Economic Outlook: A Sobering Turn of Events

The Faroese business community appears to be growing increasingly nervous over signs of a dramatically worsening outlook for the seafood export industry, the very backbone of the Faroese economy. 

View of Tinganes, the seat of the Faroese Government, Tórshavn, October 2023. Image credits: Maria Olsen.

Amid deafening silence from officials and public authorities, leading exporters of fish appear to be holding their breath as trade relations with the Russian Federation, notably, have been thrown into disarray within a remarkably short span of time. Adding to a palpable sense of insecurity that has already been brewing over global developments in the last few years, recurring unrest in the labor market and lingering divisions over fisheries and aquaculture policies combine to further complicate matters.

Indeed money was plenty for about a decade of high growth and large profits, especially in fish farming and pelagic fisheries, following an agreement made in 2014 with Russia on exports of Faroese farmed salmon and wild caught mackerel and herring to the Russian market. 

This took place against the backdrop of a trade dispute between the Faroes and the European Union alongside Norway over fishing rights, with the EU including Denmark and the United Kingdom plus Norway imposing a blockade of Faroese fish exports, banning Faroese fishing vessels to enter their ports. 

For the Faroese that measure was widely viewed as a shocking stab in the back by countries otherwise considered friendly—these ‘friends’ seemed ready to wreck the Faroese economy and starve the nation into submission over a fish quota disagreement, knowing that the Faroese economy is vastly dependent on exports of fish.

The entire episode called for a tough balancing act, which was indeed delivered by then Prime Minister Kaj Leo Holm Johannesen. The EU was already involved in a sanctions war with Russia over the status of Crimea, however the Faroes is not a member of the EU yet a member of the Kingdom of Denmark. So Mr. Johannesen played the Russian card—after a surprise meeting with authorities in Moscow, market access for Faroese fish was a done deal, much to the chagrin of envious people in the EU. On the other end as chief Faroese negotiator on fishing rights vis a vis the EU and Norway, then Fisheries Minister Jacob Vestergaard succeeded in holding a steady line without conceding. That combination saved the Faroese economy from the brink. Instead, what followed was a decade of flourishing fish trade that saw profits soar for exporters in the less than 55,000-population strong island nation. 

Now, how the Faroese on a societal level managed to govern with such growing revenues coming their way, is quite another issue—one that refuses to go away these days.

Sobering news

Meanwhile, in a likely hammer blow to Faroese exporters of mackerel and herring, it was reported in late October 2023 that fisheries authorities in Moscow have proposed banning import of fish products from the Faroe Islands to Russia. “The Federal Fisheries Agency has submitted to the Russian government a proposal to introduce a ban on the import of fish products from the Faroe Islands (autonomous territory of the Kingdom of Denmark) as a response to protective actions against Russian fishing enterprises,” the agency stated. 

The retaliatory move, likely to be signed into force within a short period of time, comes some three months after the Faroese government implemented severe restrictions on Russian fishing vessels that were using Faroese fishing ports under the long standing bilateral fisheries treaty between the Faroe Islands and Russia. The agreement gives Russian vessels access to fish blue whiting and other pelagic species in Faroese waters while in return giving Faroese vessels access to catch cod, haddock and a few other species in the Russian sector of the Barents Sea.

As if the looming Russian ban on imports of Faroese fish wasn’t bad enough, the upcoming negotiations over the annual extension of the fisheries agreement between the two countries could be in jeopardy, too. For one thing, the Faroese government seems to be ambiguous in its policy aims with no clear signal forthcoming as to what exactly they want to achieve, other than making political statements to the effect of wagging the proverbial finger at Russia for the invasion of Ukraine.

At the same time, as it happens, the Faroese fishing companies active in the Barents Sea have just taken delivery of three brand new, state-of-the-art freezer trawlers at a total price of around 1.2 billion dkk (160 million eur), all based on the century-old Faroese tradition of fishing in the Arctic as reaffirmed formally on a regular basis with the Russians since 1977 without interruption.

So with the Barents Sea business all of a sudden looking uncertain while at the same time the door to the Russian market for Faroese fish about to be slammed, no wonder people are starting to worry over the economic outlook.

Along with the now lost port business and provision of related services to Russian vessels, the Barents Sea fishing was estimated to generate an annual 1.2B dkk (160M eur) for the Faroe Islands, about two-thirds of it associated with the fishing business itself and the remaining one-third to port services. 

The annual value of Faroese fish exports to Russia totaled well over 2B dkk (268M eur) over a few years yet shrank considerably as massive trade sanctions came into play in 2022. Having picked up somewhat as trade partners found alternative ways of transferring payments, projections for 2023 had set this year’s value to about 1.3B dkk (174M eur); however that figure will likely decrease in the face of an import ban, should it be made effective immediately.

Not that there are no other markets for Faroese fish. Salmon farmers, however having seen exports decrease more recently, have gained strong footholds in China and the U.S., whereas whitefish such as cod, traditionally exported to the UK and the EU, is facing problems with plunging market prices.

Said Pól Huus Sólstein, managing director of Klaksvík-based North Pelagic, a major exporter: “As for mackerel and herring, other markets pay considerably less than the Russians do, and with the large quantities involved, the already lower prices paid in alternative markets such as Poland, Ukraine, Egypt or Nigeria would likely crash if those markets were to be flooded with higher volumes of supply.” 

Structural deficit

So over a 10-year period of unprecedented affluence, how well have the Faroese been able to govern? According to Hans Kári Vang, an economist with Komm­unu­felagið (the Association of Faroese Municipal Councils), the level of public spending has risen beyond manageable levels, especially on the part of the national government and to an extent also on the part of municipalities.

“The positive economic trend for the past ten years appears to be changing now,” Mr. Vang stated in a recent presentation to Council members. “The economic situation of today is quite dangerous, as the situation is generally misinterpreted, which leads to wrong decisions being made. Our socioeconomic structure has become outdated and needs to be changed.”

Mr. Vang went on to demonstrate the growing revenues received by the government via capital gains tax, company tax, fees on commercial fishing, and fees on fish farming. Capital gains and company taxes on business amounted to 224M dkk (30M eur) in 2010, rising with the introduction of fees on fishing and aquaculture to a combined 431M dkk (58M eur) in 2011, then continuing to rise until reaching an estimate total of 1.8B dkk (241M eur) this year (2023), to be followed by an expected decrease.

From 2015 to 2022, public expenditure rose from 2.073B dkk (278M eur) to 2.917B dkk (391M eur) at the national-government level and from 1.164B dkk (156M eur) to 1.680B dkk (225M eur) at the municipal level.

“There is in general an artificially stimulated, too high demand caused by excess public expenditure,” Mr. Vang added, citing contributing factors such as raised salaries related to Covid measures, the cost of fuel, raised salaries resulting from government executive orders, shortened workweek and more.

“Much of the growth in economic activity in recent years has been initiated by the national government and is being maintained jointly by the national and the local treasuries,” he said. “Now the proverbial fuel tank is getting empty. The national government has a large structural deficit and a very low level of sustainability, which means we’re going to see large tax increases and a cut down on expenditures. The municipal councils don’t have a structural deficit but seriously challenged sustainability in the coming years. The socioeconomic structure has to change for revenues and expenditures to become mutually coherent.”

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