#13 - JRL 7130
René Nyberg
Ambassador of Finland to Russia
http://www.finemb-moscow.fi/
Kaha Bendukidze Seminar
Higher School of Economics, Moscow
1.4. 2003
"Wit is Woe" or the dilemma of Grand Duke Alexander Mikhailovich

It is not easy to describe the advantages of smallness and specialisation in Russia. Everything is big in this country and Russian industry, like the society in general, is living as a prisoner of an image of greatness. However, a fetish for size is by no means an invention of the Bolsheviks. Large-scale expansionary growth is a recurring tone in Russian history. That is why Russians have always found comparisons with America so appealing.

No one has described this mythical configuration better than Grand Duke Alexander Mikhailovich (1866-1933), a grandson of Alexander II and a cousin and brother-in-law of Nicholas II . He releases his emotions in the book that he published in the United States in 1932:

"I thought of my grandfather, my uncle, and my cousin. They reigned over an empire which was even richer than this new country, confronting the same problems, such as an immense population incorporating in its midst several scores of nationalities and religions, tremendous distances between the industrial centers and the agricultural hinterland, crying necessity for extensive railroad building, etc. American liabilities were not smaller than ours, while our assets were bigger, if anything. Russia possessed gold, ore, copper, coal, iron; its soil, if properly cultivated, should have been able to feed the whole world. What was the matter with us? Why did we not follow the American way of doing things? We had no business bothering with Europe and imitating the methods befitting nations forced by their poverty to live off their wits. Europe! Europe! It was our eternal fatal desire to mingle with Europe that had put us back God knows how many years."

Alexander Mikhailovich's dilemma is also the new Russia's dilemma, or perhaps it would be better to say temptation of the old. A temptation to be content with what is, to remain a dual economy. What is involved is the relationship between energy- and raw materials-based development and the technology-driven kind.

We all know that Russia is a wealthy country, although its people are poor. The opposite situation obtains in Denmark and Japan, neither of which has natural resources to speak of. Finland is a more recent example of a poor country that has become wealthy by being afflicted with the woe of wit in the way that Grand Duke Alexander Mikhailovich meant.

A trading nation

Finland is today one of Russia's biggest trade partners. The total value of trade between us is approaching €7 billion. That is more than Russia's trade with Japan or France. Finland's total exports in 2002 came to nearly €50 billion. Trade with Russia accounted for less than 10% of our total imports and exports. For comparison, I should mention that the Soviet Union's share of Finnish foreign trade in the post-war period averaged about 15% and went as high as 25% in some years. For comparison, I should mention that Finland's trade with China totals about €3 billion.

As these figures reveal, Russia's northern neighbour trades with the whole world. The Finns are engineers in their souls and Finland's economic success is founded largely on technical competence. Finland is also a post-modern country, because the relevance of borders to industry and trade is relative. Finnish industry nowadays does more than half of its investment spending outside the borders of Finland. More than half of the persons on Finnish industry's payroll are working outside Finland. For example, the Finnish companies operating in eastern China have a combined turnover in excess of €2 billion. The ownership structures of many world-class companies are so international that the question of whether or not a company is Finnish is nowadays meaningless. If the capital that fled from Russia had been invested in industry and business abroad rather than spent on conspicuous consumption, Russia's position in the global economy would be a lot stronger today.

The best and most visible example of a global Finnish company is Nokia. Last year, Nokia's turnover of €30 billion slightly exceeded Gazprom's total. Over 90% of Nokia's shares are held by international institutional investors, i.e. various funds. But Nokia's top management is Finnish, and most of its research and development work is done in Finland. The great bulk of production is located in many parts of the world: America, China, Hungary, the UK and so on. Nevertheless, nearly half of the Nokia workforce is still based in Finland.

The antithesis of Russia

Finland is an example of the relativity of bigness. The combination of a limited population and a world-class industry can only be explained by the specialisation that a global economy demanded and promoted. This, in turn, required inputs to develop first and foremost people. In this respect, Finland is, according to traditional thinking, the antithesis of Russia.

The border between Finland and Russia is probably one of the deepest standard-of-living gulfs in the world. This applies to both wages and life expectancy. But the gulf reflects technological solutions as well. Finland is a northern country with climate problems that are familiar to Russians. But pipes do not crack in Finland, nor do main highways succumb to frost. Finland is a country that imports energy, but exports energy technology.

Early this year I attended the opening of an extension to a plywood mill in Chudovo, Novgorod. I asked the Finnish managers of the joint venture whether they used the waste generated in the process and similar materials as fuel in the same way as is done in Finland. I was told that gas is so cheap in Russia that it does not pay to even consider any other fuel. When I followed up by asking what they did with the waste in that case, the mill manager replied that it was being exported to Finland - for use as fuel in a mill just across the border. In other words, wood waste that no one wants on this side of the border is a valuable fuel on the other, even after it has been transported 400 kilometres.

