Joining Nato should anchor Finland and Sweden’s low risks

The decisions made by the governments in Finland and Sweden to join the North Atlantic Treaty Organization were hardly unexpected.

Public opinion in both countries has shifted quickly and decisively in favour of membership in the wake of Russia’s invasion of Ukraine, and in April the two nations announced they would seek to apply.

In doing so they will join an organization with 30 members, the majority of which are fellow EU member states, plus longstanding allies including the United Kingdom and United States.

Neither country plans to host nuclear weapons or Nato bases, but by joining they are committing to defending other members, and they can count on the support of Nato members to come to their aid should they ever be invaded.

The UK has gone one step further by offering a security guarantee to cover the transition phase, and it would seem unlikely that other Nato states would not join forces to defend Finland and Sweden’s territorial integrity if they were attacked before their Nato memberships could be ratified.

The membership process is proving to be far from smooth, however, despite the warm welcome received from Nato’s General Secretary, former Norwegian prime minister Jens Stoltenberg, as well as most of the member countries who favour a larger and stronger defence alliance.

Turkey is the exception. Its president, Recep Tayyip Erdogan, has accused Finland and Sweden of turning a blind eye to followers of Fethullah Gülen, a Syrian Kurdish militia and the Kurdistan Workers’ Party that Turkey – and indeed the EU – views as a terrorist organization.

A round of intense negotiations is underway, though it seems unlikely that Turkey’s objections will stop the plans entirely as Helsinki and Stockholm make the assurances that Ankara is requesting.

Finland and Sweden both produce military hardware and could, in turn, get more orders from fellow Nato countries 

 - Pasi Kuoppamäki, Danske Bank (Finland)

Negatively, however, both countries can probably expect interference from Russian state actors through cyberattacks and in the media, especially online, to influence elections and disrupt business operations in order to inflict financial damage.

Russia may well also increase its naval and air military presence in the Baltic Sea region – though such incursions have become familiar in recent years.

Russia’s Gazprom has already stopped supplying natural gas to Gasum in Finland. This means Finland will lean more heavily on the Baltic connector pipeline, inevitably driving up prices.

The cut in supply reflects Finland refusal to pay for its gas in roubles – as Moscow has demanded – as much as it represents a retaliatory move over the application to Nato.

Yet unless Russia invades either country, which seems unlikely in the extreme, joining Nato will have very little effect in terms of increasing the region’s risks.

Both countries are already extremely low-risk investments and, by signing up, little is likely to change, politically or economically.

Finland lies third in Euromoney’s global risk rankings and Sweden is seventh.

Both are among the safest countries to invest in worldwide, a fact that is also reflected in their strong credit ratings and high scores for economic, political and structural risk factors in Euromoney’s country risk survey.

Other favourable features include strong institutions, low corruption, transparency and political stability.

Joining Nato is a generally seen as a positive move, too, by most of Euromoney’s survey panel, not all of whom are security experts but who take a holistic view of the economic and political implications.

Take Reijo Heiskanen, chief economist of OP-Pohjola Group, who says he assesses Finland’s country risk “somewhat better than earlier.”

After the applications of Finland and Sweden are accepted, he thinks the security situation will improve further.

“This is a positive factor for economic prospects, but it will not change markedly the overall view going forward.”

Timo Hirvonen, chief economist at Handelsbanken Capital Markets, says Nato membership strengthens Finland's attractiveness as an investment and growth country, especially from a foreign direct-investment perspective and reduces country risk.

“It reduces the prospect of invasion and provides predictability, which is what companies are looking for when making investment decisions,” he says.

He adds there was solid support for Nato membership from the population, so the influence of those opposed to Nato membership on political party popularity in the coming elections in Finland is small.

Parliamentary elections are due in Finland by April 2023. Voting in Sweden, however, gets under way this September.

Pasi Kuoppamäki, chief economist at Danske Bank (Finland), agrees that Nato is a credible deterrent against invasion and that membership has large popular support.

“I would expect the vast majority to accept the outcome,” he says, adding: “Parties that have been leaning towards Nato membership in the past may benefit in the next elections.”

He goes on to say that both countries will increase defence spending and investment in infrastructure, supporting civil crisis management.

“Finland and Sweden both produce military hardware and could, in turn, get more orders from fellow Nato countries," Kuoppamäki adds. "However, I do not expect permanent Nato bases there.”

He also notes that cyberattacks and attempts to influence public opinion are obvious risks, and that after the war in Ukraine is over and détente begins, it may take more time to improve relationships between the countries and Russia.

The overall effect on country-risk profiles will be minimal, though, he says.

“The war has changed the understanding of geopolitical risks for the worse, but not excessively. Finland has always been preparing for a war and kept dialogue open with Russia."

Nato membership keeps geopolitical risk low, Kuoppamäki says, and he thinks Russia will not see Sweden or Finland as a big threat to its security.