The Folklore of Finland's Eastern Trade

Abstract

Until the end of 1990, Finland was the only developed market economy to trade with the USSR on a bilateral clearing basis. It was also, so it is widely believed in Finland, the only one among the neighbours of the Soviet Union to benefit greatly economically from this trade. This article does not aim to clarify whether such beliefs are well grounded in fact, but rather to look at the beliefs themselves. To do that, we examine a large amount of so-called grey literature: memoirs, biographies and fiction, but not research proper in economics or economic history. Belief in the benefits of Eastern Trade has been widely held in Finland, but there have always been sceptics as well. The materials used offer many insights, for instance, into the character of Eastern Trade, negotiations procedures, pricing and quality issues, relations between the counterparts, as well as the implications of COCOM restrictions of trade by a neutral country.

Notes

¹For Eastern, read Soviet. Finland had little trade with the other centrally managed economies, but for one reason or another even strictly Soviet trade was routinely called ‘Eastern’. As this strange choice of word may reflect a willingness to blur the very peculiarly Soviet character of the trade, and thus reflect its peculiarities in an assumed geographical frame, we shall follow the standard Finnish usage. It is, itself, a part of the trade mythology.

²State-owned companies contributed at most 15 – 20% of industrial output, with a declining trend, but large transfers made Finland a high taxation country.

³In spite of the high sulphuric contents of Soviet oil, this made some economic sense because this oil came by ship from Ventspils, Latvia, thus having a transport cost benefit. The advantages were increased by the need in any case to have strongly reinforced tankers in wintertime, necessary to service the main Neste refinery in Sköldvik, Porvoo, which was at the time the world's only ice-surrounded oil terminal.

⁴‘In 1962 preparations for new large-scale projects were started. … Most of the initiatives came from the Finnish side. In the background was the same problem as earlier, we had to find new imports from the Soviet Union to Finland’ (Karjalainen & Tarkka 1989, p. 129). Dr Ahti Karjalainen was foreign minister and the heir apparent to Urho Kekkonen as president for many years. Although Kekkonen retained responsibility for most if not all important Eastern foreign and trade policy (which he really did not distinguish) Karjalainen was also a key player.

⁵This is probably the most virulent anti-Kekkonen pamphlet of all times, and it had a huge printing. Urho Kekkonen was a long-time prime minister in the early 1950s and president in 1956 – 82. The constitution of Finland (which has been amended since) was very presidential, and Kekkonen took his powers to the extreme and beyond; but his position was not beyond contest until 1968. He took all Soviet-related affairs very much in his own hands, and this together with his inclination to use diplomatically non-standard channels, including intelligence officials from different countries, caused at the time and even more afterwards, much debate and soul-searching. The issue of whether the Kekkonen era was a success story, leading to wealth and over time increasing Westernisation, or an example of excessive subservience to Soviet interests, is and must be still debated. This author takes basically the first position, though knows that this is not a ‘black or white’ issue. Several examples of what should be regarded as excessive subservience are cited in this article.

⁶The use of the word Finland here demands an explanation. Though framework trade agreements with the USSR were negotiated in a government-level Trade Commission, on the Finnish side this commission was dominated by industrial managers (and on the Soviet side by government officials). Most of the Finnish economy was always privately owned. State-owned companies amounted at most to about a fifth of industry. They could be and were used at the time as trade policy tools in a still relatively closed Finnish economy. The aim to maximise imports from the USSR was never total. Clearly technically inferior products were not bought. Thus the Neste refineries processed mostly Soviet oil, but with Western equipment. Finnair, though state owned, never agreed to buy Soviet aircraft. Neither was the Helsinki underground based on Soviet technology. The first nuclear plant was bought from the USSR, but it was also equipped with Western safety measures (and has been functioning very well). In a typical act of balance, the second nuclear plant was bought from Sweden. It used to be a rough rule that of military hardware, one third should be bought from the USSR, one third from the West, and the remaining one third should be home-made.

⁷Dr Ilmari Susiluoto, Helsingin Sanomat, 24 July 2005.

⁸Imports were dominated by oil, and that is a specific story. Large-scale projects like the Saimaa Channel, the first nuclear plant and the Kostamuksha combine are also largely bypassed, as they would each need their specific discussions. The case of oil is covered in detail in the existing company history of Neste Oy (Kuisma 1997), there is a light history of Saimaa Channel (Paaskoski 2002), and Kostamuksha is the object of a research project just commencing.

⁹Lehtinen worked as a journalist before being elected to the Parliament in 1971 (Social Democrat). Having never made it to the highest political positions, he was also a diplomat, media celebrity and background political operator before being elected to the European Parliament in 2004. He has published several light-genre novels, memoirs as well as defended a PhD in political history.

¹⁰The name, thoroughly credible in Finnish, actually almost means Value Believer!

¹¹He also asks why the USSR engaged in trade that was so profitable to Finland, and finds three answers: it provided commodities to the nomenklatura, tied the Finnish bourgeoisie and could be used against Social Democrats. The last one may seem strange, but has at least some historical basis in the fact that two governments led by K. A. Fagerholm, the Social Democrat who lost presidential election to U. K. Kekkonen with the smallest possible margin in 1956, did in fact meet with serious problems in Eastern Trade, in 1948 and 1958.

