The past years and decades in the global economy have shown how geopolitical challenges can negatively affect economically open and sensitive countries. With the areas of finance, trade and investment increasingly coming to the fore alongside energy resources in relation to exposure, it is not surprising that more economies are considering the option of neutrality. The Russia-Ukraine war has highlighted areas of economic exposure that had not been considered before. As a kind of response, Hungary has also identified areas where economic neutrality is a long-term goal. We have reported on this in our previous analysis, and in our two-part series we provide a European and a broader international overview of countries that can be considered economically neutral.
The presentation of neutral countries is illustrated first with three European countries. The neutrality policies of Finland, Austria and Switzerland go back many decades. Due to the geopolitical crises of recent years, Finland decided in 2022 to abandon its previous principle and become a member of NATO. In Finland’s case, neutrality is assessed until this decision, and in the case of the other two countries, we also look at the extent to which former principles have been modified in the course of the Russian-Ukrainian conflict.
The theoretical background to economic neutrality
Economics does not provide a clear, agreed definition of economic neutrality, but rather outlines its explanation. It is no coincidence that the term neutral economy is primarily applied in periods of high geopolitical tension globally. Consequently, it may arise in situations where two or more opposing parties are in conflict and the state in question wishes to stay out of this conflict by being neutral. This may apply to the political stance and also the way in which it organises its economic and foreign economic priorities. Economic neutrality can also be understood as neutrality not for the whole national economy, but for specific areas, such as energy supply, foreign investment or sources of finance.
The question of economic neutrality has been addressed in several American studies, mainly in the 20th century, during the period between the two world wars. An interesting formulation is used by Ernest Minor Patterson in his work “Economics of neutrality“, published in 1936. According to Patterson, there are two ways of achieving economic neutrality.
- One is to maintain the previous business relationships with both sides of the war and to organise it on equal terms (Patterson, 1936).
- The other option is to minimize economic contact with the belligerents, also on equal terms (Patterson, 1936).
The two methods may seem simple, but they also present a number of difficulties. Allan W. Dulles and Hamilton Fish Armstrong wrote about these in detail in their 1936 paper “Can we be neutral?“. Dulles and Armstrong concluded that in order to maintain the effectiveness of a neutral position, we must incorporate into our policy as many restrictions as public opinion will not tolerate. If, however, these restrictions are not accepted with due caution, we could drift into war (Dulles and Armstrong, 1936).
In May 2024, the International Monetary Fund (IMF) published a detailed analysis of economic flexibility, which shares many similarities with the issue of neutrality (IMF, 2024). The study focused on the economic crises caused by Covid-19 and the Russian-Ukrainian war. The resulting economic and national security obstacles and concerns have started to reshape trade relations, alliances with partners, foreign direct investment (FDI) flows and international finance. All of these factors have led policymakers to pay increasing attention to building economic flexibility, according to the IMF’s summary. This can bring many benefits, but it must also be taken into account that if countries retreat to a greater extent from their previous commitments, the benefits of economic integration will change significantly.
The IMF highlights the extent to which economic fragmentation has intensified in recent years, with trade restrictions increasing dynamically, more than tripling between 2019 and 2024. Financial sanctions have also increased and, following Russia’s attack on Ukraine in 2022, the value of the geopolitical risk index has also risen significantly (IMF, 2024). Nevertheless, we cannot yet say that this is deglobalisation, but there is evidence that trade and investment flows are mainly determined by geopolitical trends.
If we look at the impact on global trade of trade between states that are currently geopolitically at odds with each other, we see that third countries, or those that act as so-called connecting countries, are playing an increasingly important role. Connecting countries maintain trade relations with both rival states and are also a channel through which transactions between the two opposing sides take place. The emergence of connecting countries might, among other things, have helped to mitigate the global economic impact of the direct trade decoupling between the US and China.
The IMF’s research also outlines possible solutions to both fragmentation and excessive neutrality that would, so to speak, restore the expected order in the world economy. It argues that strengthening the trading system would require a reorganisation of the World Trade Organisation (WTO) and the restoration of a functioning dispute settlement mechanism. A concerted global effort to strengthen the international monetary system is needed, including preventing the fragmentation of payment systems and related standards and regulations (IMF, 2024). It is also important to maintain lines of communication, as constructive dialogue can help prevent even deeper economic fragmentation. Countries that are neutral can play an increasingly important role in preserving global integration through their economic and diplomatic efforts.
