Salonen, Chairman of the Board of International Moscow Bank. Salonen worked with Finland's Kansallis Bank, taking care of the bank's relations with the eastern neighbour, first in Moscow in 1985-1988, and later in Helsinki.
But how did the Soviets manage to accumulate a debt of EUR 1-1.3 billion?
"It just went that way", says Timo Repo, who worked as secretary-general of the Finnish-Soviet Economic Commission until 1992.
The debt accumulated in the final phases of the system of bilateral, barter, or clearing trade that Finland and the Soviet Union were engaged in for 40 years.
In the clearing system, action taken by the state is of greater importance than in multilateral trade in the West. The growth of the debt was a cause of bewilderment to civil servants, industry, politicians, banks, the Bank of Finland, and recriminations were intense.
A key figure in Finland's trade with the Soviet Union, former Neste CEO Jaakko Ihamuotila blamed politicians for what happened. He noted in an interview marking his 60th birthday in 1999 that suddenly stopping the bilateral trade system was a serious mistake for Finland. There could have been a transitional period, if the politicians had really wanted it, he says.
Commercial banks blame the Bank of Finland. "The Bank of Finland and officials probably miscalculated", says Martin Relander, who is now retired. He represented Postipankki in Moscow, and also worked at the Ministry for Foreign Affairs, and in the Ministry of Trade and Industry.
Ilkka Salonen says that it was difficult for Finns to comprehend the difficulties that the Soviet Union was undergoing, because the country had always been very good at paying back what it owed. "The thinking was, that because the sun rose yesterday and today, it will certainly come up again tomorrow."
The Bank of Finland sharply denies that it had taken a risk or misjudged the situation.
Kari Holopainen, the former head of the central bank's section on trade with the east, notes that the Bank of Finland recognised the situation of the Soviet Union better than many others did. The Bank of Finland imposed discipline on the overextended clearing account, which had "degenerated into a brothel" in the late 1980s. Holopainen feels that the emergence of the debt was the result of Finnish recklessness. "People did not understand the Soviet Union. Companies usually had only one contact person in Russia."
The end of clearing trade did not come as a surprise to Ilkka Salonen of Nordea Bank. He says that he heard about such a move in Moscow already in 1985, when he began work there at the Moscow office of Kansallis Bank.
"If it came as a surprise to anyone that there were thoughts like this in the Soviet Union, that person was not following events very closely."
In barter trade, companies made deals, and officials kept things organised - or at least tried to - with the help of annual, and five-year agreements on goods exchange. In the negotiations, the Ministry for Foreign Affairs was responsible for exports, and the Ministry of Trade and Industry answered for imports. The Bank of Finland managed the clearing account, which handled all incoming and outgoing payments through the mediation of Finnish commercial banks.
The trade began after the end of the war, in 1945, but the first clearing framework agreement on trade between the two countries was made for the years 1951-1955. After that, the trade was continued until the end of 1990.
At first, Finland exported metal goods, ships, and machinery, as a continuation of the war reparations. Later exports included products of the wood processing industry - mainly paper. After the Moscow Olympics of 1980, more Finnish-made consumer goods - clothes and foodstuffs - were sold to the Soviet Union.
Imports from the Soviet Union were 90 percent energy.
The clearing account had a credit limit, which means that there could be a small imbalance in case there were momentary aberrations in exports and imports.
In practice, the account amounted to an interest-free credit for the Soviet Union, which exceeded the credit limit many times over throughout the 1980s.
When the price of oil rose, Finland went into debt to the Soviet Union. When it went down again, the opposite occurred.
Until the oil crisis of the 1970s, exports were more or less balanced with imports.
In 1980-1981, the price of crude oil tripled. As a result, exports to the Soviet Union rose to a new record in 1982, comprising as much as 26 percent of all of Finland's exports.
As the price of oil declined, it was difficult to cut back on trade for both political reasons, and with the interests of industry in mind. As a result, the debt rose so high that a new arrangement was drafted.
Under the arrangement, the credit limit was reduced, and credit was interest-free only to a certain limit. In return for this, the Soviet Union required commercial credit.
As the commercial credit was given using convertible currency outside the clearing system, the debt went out of control. Some of it was guaranteed by the State Guarantee Centre, but there was no official monitoring of the clearing system.
At the end of 1990, as the clearing trade system ended, the Soviet Union owed Finland between six billion and 7.5 billion Finnish markka, or EUR 1-1.3 billion, of which FIM 5.15 billion (EUR 870 million) was in outstanding credit.
Of this sum, currency banks were owed FIM 2.67 billion (EUR 450 million). On the actual clearing account, Finland owed the Soviet Union FIM 570 million (about EUR 100 million).
Of the debt, FIM 2.15 billion (EUR 360 million) was in the form of loans to Finnish exporters by Finnish Export Credit Ltd. When Russia was not able to pay it off, the matter became an issue of negotiation in the so-called Paris Club.
Discussions at the Paris Club involved making the debt payable in goods, and the debt has been gradually paid off. The final consignment will be paid to Finland on August 21st.
Helsingin Sanomat / First published in print 6.8.2006
KATRI KALLIONPÄÄ / Helsingin Sanomat