IMPLICATIONS OF FINNISH TRADE WITH THE SINO-SOVIET BLOC (RR IM-424)

Created: 4/2/1956

OCR scan of the original document, errors are possible

INTELLIGENCE MEMORANDUM

IMPLICATIONS OF FINNISH TRADE WITH THE SINO-SOVIET BLOC

CIA/RR6

warn/kg

THIS DOCUMENT CONTAINS INFORMATION AFFECTING THEOF A1 BE UNITED STATES WITBIN THE MEANING OF'LAWS,USC,R REVELATION OF WHICH IN ANY MANNER TOPERSON IS "PROHIBITED BY LAW.

CENTRAL INTELLIGENCE AGENCY Office of Research and Reports

BLANK PAGE

CONTENTS

Page

Summary and Conclusions

I. Historical Background

IT. Reparations

III. Trade and Credit Arrangements

Arrangements

IV. Extent, Implications, and Consequences of Finnish Trade

with the Soviet

of Finnish

and Consequences

Finnish

Appendixes

Appendix A. Supporting Statistical

Appendix B. Source References

Tables

Finnish War Reparations to the USSR,

Commodity Composition of Finnish Exports and Reparations

nd

- ill -

Page

3. Indexes of Finnish Industrial Production, Selected Years,

U. Finnish* Imports, by Country ofand

15

Kxports, by Country of, and

*s

Finnish Foreign Trade, by Trading8* l6

Finnish Trade with the USSR and the Slno-Sovlet Bloc, as a

Percentage of Total Foreignnd

17

Trade with the Sino-Soviet Bloc, by Country of

Origin and Destination, 18

Trade with the USSR, by Cccnmodity . 19

10. Projected Finnish Trade with the USSR Under the Trade

Agreement of 20

Chart

Following Page

Finnish Foreign Trade, by Trading6

iv -

HfT

R*

IMPLICATIONS Or FINNISH TRADE WITH THE SDiO-SCVTET BLCC*

Suraary <md Conclusions

The econanic losses incurred by Finland in two uors with the USSR and the stringent provisions imposed by the peace treuty7 left Finland impoverished nnd vulnerable to Soviet economic encroachments- Soviet insistence that Finland deliver reparations valued at more than0rimarily in producta. of the mctalworklng and shipbuilding industries, commodities not previously exported to any large extent by Finland, substantially compounded the economic burden.

The forced expansion of Finnish industry, primarily geared to deliveries ofeft the Finos dependent on Soviet markets even after such deliveries had been completed- By the end3 the Slno-Soviet Bloc accounted for almost one-third of Finnishtrade, and the USSR displaced the UK as the principal trading partner of Finland.

The serious decline In the world demand for wood and woodand the inability of Finlond to find suitable markets in the West for products of its metalworklng and shipbuilding lndustrieo.

In which Finland does notomparative advantage in trade, have made it imperative, in Finnish eyes, to retain their markets

in the Sioo-Soviet Bloc.

Finnish dependence upon the USSRrimary market for Finnish Industrial production, in turn, hasubstantial reliance upon the Soviet Blocource of supply. Faced with the prospect of increasing its already large accumulation of Inconvertible currency from the Bloc, Finland has been obliged to import large quantities of goods from the Bloc. Finland has been forced to re-export many of these goods, often at considerable loss. Totai Finnishfor imports of petroleum, coal, bread grains, sugar, fodder, fertilizers, and,esser extent, of iron and steel, ferroalloys, and cotton now are filled almost entirely by the Soviet Bloc.

The estimates and conclusions contained in this memorandum represent the best Judgment of ORR as

** Dollar figures are given la current US dollars unless otherwise specified.

That such close commercial ties with the Soviet Blocatent danger to Finnish Independence and make Finland vulnerable to Soviet pressurevident both to Western observers and to the Fioue themselves. There Is little evidence, however, of any immediate threat to Finnish eeonomlc or political integrity. The inability of Finland to find suitable imports from the Soviet Bloc and Its reluctance to accumulate larger ruble balances militateubstantial increase in Finno-Soviet trade in the foreseeable future. Finland isits efforts to lower its costs of production and to increase the ability of its raetalworking and shipbuilding industries to compete in both the domestic and foreign markets. There is evidence that, if the USSR were to curtail suddenly its imports of Finnish products, Finland could,eriod of initial adjustment, adapt itself to aewof production, consumption, and trade with the non-Bloc areas. This readjustment, of course, would depend upon Western willingness and ability to absorb the bulk of the traditional Finnish exports.