¹²Economically, it did not make much sense for the USSR to supply so much oil to Finland. The arrangements committed it, through the clearing mechanism, to buying Finnish-made products, while sales to the world market would bring convertible currency, which could be used to buy any commodities. So why did the USSR sell oil to Finland as the backbone of clearing trade? Economically (leaving aside the possibility that trade was just politically based) two possibilities come to mind. First, sales to Finland were stable. This was, after all, a time when Soviet foreign trade met with political limitations, and Finland, together with Italy, was one of the few countries with Western standard commodities available for import into the USSR, for which Soviet crude could be exchanged in major quantities. Second, Finland may have paid a good price. Most probably, political reasons dominated, either that of dependence or that of good neighbour policies. Kuisma (1997) argues that in the 1960s at least, the Finns seem to have paid about an average price for Soviet oil, but adds that to judge trade profitability export prices should also be taken into account.

¹³One of the more infamous ones was that the Soviet Union supplied armaments to a third-world oil producing client state like Libya, which then supplied oil to Finland as the payment. There were even plans for an eventual Finnish – Soviet co-operation in nuclear energy in Libya. The full political and economic ramifications of such deals remain unclear, as does the way in which such trade was actually recorded in Finnish Customs statistics. One source claims that the statistics were basically falsified so that Libyan oil was recorded as being of Soviet origin.

¹⁴In 1981 – 83, when oil prices again climbed, Soviet buyers seemed to lose control of appetite. In spite of exceeding the purchasing power available on the clearing account, they kept buying, and the Bank of Finland had to finance the ensuing imbalance by supplying interest-free credit. Later, such imbalances were made to carry an interest rate cost.

¹⁵For the very large-scale Kostamuksha mining combine and town-building project, competing Finnish construction companies used the joint Finnstroi company, established earlier for another Soviet project. This looks very much like a cartel, but the participants naturally argue that it was needed because no single company could have managed a project of this size. In another case, for which there are no publicly available details, a construction project manager, deeming the cost estimates of his employer to be excessive, actually stole the blueprints, took the risk of establishing his own company and made a deal on the basis of lower cost estimates. He was duly punished in court, paid a fine, and progressed to become the main owner of the largest closed ownership construction company in Finland.

¹⁶Olavi J. Mattila, one of Kekkonen's men in business, comments on Khrushchev's times: ‘That was a hell of a circle: we ate, drank, went to sauna, swam, ate and drank’ (cited in Keskinen 1987, p. 256).

¹⁷Anyone having dealt with the Soviet Union for decades will probably agree that being invited home was a privilege. In times when all official discussions had to be held in (specially equipped) meeting rooms, Soviet family hosts opened themselves up for queries or worse from the security services. They would also be uncertain on whether what they had to offer was comparable with what Western guests expected. One informant tells of his (academic) host noting with pride that nothing on the table had been bought from a shop.

¹⁸In interviews, Eastern Traders comment on the times of high oil prices: ‘We ate caviar like porridge … the Russians paid a major part of the development costs of the main product of today's Nokia … we did sell them a lot of air—at a high price’ (Heliste & Vaaramo 2005).

¹⁹The most valuable bribe he decided in the end not to tell about.

²⁰The story concerning the tin buckets is told of a major Finnish ship builder, which accepted them in (surely very partial!) exchange for ice breakers.

²¹Wasted time walking, reading, playing cards, chatting, and inevitably drinking and womanising. In one famous case a German businessman had to be carried away from the National bar after one of the richest men in Finland had decided that the German was getting too friendly with a female Finnish member of a youth organisations' delegation. More seriously, the National was known to be well equipped with listening devices. Long joint walks were preferred also because of that (Nykopp 1985; Vesikansa 2004). At least one Finnish Eastern Trader reportedly even had the nerve to go and have a look at the listening device controls room. In addition, places like company representative offices (Vesikansa 2004), saunas (where Finns were known to have deep discussions) and the Finnish ambassador's bedroom were equipped with microphones.

²²A later novel of his (Lehtinen 1991), set against the early turmoil of post-Soviet Russia, returns to many of the same issues but adds little of substance.

²³For a biography see Zilliacus (1984).

²⁴Sergey Khrushchev, the leader's son, tells an anecdote showing the extent to which this was true also on the highest level. When Nikita Khrushchev was planning the first ever US visit of a Soviet leader, he was anxious to get a reception at least on a par with that of a British or French leader. The draft programme included a visit to Camp David. Khrushchev's kitchen cabinet did not know what it was, and worried they would be sent camping in a tent. Only with great labour was it possible to reach somebody who knew what Camp David was, and anxiety was relieved (Khrushchev 2000, p. 293).