Why is it worth staying neutral?
As we have already touched on in the theoretical part, neutral countries can play an increasing role in global trade, as a kind of intermediary. The widening of the fault lines between Russia and the United States and between the United States and China – not counting the other micro-conflicts and the situation in the Middle East – allows the ‘outlier’ countries to maintain trade relations with all parties concerned, and even to exchange goods between rival countries through their intermediary role. Maintaining transactional links in such a complex trading environment creates opportunities for neutral countries to attract higher levels of FDI flows as attractive investment locations, thereby diversifying their economic partnerships. However, it is also important to note that as geopolitical fault lines deepen, it becomes increasingly difficult to remain neutral.
No two countries are neutral and have the same economic structure. India and Qatar, for example, are neutral, but the Indian economy is dominated by services, while Qatar is mainly sustained by oil. The common point, despite their different economies, is that their trade patterns are multipolar. This multipolarity is the result of maintaining relations with as many trading blocs as possible, despite geopolitical divisions. The countries involved clearly aim to optimise economic benefits and it can be shown that the bloc of neutral countries involved in the current East-West divide is profiting from this activity. According to Economist Impact calculations, while Western economies recorded a 0.35% drop in GDP and China a 4.48% decline in 2023, neutral countries achieved a 0.66% increase in GDP (Economist Impact, 2024). This expansion is mainly due to the intermediary trade role and the benefits already mentioned. Of these benefits, let us now consider two, which may also be the most significant in general.
One of the benefits already mentioned is the higher value of FDI attraction. For foreign investors, political and economic stability is one of the most important considerations when setting up or maintaining a subsidiary. In the event of global conflicts, states that are not exposed to fighting can maintain the listed stability indicators, becoming more attractive investment locations. This increased FDI flow not only diversifies investment partners, but also strengthens the economies concerned by developing infrastructure and industry, which can be key to long-term economic development.
Another way for a country to benefit from geopolitical fragmentation is to act as an intermediary or alternative trading partner between rival countries. Most conflicts result in sanctions being imposed between the parties concerned, which can lead to supply problems. Neutral countries can remedy this obstacle by selling the given product between the opposing parties, acting as a kind of intermediary. A good example of this role is Brazil, which became an intermediary country during the trade war between the US and China. China imposed an extremely high tariff of 25% on US imports of soybeans and other agricultural products, creating a shortage of these goods in China. Brazil’s response was to increase imports of soybeans significantly, a big proportion of which was then resold to China. The soybeans purchased were, of course, imported from the USA and then exported to China. This rapid response not only strengthened Brazil-China relations, but also benefited the country’s agricultural sector. It is also important to see that all this has not led to a deterioration in Brazil-US relations, with the US continuing to see the country as a major non-NATO ally.
Figure 1: Evolution of foreign trade of soybeans in Brazil between 2015 and 2023. Source of data: World Bank, WITS, 2024.
Figure 2: Change in the value of Brazilian exports to China and the US between 2015 and 2022 (in million USD). Source of data: OEC World, 2024.
Possible disadvantages of adopting neutrality
The economic benefits have already been discussed, but it is also worth briefly reviewing the disadvantages that a country may face if it chooses a neutral position. One of the main problems is that the development of trade relations cannot go beyond nominal growth. In other words, although there may be proportionally higher exports-imports between the two countries (hostile and neutral), they will not increase the volume of agreements, declarations and preferences between them. Underlying this is a lack of trust which hinders regulatory and harmonisation cooperation. However, these are the basis of foreign trade, so in order to ensure that goods and services continue to flow smoothly between the two countries and other countries in the region, it is necessary to overcome this. In addition, transnational trade is more restricted because the countries involved in the conflict may regulate market expansion more tightly, which also has an impact on the expansion possibilities of the neutral country.