I. Historical background.

Before Worldhe position of Finland as an autonomous Grand Duchy attached to the Russian Empire led inevitably to strong commercial ties with the Empire. Russia occupied first place among the trading partners of Finland and accounted for aboutercent or total Finnish foreign trade. In fact, Finnish industry had been geared so closely to Russian requirements for imports thatussiaf the pulp and puper,ercent of the leather goods, QU percent of the metal manufactures,ercent of the stone and mineralandercent of the products of the spinning and weaving mills exported by

The Russian revolution and subsequent Finnish independencealtered the traditional pattern of Finnish foreign trade, and0 the USSR accounted for little more thanercent of the total foreign Trade of the new Finnish Republic. This rapid decline wasesult of the Soviet policy of limiting imports to vitally needed capital goods in an-effort to hasten Socialistand economic self-sufficiency. Not untilwas anyeffort made to expand tbe exchange of goods between the USSR and Finland,rade agreement concluded* in June of that year wasby war.

* For serially numbered source references, sec Appendix B.

In the meantime, the UK had quickly become the major market for Finnish exports. The UK was to remain the principal trading partner of Finland he last full year of normal tradeercent of the value of total Finnish exports went to the UK, compared withercent toercent to theercent to Sweden,ercent to the/

Finnish involvement in two major, coupled with the particularly stringent provisions of the peace treaty imposed by the USSR, left Finland impoverished, with Its foreign trade practicallytandstill. Finland was forced to cede to the USSR approximatelyercent of Its territory, includingercent of its cultivatedlants which had contributed moref its total industrialileB of railroad trackage, approximatelyercent of the total; plants which hod producedercent of its prewar hydroelectric power; and many valuable ports which had handled almostercent of Finnish prewar exports. 3/

Especially hard hit were the woodworking plants that hadthe bulk of Finnish exports before World War II. Amongsurrendered to the USSR wereaw and planing mills,producedercent of the total productionndfactories and plants, which had accounted forercentchemical pulp,ercent of the plywood,ercent ofpulp,ercent of the paper produced by Finland.has been officially estimated that the economic loss in therepresented almostercent of the prewar

resources of

II. Reparations.

The difficulties that beset the already strained economy of Finland were increased by the reparations that were imposed by the armistice treaty of4 and later confirmed by the peace treaty Finland was obliged to pay in kind to the USSR war reparations amounting0ayableear period. Although subsequent agreements reduced the sum6ollars) and extended the term of paymentears, the Soviet demand that deliveries of reparations include many commodities not previously exported by Finland forced an expansion of Finnish industrial production. 6/ Aided, however, by US and Swedish loans3 million, chiefly for investment in

mctalworking and shipbuilding industries, Finland was able to fulfill its reparations obligations, and by2 it had delivered to the USSR commodities worth more0 million. 7/

Finnish war reparations to the USSR,re shown in Table 1.

Table 1

.Finnish War Reparations to the USSR2

Reparationsercent of

Total

In

for the value of reparations in dollars, data werefrom

former German 9/

With more than one-half of all deliveries to the USSR scheduled to consist of commodities not previously exported, Finland wna forced to begin new lines of manufacture quickly, and production wooto meet the demands for reparations. The commodityof Finnish exports and reparations deliveries3 arc shown in Table 2. The figures, given in percentages of total values, indicate the magnitude of the modifications in the Finnish industrial structure required by the deliveries of reparations to the USSR-

Table 2

Commodity Composition of Finnish Exports and Reparations3

products

The major burden, of course, feLl on the Finnish metaluorkiog end shipbuilding industries,3 percent of the total value of reparations uas to consist of shipping of variousf machinery and equipment;ercent, of electric cable. Deliveries during the Tirst years of Industrial reorganizationconsisted largely of used ships and wood products, but the value of the products of the metalworklog and shipbuilding industries steadily increased fromercent of the value of all reparationso almostercent during theears of such

