World Economy

Russia Is Finnish Fund’s Biggest Worry

Russia Is Finnish Fund’s Biggest WorryRussia Is Finnish Fund’s Biggest Worry

Sharing the European Union’s longest border with Russia can provide a unique perspective when it comes to assessing the region’s biggest geopolitical threat.

The man running one of the largest funds in Finland—a country that has avoided provoking Russia by staying outside NATO—says Europe’s relationship with its eastern neighbor is his top concern when he goes over the list of geopolitical flash points threatening to destabilize the global economy, Bloomberg reported.

“The big problem is the situation between the EU and NATO against Russia,” Timo Ritakallio, chief executive officer of Ilmarinen, a Finnish pension fund that oversees about €36 billion ($40 billion) in assets, said in an interview in Helsinki. “It is not a good situation for anybody.”

The EU imposed economic restrictions on Russia in 2014 after President Vladimir Putin annexed Crimea. Russia then responded with its own sanctions. The spat drove Russia’s economy deep into recession with gross domestic product plunging as much as 4.5% in the second quarter of 2015.

“The Russian economy is very weak after these sanctions,” Ritakallio said. But the measures have “also led to lower economic growth in the eurozone.” There’s now a “permanent” state of geopolitical tension, which is clearly “not a good thing”, he said.

“The biggest geopolitical challenge is still here in Europe, and Russia and the relation between the two,” Ritakallio said. Add Turkey to the mix, and the problems start to look even bigger, he said.

For now, Ilmarinen is cutting back on fixed-income investments and switching more into real estate and infrastructure. Part of that shift is linked to the fund’s efforts to shield itself from a sudden surge in inflation following a period of extreme monetary stimulus.

“We’re keeping our bond portfolio duration on a very short level,” Ritakallio said.

“Someday, after this period of money-printing from central bankers is over,” inflation will again be on the agenda, he said. “Not this year, not next year probably, but some day. Then it will be important to have assets that provide a very good inflation hedge.”