The logic of bigness and smallness

When we ponder the logic of bigness and smallness in industry, the Finnish energy economy provides one of the best illustrations. I shall take two extreme examples: Wood-based bioenergy covers some 20% of Finland's own energy consumption and already 10% of electricity generation. As much as 70% of the energy used by the Finnish forest products industry is derived from wood. No other developed country utilises bio-energy on such a large scale.

Finland's specialisation in energy technology can be compared to our specialisation in information technology and paper production. Exports of energy technology now account for six per cent of our total exports. They quadrupled in the 1990s and are valued at around €3 billion now. Finnish expertise in relation to bio-energy and combustion technology is a significant strength also on the international market for technology to limit greenhouse gas emissions.

A second interesting example from the Russian point of view relates to nuclear power. Finland is the only European Union member state that is currently adding nuclear power capacity. The last day of March, was the closing date for tenders to build the new nuclear plant.

I accompanied the Russian Nuclear Energy Minister Alexander Rumyantsev on his visit to Finland last February. As you probably know, Finland has two Soviet-built and two Swedish-built power reactors. It is interesting to compare the operational efficiency of Finnish and Russian nuclear power plants. The four in Finland generate 21.4 TWh per year, Russia's 30 reactors generate 141.6 TWh. At 94% (in 2001), The Finnish reactors boast the world's highest average annual capacity factor. The corresponding figure for Russia is about 70%. Specialisation

Specialisation by a globalised industrial sector is the key to understanding Finland's success. I shall take a traditional example and a new one: a determined drive to increase the degree of processing guarantees Finland technological leadership in the world forest products industry. Finland has only 0.5% of the world's forest resources, but our share of global production of coated paper is 25% (Annex 1). We have been able to raise our degree of processing so strongly thanks to technological competence and very substantial investment. But to a modern Finland the forest products sector means more than just making paper or sawing timber. An extensive advanced-technology totality, what we call the forest cluster, has grown up around forestry and the forest products industry (Annex 2). Finland has a solid international lead in paper machines, mechanical wood processing machinery, manufacturing various kinds of forestry machines, process automation, research and consultancy services.

There is probably no other sector besides the forest products industry in which Finland and Russia need each other so much. Developing the forest products industry is a question of overriding importance for Russia from the perspectives of both employment and regional and industrial development. Russia does not have a single paper or pulp mill less than 20 years old. A modern paper mill nowadays costs around a billion euro. It is only a matter of time before the first new paper mill is built in Russia. But a paper mill requires a dependable supply of wood, efficient logistics and availability of energy. A pulp mill with an annual output of a million tonnes needs to receive a full road rig of wood every 12 minutes. The process allows no room for interruptions. A supply of wood presupposes forest management and tree harvesting. Neither is possible without an adequate road network. The annexed picture shows the relative densities of the road networks on either side of the border between Finland and Russia-Karelia (Annex 3).

Private ownership of forests has traditionally been a typical feature of Finland and it is very broadly-based. As early as the 18th century, when the country was under Swedish rule, a law prohibiting the destruction of forests was passed. In Russia, forests are owned by the Federation. There is a general view that the co-existence of different forms of forest ownership ensures balance in the way forests are exploited and promotes sustainable forestry. Russia is advancing cautiously in its reform of proprietary relationships. It is to be hoped that enough of the forest-owner's powers will be delegated from the Federation to its subjects. The period of validity of leases and concessions and the terms of contract applying to them ought to be such that the party exploiting the forest can assume a similar long-term responsibility for its development as the owner has.

A practical example from Siberia, which I visited with a delegation from Finnish industry last autumn: the east Siberian region we saw has an area bigger than that of Finland. Its forest resources are notionally enormous, but those to which the road network permits access are very limited. The most easily accessible forests have been subjected to intense felling for decades, whilst the more remote ones are not being exploited. Inadequacies in the sivilcultural management of the felled areas have led to an increase in the number of low-value broadleaf forests. A lack of infrastructure makes it difficult to redress the situation. This region is not a unique case; the problem of unbalanced exploitation of forests can be seen in many other regions as well.

Information industry

The biggest success story in the history of globalised industry in Finland is beyond any doubt the information sector. It is a new segment of operation in which a technological lead and favourable circumstances created the prerequisites for the emergence of a completely new branch of industry.