²⁵Another Finnish shipyard had a somewhat similar experience in the 1980s, constructing two deep-sea mini-submarines for the Soviet Academy of Sciences. The Americans did not believe the Finns could master technologies for diving down to six kilometres. (They had failed themselves.) Therefore, they did not originally object to the deal, and like some other Western powers, watched closely the ongoing work. When it became evident that the vessels could actually be built, the CIA started pressuring the Finnish shipyard, also threatening the mother company with bankruptcy. After long and arduous lobbying, a compromise was found. The two vessels ordered could be built, but no more (Tuuri 2005). Paradoxically, the main benefit of the submarines may have well gone to Hollywood, when one of them was later used with great effect in the filming of Titanic, the blockbuster movie.

²⁶See Paasikivi (1985, vol. 2, p. 595). Paasikivi notes in his diary that Kekkonen was present and agreed with him. On the other hand Kare (1969) claims that Paasikivi's limit was 12 – 15% while Deryabin (1996) relates: ‘I remember when in the negotiations during Kosygin's May 1977 visit to Finland Kekkonen said: now Paasikivi is certain to turn in his grave, he after all regarded 25% as the limit, after passing of which there may arise problems with Finland's sovereignty. And he added: but Paasikivi was after all a pessimist, while I am an optimist’ (Deryabin 1996, p. 85).

²⁷This is argued by Dr Ilkka Herlin, a core member of the family owning most of Kone Corporation, which used to compete with Wärtsilä in making cranes, in his biography of Academician Kustaa Vilkuna, his uncle and a key Kekkonen confidante (Herlin 1993, p. 274). On the other hand, Wahlforss rose against Kekkonen in 1961, just a year before retiring, and though we do not know what might have happened otherwise, Wärtsilä remained a key company in Eastern Trade.

²⁸Obviously, Uskola did not know the difference between demand- and supply-constrained economic systems, made famous by Kornai (1981).

²⁹Which they also did. Fundamentally, the Finnish Communist Party was interested in a better livelihood for its members and supporters, and heaped scorn on any ideas that economic hardship might develop the political consciousness of the proletariat.

³⁰So fundamental was Eastern Trade seen for Finnish foreign policy that when a free-trade agreement was signed with the EEC in 1974, the Finnish Parliament solemnly announced that the agreement should be scrapped if Soviet trade were to suffer as its consequence. Few, apart from communists and asserted leftists, went however as far as two ultra-Kekkonen-line pamphleteers who saw Eastern Trade as the preferred alternative to relations with the EEC (Kähkölä & Ripatti 1971).

³¹In retrospect, the wide literature on these issues seems a peculiar exercise in liturgy. At the time, however, the issue was extremely serious, as it concerned the very basics of Finland's international existence, both in peace and at war. On the professional historians' level, joint Finnish – Soviet seminars proved quite helpful in clarifying facts and their interpretation. In the beginning, it has been quipped, only the date of the end of Swedish rule in Finland could be agreed upon. In the end there was much more common ground.

³²Albert Akulov (1996), a former KGB resident in Helsinki, also sings the praises of Soviet policies. According to him, the USSR never wanted any internal convulsions in Finland, never tried to make Finland economically dependent, never opposed Western economic assistance to Finland and never pressurised Finland economically. Having argued all that, he then proceeds to describe how the Soviet Union in 1958 used both economic stick and carrot to bring down a government not of their liking!

³³Now long retired, he is affiliated with the Institute of Europe of the Russian Academy of Sciences, and has even recently contributed almost laudatory articles on Finland to the Russian press.

³⁴Snellman was the key statesman of the second half of the nineteenth century, when many political and economic institutions were established in Finland.

³⁵However, when Nikita Khrushchev came to celebrate his sixtieth birthday, Kekkonen famously announced that Finland would be the last country to convert to communism.

³⁶This, obviously, was much criticised, both at the time and afterwards, when the frequency and intimacy of these contacts became known. Rautkallio has characterised Kekkonen as a Soviet agent, at least in the sense of an agent of influence. Others still see him as basically outwitting the Soviet Union, though admitting that he passed the limits of what would now be regarded as acceptable behaviour. Kekkonen himself worked for a short period of time for the Finnish security service in the 1920s, and later, while president, also maintained contacts with—at least—British and US intelligence officers. Some of his close friends were also similarly occupied. This was a game they thought they mastered.

³⁷This is a letter to the Finnish ambassador in Moscow, a Social Democrat with a labour union background, who might perhaps be counted to have sympathy with such an approach, but still the degree of cynicism is notable. A president would expect his letters to an ambassador to become public at some point of time.

³⁸In fact, there seem to be several cases when Kekkonen actually negotiated alone, even relying only on a Soviet interpreter.

³⁹This phenomenon of ‘Home Russians’ was a Finnish peculiarity. Regarded as a must among men of self-professed importance, it gave the KGB and other Soviet organisations great access. The Finnish Security Police tried to follow these goings-on.

Additional information

Notes on contributors

Pekka Sutela

Opinions expressed are those of the author and do not represent the views of the Bank of Finland. Comments by Dr Antti Kuusterä, Mr Jouko Rautava and the anonymous referees are gratefully acknowledged. An earlier version of the article was presented at the Bratislava Conference on Neutral States and Economic Relations during the Cold War, 22 – 24 September 2005. Comments by participants are gratefully acknowledged.