Geopolitical tensions and the escalation of the conflict may make it increasingly difficult to maintain a neutral position. As tensions between adversaries increase, the room for manoeuvre for neutral countries shrinks. After a certain period of time, it is inevitable that a stronger relationship with one side or the other will develop, which may lead to “retaliation” from the other side. This can be diplomatic in nature, it can affect economic relations, and it can lead to a situation with the former partner country that entails the imposition of sanctions or tariffs. Excessive isolation from hostile parties is also bad policy, as the share of economic gains may be significantly reduced.
Overall, the maintenance of neutrality is demonstrably workable in the short term, but in the long term it poses a number of risks. Whether a country adopts it in the short or longer term, it needs to take into account all the potential pitfalls, so that it can weigh up as a kind of cost-benefit analysis how much the economic benefits gained from neutrality are worth to it.
Outlook – European neutral economies
Methodological background
In our analysis, we set out to look at the economic neutrality of three European and three non-European countries. The task is not an easy one, as there is no definition of which countries can be considered economically neutral. Starting from the principle that political neutrality “protects” a country from possible wars, sanctions and restrictions, economic neutrality can be defined as a foreign economic stance in which the neutral state maintains economic relations with the state involved in conflict despite the above-mentioned factors. The benefits of this relationship for the country are primarily economic, so that it acts as an intermediary, even between rival states. We will see examples of this mainly in the case of international, i.e. non-European, countries.
In the analysis of the countries, three aspects were examined, namely:
- Diversification of foreign trade partners – the country’s foreign trade relations, where they are concentrated, how diversified they are, and its relations with the US, China and Russia.
- Diversification of FDI – the source of FDI flows to the country, typically which countries are the source of capital, is there a strong capital dependence on a major power (US, China, Russia).
- Energy supply points – what is the country’s energy use, what is the proportion of each energy source, where it sources its imports from, is it dependent as a result on a particular country for energy (US, China, Russia).
The countries will be examined mainly in terms of the influence of the three major powers, Russia, the US and China, according to the criteria listed, also touching on the state of bilateral relations. Among the European countries, Finland, Austria and Switzerland are analysed, while Brazil, Vietnam and India are examined among the non-European countries.
Finland
The development of Finnish neutrality policy dates back to the Cold War period, during which the country was able to maintain its special position. Its aim was to preserve its international relations, which in turn gave it greater economic, security and political room for manoeuvre. However, it could not remain completely independent and neutral even during these years: in 1948, it concluded a Treaty of Friendship, Cooperation and Mutual Assistance with Moscow, which enabled the Soviet Union to exert political pressure on the Finnish state (Márton, 2010). However, the expected Sovietisation, which Moscow implemented relatively quickly in the Eastern European states, did not take place in Finland. Some explanations suggest that Helsinki was not as important to the Soviet Union as the other states, so it used softer means here (Borhegyi, 2022).
The forced relationship with Moscow did not have a negative impact on Finnish foreign policy with the Western powers. While the Soviet Union was one of Finland’s most important foreign trade partners during the Cold War years, Finland became a member of the European Free Trade Association (EFTA) in 1961 and signed a trade agreement with the European Economic Community (EEA) in 1973 (Borhegyi, 2022). At the same time, Helsinki signed a treaty with the Comecon, thus demonstrating that it managed to harmoniously balance its particularly important economic interests between East and West. In some cases, however, there was excessive interference from the Soviets (Soviet trade restrictions in 1958), but Finland essentially managed to shape the situation in its favour. In addition, there was also a Soviet element in Finland’s accession to the EU in 1995, as the break-up of the Comecon and the Soviet market reduced Finland’s trade links and there was a fear that an economic crisis would develop as a result. With the accession, Finland was able to avoid all this, and was given a wide scope for trade again by joining the EU.
Its relationship with the US is also positive. In recent years, the number of bilateral partnership agreements has steadily increased, with NATO accession in 2023 being the highlight. Trade relations are also significant, with the US being the most important trading partner of Finland outside Europe. There are numerous maritime, energy and bio-economic cooperation agreements between Washington and Helsinki (Finland Abroad, 2024).
