Our country risk team provides a snapshot of the events shaping country risk in October: the G20 debt relief extens… https://t.co/HXH9Un9z19
European Defense Relations
On 7-10 May, the defense ministers of Sweden and Finland - Peter Hultqvist and Jussi Niinistö - met with US Secretary of Defense James Mattis to discuss defense relations.
- The trilateral statement of intent between Sweden, Finland, and the United States will serve to further deepen defense co-operation between these countries.
- Russia is unlikely to retaliate unless the agreement opens the road to NATO membership or to the deployment of US forces on Swedish or Finnish territory,
- The elections in Sweden and Finland in September 2018 and April 2019 will likely determine the future trajectory of military co-operation between the two Nordic countries and the US and NATO in general.
On 8 May, the three officials signed a trilateral statement of intent (SOI) on defense co-operation. The stated purpose of the SOI is to deepen military co-operation between the two Nordic countries and the United States in light of the deterioration of the security situation in the Baltic region. However, it is unlikely that this will lead to NATO membership or the deployment of US troops in Sweden or Finland.
The trilateral SOI comes on the back of previous bilateral defense agreements and growing military preparedness by Sweden and Finland. In 2016, both Sweden and Finland signed bilateral SOIs with the US. Moreover, both governments have recently undertaken measures to strengthen their defenses. In 2017, the Swedish government reintroduced military conscription and earmarked an additional GBP765 million for the Swedish army for the period of 2018-20. The Finnish parliament approved in June 2017 a government-prepared defense report that envisages the funding of key defense procurements, including multi-role corvettes and jet fighters. It also focuses on enhancing the combat readiness of Finland's conscripts, increasing the operating expenditures of the defense forces by EUR50 million in the period 2018-20. From 2021 onward, the Finnish government plans to allocate additional annual financing of around EUR150 million to the defense forces. All of these measures and agreements should be seen in the context of, and as a response to, growing Russian military assertiveness in the Baltic region.
The trilateral SOI builds on the bilateral treaties of 2016, seeking to ensure that there is no duplication of effort with military exercises. The new agreement seeks to rationalize the conduct of joint military exercises, improve interoperability, as well as facilitate the sharing of intelligence between the three governments. In practical terms, the agreement will give the US greater influence over these two Nordic countries on matters of defense . The two Nordic countries' decision to seek closer defense relations with the US directly, rather than with NATO, is probably a deliberate decision to avoid provoking Russian retaliation. Although Russia has expressed its opposition to the prospect of Finnish and Swedish NATO membership, it is in a weaker position to react against bilateral or trilateral initiatives.
Russia has opposed Finland and Sweden joining NATO, threatening a military response if they do. In October 2017, Russia's ambassador to Finland warned that accession of the country to NATO would "trigger significant changes" to bilateral relations. Russia's president Vladimir Putin said in July 2016 that Finland's accession to NATO would "need to react militarily" by bringing back former heavy military deployments to the Russian-Finnish border. Any deepening of military ties to the US is likely to be perceived by Russia as a step towards future NATO accession.
However, despite the heavy political rhetoric, Russia already considers Finland and Sweden de facto members of NATO, given their enhanced co-operation with the alliance. Official membership in NATO would primarily be a political blow to the Russian government, rather than a change in the regional military balance. As a consequence, the trilateral SOI is unlikely to trigger any noteworthy reaction from Russia, unless it opens the road for either formal NATO accession or the opening up of Swedish and Finnish bases for US military deployment, however small and temporary this might be.
Militarily, Russia would likely respond to NATO by further militarizing the Arctic and the Kaliningrad exclave. Russia will be likely to increase the frequency and size of provocative military exercises in the Baltic Sea region near Swedish and Finnish territorial waters or airspace, as well as cyber-attacks targeting critical national infrastructure. Open military confrontation with the two countries would be unlikely, especially if they formally join NATO.
Economically, Russia would be more capable and willing to target Finland through regulatory measures such as import embargoes or border blockades, affecting mainly timber, paper production, and consumer goods. Swedish exports are better diversified, but the automotive sector could be affected by restrictions. Additionally, Russia could target Finnish and Swedish businesses operating in Russia with discriminatory measures, such as tax, environmental, sanitary, and disruptive 'inspections'.
Outlook and implications
The signing of the trilateral SOI will further entrench Sweden and Finland's position as de facto US and therefore NATO allies. It will likely lead to more extensive defense collaboration, especially if, as is likely, the security situation in the Baltic region persists. However, given the tradition of the two countries in maintaining neutrality, Swedish and Finnish collaboration with the US/NATO will fall short of their seeking official membership, or the opening up of these two countries to US or NATO military bases. The majority of Finnish and Swedish voters do not support NATO accession, a factor that will weigh heavily with the main parties in both countries. Indicators of risk change include any incidents involving repeated Russian incursions into Swedish or Finnish airspace or territorial waters, which could well serve to shift public opinion in favor of NATO membership or the facilitation of US troop deployments in these two Nordic countries. In Sweden, the outcome of the September general election is a key indicator. If the mainstream center-right parties perform strongly, this would create a political environment that would facilitate further military collaboration with the US, and even outright NATO membership, especially if their election is interpreted as a shift in public sentiment toward NATO accession.
In Finland, risk change indicators include the outcome of the parliamentary election, which is currently scheduled for April 2019 but could take place earlier because of friction within the ruling coalition over the adoption of the healthcare and regional administration reform. If the next government is led by the opposition Social Democratic Party (SDP) and is inclusive of the Green League (Vihr) or the Left Alliance, this would be an indicator of opposition to outright NATO membership, thereby decreasing war risks. If the government is led by the National Coalition Party (KOK), NATO membership would be more probable. In any case, Finland is unlikely to join the alliance without Sweden and only after holding a referendum. Currently, the trilateral SOI does not increase war risks in Finland or Sweden.
- Country Risk Month Ahead: October 2020
- Capital Markets Weekly: Zambia seeking rescheduling: EM supply unaffected given prior warnings
- Weekly Pricing Pulse: Lumber sees a spectacular fall
- Capital Markets Weekly: Multiple ESG debuts well received, flagging clearly positive EGG momentum
- Weekly Pricing Pulse: Cracks start to appear, but commodity prices continue rising
- Leveraging text as data: Tracking economic recovery from COVID19 in the US
- Geopolitics in a post-pandemic world: A fragmented world
- Creditor response in sub-Saharan Africa
Zambia is seeking bondholder consent to miss three interest payments starting this October. https://t.co/cWdmmQnuT1