The war itself had provided some impetus to the Finnish metal-working industry, but deliveries of reparations required an even more rapid expansion. The indexes of Finnish industrial production in selectedre shown in Table

Table 3

Indexes of Finnish Industrial Production Selected

Wood and

Year Total Industry

87

From an industry producing primarily for the domestic market and employing little more0 personshe mctalworking industry has become the second largest in Finland, employing0 workers,ercent of the total industrial labor force. has increased to almost two and one-half times thatndhe peak production year of the metalworktng industry, it accounted forercent of the net value of total industrial output-

Approximately paralleling the growth of the metalworking Industry was the Finnish shipbuilding industry, whichessels of various types for delivery as reparations. ersonnel employed in the steel shipbuilding industry increasedobyercent, and employment in the wooden and composite shipbuilding industry increased,

III. Trade and Credit Arrangements.

A. Postwar Trade.

Once Finland was committed to the maintenance of closerelations with the USSR by the peace treaty7 and the Finnish-Soviet Mutual Assistance Pactloser economic ties with the USSR were inevitable. The expansion of Finnish ccnnnercial exchanges uith the USSR, which was the result in part of pressing postwar reconstruction deeds, the inaccessibility of Western sources of supply, and the heavy burden of reparations, brought about important modifications in the direction and composition of Finnish foreign trade.

The most striking feature, of course, was the increasing prominence of the Soviet Bloc in Finnish foreign trade. From the relativelyercent of total Finnish exports that went to the USSRhe proportion roseeak4 per-"cent3 -* The European Satellites also registered gains in trade with Finland as the result of trilateral agreements that were designed to compensate for Finnish-Soviet trade imbalances. Under these agreements, Finnish imports from the Bloc increased3 percent of total imports74 percent In the peak year Meanwhile, the UK forfeited its position as Finland's chief tradingosition which it hod occupiedIt is notable, however, that the large proportion of Finnish trade with the Soviet Bloc3 uss due less to any sizable increase in purchases from the Soviet Bloc than the steady decline in Finnish exports to the Free World after the Korean War,*

* Sec the chart, following p.ndppendix A.

? the exchange of goods, other than reparations, between Finland and the USSR proceeded on an ordinary clearing basis, with payments made through dollar accounts opened by the central banks of both countries. Under the termsrade agreementin Decemberhowever, Finnish commercial relations with the USSR were more firmly established, and provisions for the most favored nation principle and the right of mutual free transit were included. The comaodity composition of Finnish-Soviet trade adhered generally to traditional patterns, with. Finland importing wheat, rye, sugar, oil products, and fertilizers and paying for thesewith prefabricated housing, sawn timber, woodpulp, and

owever, with deliveries of reparations to the USSR virtuallyonsiderable change was evident in the nature of Finnish exports. For the first time in Finnish history, products of the greatly expanded shipbuilding and metalworking industries accountedignificant share of Finnish free exports to the USSR. This change was confirmed first in2 supplement toear Finnish-Soviet trade agreement concluded0 and thenrade protocol signed inhich dealt with tradeU. The latter agreement provided that machinery and equipment were to constituteercent of Finnish exports to the USSR, Includingercent which was to consist of ships. Wood and wood products accounted forercent of the remainder. Finland Imported from'the USSR most of its required grain, fodder, petroleum products, sugar, and

Inear trade agreement with the USSR was concluded for the. In general the commodityof Finnish-Soviet trade remained similar to that of previous agreements. Ships ore to account forercent of the total value of Finnish exports to the USSR; products of the metalworking industry,ercent; and wood and paper4innish-Soviet trade is scheduled toteady increase in both directions duringeriod. An annual Finnish export surplusillion is to be compensated for partly by trilateral deliveries from the European Satellites and partly by convertible currency supplied by the USSR. eilingillion rubles is established for the deficit, which may be accumulated by either party. Ifthe sura must be settled in gold, dollars, or some other mutually acceptable

Inhe USSR grantedredito be drawn upou either in gold or foreign exchange at theof the Finns. The amount borrowed within theear period is to bear interestercent and is to be repaid in the same mediumeriod ofears. This credit was the first to be granted in gold or convertible currency by the USSRountry outside the Sino-Soviet Bloc. It was followedimilar credit extended to Finland in Thus far Finland hasotal5 million to support currency reserves of the Bank of Finland and for specially selected productive purposes.

