Oct 9th 2025|Helsinki|3 min read
On a sunny afternoon aboard an icebreaker in Helsinki’s harbour, it is possible to forget that the border of a warmongering dictatorship is just 150km away. The ships, powerful enough to provide electricity for a small town, are a potential high-tech export to America. They are also a sign of the strains on the Finnish economy. Ever since war in Ukraine broke out and Finland closed its border with Russia, it must trade via the Baltic Sea, hoping to eke out growth in icy conditions.
Finland is not alone. The other EU countries bordering Russia—namely, the Baltic states and Poland—face similar problems. Yet their fortunes are diverging. Poland has grown faster than America since war in Ukraine began, with Lithuania not far behind; forecasts suggest both will continue to grow at an annual clip of 3%. Estonia and Finland, by contrast, have barely grown, and are forecast to grow slowly. To understand front-line economics, consider trade with Russia, investor uncertainty, defence spending and consumer attitudes.
For many of the countries, Russia had been a trade partner and supplier of resources. Finland’s timber and paper industry, for example, used to import wood from Russia, just as its refineries distilled Russian crude. Finnair, the country’s national carrier, used Russian airspace to make the most of Helsinki’s location in the middle of routes between Europe and Asia.
Cutting off links with Russia has therefore caused pain. But the overall impact on growth has been minor, according to a study by Finland’s central bank. Instead, a loss of investor confidence seems to be more serious. Foreign direct investment in Poland has slumped in the past two years, and been flat in other front-line countries. Although there are plenty of non-conflict-related reasons for the shift, it is notable that firms doing business in the region are now much more likely to take out insurance (see chart), suggesting fears of sabotage or destruction may play a part.
Chart: The Economist
Defence spending has not been much of a saviour yet. Although Poland has ordered more bullets and drones, its domestic industry is struggling to meet demand. Finland, along with many of its neighbours, plans to spend more on weapons, and hopes to benefit as Germany loosens its purse-strings. The problem is that there are not many Finnish defence firms, which limits gains. When Finland ordered 64 F-35 fighter jets from America in 2021 at a cost $9.4bn (3.2% of GDP), for example, just a few parts could be produced at home.
That leaves consumers. In Poland and Lithuania shoppers are spending happily; measures of consumer sentiment suggest this is likely to continue. In Estonia, Finland and Latvia, consumers are less cheery, leading to a downward spiral. A subdued economy makes consumers wary of a shopping spree, for fear of job losses or meagre wage growth, in turn worsening the economic situation. Whereas Finland’s unemployment rate is near 10%, in Poland unemployment is just about non-existent.
Polish public spending is nevertheless fuelling the fire. The government’s own forecasts see its deficit at a huge 6.9% of GDP this year and a still large 6.1% by 2028. Ministers are prioritising defence and support for consumption above all else. “There are no more fiscal conservatives,” says Mateusz Urban of Oxford Economics, a research firm. Public debt could reach 70% of GDP in 2028, up from 51% before Russia’s war in Ukraine began.
Conversely, in Finland, where state spending might pep up beleaguered consumers, ministers hope to cut the deficit, conscious that debt to GDP is forecast to approach 90% by the end of next year. Those running front-line economies must not just contend with living next door to Vladimir Putin. They also face the threat that guns and butter today could lead to a fiscal reckoning tomorrow. ■
For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter.
Finance & economicsGlobalisation
This article appeared in the Finance & economics section of the print edition under the headline “Far from finished”
Discover stories from this section and more in the list of contents
Subscriber only | Money Talks
Delivered to your inbox every week
Yes, I agree to receive exclusive content, offers and updates to products and services from The Economist Group. I can change these preferences at any time.