There are several factors in the background to development. The pattern of the Finnish information industry contains a great deal of other actors than Nokia, which has undeniably been one of the great international success stories in recent decades. Looked at in the broad picture, Nokia's importance to Finland is founded on the information industry cluster that has emerged around the company and largely thanks to it. Despite its dizzying growth, Nokia has managed to keep its personnel strength within limits. Last year, the company had 52,000 employees, of whom 22,500 were in Finland. Outsourcing is undoubtedly one of the secrets of Nokia's success. It presupposes trust, that contracts are honoured; to put it in a nutshell: the rule of law. The situation is the same everywhere in Europe: it is small and medium enterprises that create jobs, not large-scale industry.

Rather than being in bigness, the decisive factors in the information industry lie elsewhere. I would especially emphasise the combined effect of the following three factors: education policy, official regulation and technological standards.

For decades Finland has been investing strongly in training as well as in research and development. This has been made possible by close trilateral cooperation: universities, state-owned industrial enterprises as well as private companies have combined their research inputs. Finland's rate of R&D spending as a proportion of GDP is one of the highest in the world and over three times bigger than Russia's. Unlike in Russia, the great bulk of the money in Finland comes from companies (Annex 4).

Finland is a Scandinavian welfare state and lacks the features of a class society that one finds in, for example, some western European countries. In comparative studies of competitiveness Finland emerges as one of the world's most successful societies. As a country where the rule of law has traditionally prevailed, Finland boasts the world's lowest corruption rate. Our education system is likewise among the best in the world. Surveys have shown that Finnish 15-year-olds are the most literate in the OECD countries. In mathematical skills, Finland ranked fourth and in the natural sciences scored third . Finland has invested in people.

By deregulating telecommunications in 1987 the Nordic countries laid the groundwork for the telecoms revolution that has brought the mobile phone to the pockets of Muscovites and soon to those of every Russian. The lead the Nordic countries gained was several years.

The analog NMT standard created in the Nordic countries and brought into use in 1981 provided the springboard for Ericsson's and Nokia's success. The world's first digital GSM call was made in Helsinki using a Nokia phone in 1991.

Russia in Europe

It may seem unreasonable to compare Finland and Russia. But the question does not concern that. Instead, Finland's geographical and historical closeness gives us an excellent opportunity to put the new Russia, its economic capability as well as training and research policy in perspective.

Unlike the Soviet Union with its striving for autarky, Russia is today a country that depends on foreign trade. Compared with the Soviet era, Russia's industrial and population centre of gravity have shifted further to the west and north. The main logistical node of Russian foreign trade is in the north-west of the country.

A Russia integrating into European and worldwide structures still shies away from the idea of mutual dependence. Russia's determined decision to itself build the ports it needs is an excellent example of this. Whereas Germany accepts the fact that its biggest ports are Rotterdam and Antwerp and not by any means Hamburg or Bremerhaven, Russia wants to own the ports it uses.

For a country that depends on foreign trade efficient transport is a vital requirement. Logistics are just as much a part of the production chain as are manufacturing facilities. Logistics provide an excellent example of a sector in which Finland has had success, because we had to. Improving the logistics chain has boosted efficiency and productivity. This has been done in conditions of which typical features are long distances, thin flows of goods and a severe climate. In Finland ships do not sit stuck in the ice for days and sometimes weeks, as happened off St. Petersburg this winter.

This year's exceptionally cold winter has shown that cooperation is a prerequisite for maritime safety in vulnerable sea areas. A Vessel Traffic Management and Information Service (VTMIS) approved by the International Maritime Organisation (IMO) is scheduled for start-up in the Gulf of Finland in 2004. This winter, the Finnish and Russian authorities agreed to cooperate in the standardisation of ice-class definitions. Intense negotiations with a view to ordering new icebreakers are likewise in progress.

The Gulf of Finland and the Baltic Sea, the land border with Finland (Vyborg/south-east Finland) as well as in the future the ice-free Murmansk coast will be the main arteries for Russia's exports and imports. According to official estimates, 35% of Russia's foreign trade flows will be through the Baltic Sea in 10-15 years from now. The St. Petersburg region is the logistics centre for Russia's foreign trade. The Gulf of Finland is the new Öresund Strait, a place where the synergy benefits that Finnish, Russian and Estonian ports provide are developing along with the economy and above all the logistics of foreign trade. The fastest-growing ports in the Baltic are St. Petersburg and Tallinn.

In the historical and cultural senses, Russia has traditionally been a European country, although it is not yet a European society. For example, the celebrations marking the 300th anniversary of the founding of St. Petersburg are an important European event. Decades of isolation from the rest of Europe continue to handicap the development of Russian civil society. The existing standard-of-living and technology gaps can be overcome through determined work. In this, Finland and the EU are ready to play their part.

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