D. Trilateral Arrangements.

The use of trilateral agreements with the European Satellites to compensate for the surplus of Finnish exports to the USSR has been provided in the long-term agreement0 and In alltrade arrangements with the USSR. innish trade Imbalances with the USSR have been covered, in whole or in part, by trilateral arrangements which have included, at one time or another, each of the Satellites except Bulgaria and Albania. By the endinnish credit in the clearing account with tho USSR had been reduced5 million rubles, as compared withear earlier and aboutillion at its peak In an effort to reduce its indebtedness, the USSR not only encouraged trilateral trade arrangements with the Satellites but also made direct settlements with Finland in gold and foreign currencies.* such settlements totaledillion

The ruble clearing arrangements, however, have substantially nullified any advantages which might have accrued to Finland from Its excess of exports to the USSR. Unable to find suitable imports from the Soviet Bloc and needing raw materials from the Free World, Finland has been obliged to offer ruble clearing to the West atdiscounts. The Finnish government also has been required to subsidize, with considerable loss, the re-export of lurgeof unusable goods from the Soviet Bloc.

Relther the credit agreements nor the provisions of the trade agreementholly solve the Finnish problem of accumulated ruble clearing, nor do they restore to Finland the freedom of choice it would have if Soviet payment for Finnish exports were made in hard currency.

TV. Extent, Implications, and Consequences of Finnish Trade with

the Soviet Bloc.

A- Extent of Finnish Dependence.

The reliance of Finland upon the Soviet Bloc as the primary market for Its industrial products has engendered considerable dependence upon the Blocource of supply. Although Finlandubstantial portion of its imports from the Bloc, In an effort both to rid itself of unwanted imports and to purchase needed raw materials from theignificant share of Finnish foreign trade is firmly wedded to the markets and products of the Bloc.

Although Finnish-Soviet trade declinedercent4 as comparedinland remained heavily dependent upon the Soviet Blocarket for Its industrial output. Ninety-six percent of the value of exports of ships went to the Bloc (while Finland itself purchased vesselss well asercent of all exports of machinery, copper, and copper products. Although Finland exports its forestry products largely to thef all its exports of prefabricated houses went to the USSR. At the same time the USSR suppliedercent by value of the bread grains imported by Finland,ercent of the petroleum products (largely of Rumanian7 percent of the sugar,ercent of the cotton,ercent of the fodder, andercent of1 the fertilizers. Poland and the USSR suppliedercent of Finnish Imports of coal and coke, and the Bloc suppliedercent of the automobiles imported by If Finnish-Soviet cccnuitmeots under the long-range trade agreement are met, Finnish dependence upon imports from the Soviet Bloc will increase

Perhaps even more significant in linking Finnish foreign trade with that of the Soviet Bloc has been the forced expansion of Finnish Industry, geared to Soviet requirements for Imports, which resulted from the compulsory delivery of reparations. The Importance to Finland of export markets in the Soviet Bloc has been increased by the serious decline in the world demand for wood and wood products, the inability of Finland to find suitable markets in the West for goods primarily fashioned to Soviet needs, and the generally noncompetitive character of Finnish exports. Por example.

the cost of snip cons'.ruction, according to toe mission of the later-national Bank for Reconstruction and Development to Finland, iso h0 percent above that of Western

B. Implications and Consequences.

The economic and political implications of the progressive increase in FinniBh trade with the Soviet Bloc are viewed withby most non-Communist observers both in and out of Finland. The Finnish shipbuilding and metal working industries continue to rely almost exclusively on the USSR as an export market. Finland relies almost completely on the Bloc, and on the USSR In particular, for imports of petroleum, coal, bread grains, sugar, fodder, and Finnish reliance on the Bloc is significant also in the cose of iron and steel, ferroalloys, cotton,umber of otherrow materials. Finnish import* of machinery, tractors, and automobiles, which hitherto bad come almost entirely from the West, have recently been received in increasing volume free the USSR, Czechoslovakia, and East Germany.

