Shifting Realities: The Unintended Consequences of Sanctions Against Russia on the Finnish Economy

Finland's historically close economic relationship with Russia, characterized by geographical proximity and decades of collaboration, has been significantly disrupted by the European Union's (EU) and United States' (US) recent imposition of unprecedented sanctions against Russia. As a participant in the EU sanctions, Finland faces unique challenges, as the country itself shares a more than 1000 kilometers long border with Russia and ultimately has disrupted it`s formerly strong trade relations with Russia. This study examines the impact of these sanctions on Finland's own economy, addressing a gap in existing literature that most often has focused on the target country of sanctions, rather than the sanctioning countries themselves and their overall economy. To gain insight on how Finland`s economy has been impacted, this study first gains a profound understanding of Finland`s trade structure and dynamics. To analyze the impact from sanctions, the Synthetic Control Method (SCM) will be employed to construct a counterfactual Finland and a scenario where Finland did not put sanctions against Russia. The SCM will be constructed by using a key economic indicator, GDP per capita as the outcome variable with variables such as exports, imports and investments to be used as predictors. The objective is to isolate the impact stemming from the sanctions and thus includes a donor pool of countries who are not part of the sanctioning countries or have minimal trade relation with Russia and are not affected by them. The synthetic control model reveals a significant negative impact on the Finnish economy, a predicted average loss of 8% in GDP per capita, confirming the hypothesis that indicates that the combined effect of institutional pressures and the subsequent need to adjust trading partners to cover resource dependencies due to sanctions against Russia has resulted in a statistically measured decrease in Finland's GDP growth in comparison to the synthetic Finland, unaffected by the sanctions. The study will contribute to existing literature about the impacts from sanctions on a sanctioning country, which in this case has caused unintended negative consequences to the Finnish economy and thus provides valuable data-driven insights to inform policy decision making and be of interest to the business community as well as the public. Keywords: Sanctions, international trade, institutional theory, synthetic control method.