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A wide coalition of countries have imposed economic sanctions on Russia for its brutal aggression against Ukraine. The sanctions regime has impaired – but not exhausted – Russia’s financial and technological ability to make war.

There is still work to be done to improve the financial system’s resilience to crises. Key steps would include a stronger cap on household borrowing in Finland, and a common system of protection for bank deposits across Europe.

Especially households with high debts in relation to their income may come under particluar strain in the near future, as both loan servicing and other daily costs are rising at the same time.

The Finnish economy slipped into recession last autumn as a result of the energy crisis brought on by Russia’s war in Ukraine. The economy's weak performance will continue this year, as it takes time for the effects of high inflation and the rise in interest rates to be felt in full.

In 2023 sanctions continue to hurt Russia’s economy. Many businesses have had to adjust to using inferior-quality components or paying higher prices for traditional inputs.

Key aims of the sanctions are to limit its financial and military capabilities to wage war.

Ukraine has suffered most from Russia’s illegal war of aggression launched a year ago. Besides the humanitarian emergency, the war Russia started has been catastrophic for the Ukrainian economy.

Data on the demand for and supply of bank loans in Finland is obtained four times a year through the euro area bank lending survey.

The war in Ukraine and the energy crisis are fanning uncertainty and driving up inflation. Reduced purchasing power will hit private consumption, and the economy will slide into a mild recession. Finland’s GDP will shrink by 0.5% in 2023. Growth will return in 2024, reaching 1.1%.

The alternative scenario in the Bank of Finland’s forecast for the Finnish economy examines risks surrounding the Bank’s December 2022 baseline forecast which, should they materialise, could lead economic growth to be weaker than projected. The scenario estimates the possible impacts on the Finnish economy if Russia’s war in Ukraine drags on and if the availability of energy weakens further and economic uncertainty increases.

In recent years, Finland’s public finances have shifted from one crisis to the next. The debt ratio has grown almost without interruption since the global financial crisis. Halting the accumulation of further debt in the immediate years ahead would aim to give sufficient room for manoeuvre in future crises and for coming generations.

Finland’s general government revenue and expenditure are chronically out of balance. Population ageing is adding to health and social services spending and at the same time public debt service payments are growing. A fiscal correction will require significant spending cuts and tax increases in future parliamentary terms. The Bank of Finland estimates that the sustainability gap is about 4% of GDP.

Climate change is forcing the economy to transit towards a more sustainable future. Transition risks are related to the process of adjustment to a low-carbon economy. Granular data are needed to analyse the transition risks.

With India’s ever-increasing importance in the global economy, Europe’s central banks and other key institutions need to sharpen their focus on India. The International Relations Committee of the European System of Central Banks (ESCB) established an informal India expert network in 2021.

Finland’s general government debt ratio has grown almost without interruption since the global financial crisis. This trend differs significantly from that seen in the other Nordic countries. It is vital to build a strong political commitment to fiscal sustainability and to the resolute implementation of the measures this calls for.

Growth in Finland’s economy will stall temporarily due to Ukraine war and energy crisis. High inflation is weakening consumers’ purchasing power and general confidence in the economy. In the public finances, spending will continue to exceed revenues.

The energy crisis will push the Finnish economy into a mild recession in 2023, but this will be short-lived. Energy prices will gradually fall, and in 2024 the economy will return to growth.

Russia’s oil exports have decreased only marginally in volume since it began the war in Ukraine. While the export volume to countries of the European Union has fallen somewhat, Russia has found new markets in India, China and Türkiye.

The energy crisis is threatening to increase the euro area’s energy bill many times over. This will impede growth in the euro area economy in the near term. Besides energy prices, the prices of other products too have climbed sharply.

The surge in inflation has prompted central banks to normalise their monetary policy. This means they are tightening financing conditions by raising key interest rates.