The pitfalls of overdepeodeoce on markets in the Soviet Bloc have been mode clear to the Finnsumber of occasions. Perhaps the most recent demonstration has been the serious decline in the Soviet market for Finnish exports of prefabricated houses. Soviet imports have decreased from* millionilliono lessillion* The Finnish anticipation ofquare meters ofhouses annually to the USSR, as provided underas frustrated by the Soviet announcement that the USSR wouldtakequare metersk/ The prospect of finding compensatory markets for this relatively high-cost industry ore slim indeed, and it is difficult to gauge the economic dislocations which will result from the curtailment of production in one of the most important branches of Finnish industry.

Although the situation remains potentially dangerous for the Finns, there appears little indication of any Immediate threat to Finnish economic or political integrity. If the USSR were to

* Finnish dependence upon the Soviet market is evidenced by the fact that of total exportsquare metershe USSRquare meters.

the home market. If the costs could be measurably decreased orwere arranged, projects such as the modernization of themerchant fleet and the repair of rolling stock io Finland could provide ample employment for its shipyards and metalworking industries for years to come, soviet supplies of grain, oil, and coal presumably could be replaced by the Free World. In terms of Western resources, annual Finnish requirementsons of wheatillion tons of coal ore not very large.

The degree of Finnish economic dependence on the USSR does not approach the degree of economic dependence of the Balkan countries on Germany before World War II, whenoercent of Balkan trade was with Germany. Evenhe peak year of Finnish trade with the Soviet Bloc, over two-thirds of its trade was still with the Free World; and prospects do not seem very good for Soviet-Finnish trade to exceed substantially its present proportions. Trade with the USSR will be governedarge degree by the ability of Finland to find suitable imports from tho USSR and to decrease its already sizable accumulation of inconvertible Bloc currencies. It will also depend upon the willingness of the USSR to increase its purchases of Finnish forestry products despite the feet that the USSR itself is an important producer of timber.

There is little reason to believe that the USSR would hesitate to attempt to scuttle Finnish industryudden curtailment of trade, if Finnish behavior varrentedrastic measure. Barringontingency, howevernd there is little to indicate that Finland will soon repudiate its policy of "friendly neutrality" toward the USSRrastic Soviet action appears unlikely. The USSR probably realizes that any further Soviet economic pressure upon Finland which the Finns deem inimical to Finnish nationalis likely toet political loss for the USSR.

Finnish reliance upon the Soviet Bloc is not'only of potentially serious consequence to Finland itself, but to all of the Free World-Finnish trade with the Bloconvenient mechanism by which the

B

USSR is ablercuovent Western export controls. Finland has received from the West raw materials and components for use In the production of strategic goods for the Soviet Bloc. Because Finland is not receiving economic or financial assistance from the US, it is not subject to the provisions of the Battle Act, and there is no legal sanction which can be Invoked to force Finland to delete strategic items from trade with the Bloc. The advisability of any CCCOMto impose export controls on Finland by the West Is open to question. Such pressure would undoubtedly be fiercely resented In Finland and would perhaps result in the strengthening of Finnish ties with the USSR.

C. The Finnish View.

It. difficult to generalise concerning the many divi'^cnl views on Increased economic ties with the USSR held by the Finns. Official opinion, however, has become sufficiently solidified to warrant certain conclusions. Influential Finns apparently are well aware of the potent political weapon which their economic dependence has given the USSR. Faced with the immediate alternative of either deactivating the costly metalworking and shipbuilding establishments or relying on the Soviet Bloc to buy enough products to sustain these industries, however, the Flans have apparently choacc the latter course.

arge extent Finnish opinion is crystallized in the views of President Kekkonen, who has welcomed the excessiveof Finnish shipbuilding and iron and steel industries and hopes that Finland mayigh level of prosperity through Increased commercial exchanges with the USSR.

At the conclusion of Finnish reparations payments to the USSR inhen he was Prime Minister, Kekkonen declared:

But oo the day upon which war reparations conclude, we must also, and by preference, look forward. We must guarantee full activity in our modern industry which has sprung up on the basis of the war reparations. We can best do this by maintaining close and trusting trade relations with the Soviet Union, which knows

our products and through experience relies upon our capacity to deliver. IT we canto take /advantage/ of our trade with the Soviet Union in proper fashion, then eight years of plenty will follow the eight lean

Others are not hesitant to blame the Western powers for the present predicament of Finland, in that they permitted the USSR to impose such heavy burdens of reparations on Finland at the end of the war. Almost all Finns are satisfied, however, with theireconomic achievement and feel confident that they can hold their own against possible Soviet encroachments.

APPEKDXX A

SUPPORTING STATISTICAL DATA

-

*

pc?

I-i g

I KK18K!

Finnish Foreign Trade, by Trading Areas8

Billion Finnmarks

Dollar area b/

Sterling area c/

EFU (except UK and Ireland) d/

Sino-Soviet Bloc e/

Other countries

Total

a-

S and Canada. S, Canada, Mexico, Cuba,

K, Ireland, Egypt, South Africa, Southern Rhodesia,Ceylon, British Malaya, Australia, and New Zealand. the British Cccnmonwealth.

Norway, Denmark, Iceland, Netherlands,Germany, Austria, France, Italy, Greece, Turkey, Portugal,

c. USSR, Poland, Czechoslovakia, East Germany, Hungary, Rumania, Bulgaria, and Cccoiunist China.

Finnish Trade with the USSR and the Sino-Soviet Blocercentage of Total Foreign Trade

year

Imports

of E>

Bloc

aZ Figures are based on current value and include reparations and transfers of former German

-/

Table 8

Finnish Trade with the Sino-Soviet Bloc by Country oi" Origin and Destination

Million Finnmarks

Germany

China

Tabic 9

Finnish Trade with the USSR, by Commodity Croups

Thousand US $

Exports to the USSR W

beverages, and tobacco

and wood

c/

goods

and

and

from

USSR

and

crude materials

fuel

fuels

goods

Others

war reparations.

C. Including synthetic fibers and uoodpulp.

BLANK PAGE

APPENDIX B

SOURCE RKFEREfCHS

Bvaluatlons, following the classification entry and designated Eval., have the following significance:

of Informati

ocumentary

ompletely reliable

sually reliable

airly reliable

ot usually reliable

ot reliable

annot be Judged

- Confirmed by other sources

- Probably true

- Possibly trueDoubtful

- Probably false

- Cannot be judged

, Evaluations not otherwise designated are those apuearing on the ci document; those designated "RR" are by the autbOr of "this report. No RR evaluation is given when the author agrees with the evaluation on the cited document.

T-T- "Russia's Place in the Foreign Trade of Finland,

Bank of Finland Monthly Bulletin, no. U. Eval. RR 2.

Foreign Commerce

U- Eval. RR 2.

3- bright.. Finland.- I- U. Sval. Hit 2.

Piatt Raye. Finland and its Geography, Hew YorK,

. U. Eval. Rfl

W

AS

10. Statistical Yearbook of Finland, U- Eval- RR 2.

1/

13. Luther, Ceorg. "The Structure of industrial Activity in

ank of Finland Monthly Bulletin,o U- Eval. RR 2.

15- inland,Merchant

16. Palmroth, Gunnar. "Trade Between Finland and theank

Of Finland Monthly, U. Eval. RR 2.

"flew Trade Agreement with theank Of Finland Monthly Bulletin, U. Eval. RR 2.

State. Helsinki. ,. 4. OFF USE- Eval. RR 2-

"1FF USE. Eval. RR'i. Ibid.

27- Statistics! Yearbook of Finland, U. Sval. RR 2.

Bank of Finland Monthly Bulletin, U- Eval. Rji

Helsinki. 6ncl no- 1. U.

Eval. RR 2.

,ncl no- 1- U- Eval- RR 2.

Bureau of Foreign COranerce, International Economic

1 At, t t: r 1

Soviet, Value Series, Revised- U. Eval! RR 2.

Original document.

Comment about this article or add new information about this topic:

CAPTCHA