Finland’s relations with China started to develop more dynamically in 2013. At the 2013 high-level meeting, the leaders of the two countries agreed on the importance of deepening the relationship between Finland and China and the framework for deepening it. Subsequently, the Sino-Finnish International Innovation Platform (FinChi Beijing) was established, a cooperation agreement was signed between the two countries’ justice ministers and a direct flight from Helsinki to Xi’an was launched. Several working groups and committees have also been set up to work on joint projects (FMPRC, 2016). 2020 marked the 50th anniversary of the establishment of diplomatic relations between Finland and China, which again provided a good opportunity for cooperation (Finland Abroad, 2024). Cooperation has also had a positive impact on trade relations: in 2013, 4.5% of Finnish exports were destined for China, rising to 5.5% in 2022 (OEC World, 2024).
Following the years of regime change and Finland’s accession to the EU in 1995, the country’s need for neutrality in the changing world order remained. This approach persisted until the Russian-Ukrainian conflict, after which the possibility of Finland joining NATO came to the fore. Although Finland had not previously been a member of the organisation, cooperation with NATO was a priority. Following the events in Ukraine in 2022, Finland made a final decision, and a few weeks after the start of the fighting in February, Finnish MPs declared possible membership of the military alliance (Csiki et.al., 2022).
By choosing a policy of neutrality, Finland has also put its economic interests first, while making the best use of its international relations. Both during the decades of the Cold War and afterwards, this desire for neutrality has been apparent in the Finnish economy. In its foreign trade and in the composition of its trading partners, there has been a kind of alignment towards both Eastern and Western countries.
Figure 3: Distribution of Finnish foreign trade by continent in 2022 (in million USD). Source of data: OEC World, 2024.
Due to its geographical location, its primary export markets are mainly in European countries. Among them, neighbouring Sweden (10.1%) and Estonia (3.98%) account for a significant share of Finnish exports. Alongside them, Germany (11.1%), the Netherlands (6.54%), the UK (3.73%) and Belgium (3.27%) also receive a high share of Finnish exports (OEC World, 2024). Finland also has significant trade with China and the US among non-European countries. In 2022, China accounted for 5.5% of total Finnish exports and the US for 10.2% (OEC World, 2024). Exports mainly include electronic products, metal products, paper and pulp, energy carriers, vehicles and transport equipment, and timber products (OEC World, 2024).
The composition of the Finnish import structure and import partners is similar to that on the export side. Finland mainly sources from countries on the European continent, with China and the US also playing a significant role. The share of imports from Poland (3.57%) and Russia (5.83%) is higher than in the case of exports. The structure of imported products is also similar to that of exports.
Figure 4: The value of Finnish exports to the US, China and Russia, 2010-2022 (in million USD). Source of data: OEC World, 2024.
Finland’s trade with Russia has been affected by the impact of international sanctions imposed both after the events in Crimea in 2014 and after 2022. Russian assets were the dominant factor in trade, which almost halved between 2014 and 2022. At the same time, the value of Finnish exports to Russia has also fallen, with the decline being even more spectacular: between 2010 and 2022, the value of Finnish exports fell by a third, with the post-2022 situation playing a major role. The shrinkage has been continuously observable in the values. The main reason behind the Russian decline is the fall in energy source imports, which is discussed in more detail below.
Alongside the deterioration of Russian-Finnish values, foreign trade with the US and China has become increasingly important. On both the export and import side, growth is visible in both the US and Chinese figures, confirming that Finnish exports have been shifting from Russian to Far Eastern and overseas markets.
Finnish foreign trade is relatively diversified, but there is also a high concentration in Europe. The share of China and the US has increased somewhat in recent years, but is still not excessive. However, its external trade with countries on the South American, Australian and African continents is small, so increasing trade with these countries could help to achieve a more balanced trade.
Finland’s data on foreign capital flows show a varied picture. In recent years, the amount of FDI inflows has fluctuated, influenced by the geopolitical situation and the tightening of legal regulations.
Figure 5: Change in the value of Finnish FDI flows in total and in terms of individual countries between 2010 and 2023 (in million USD) Source of data: OECD International Direct Investment Statistics Yearbook 2014, 2018, 2022. UNCTAD, 2024.
In 2023, total FDI inflows to Finland amounted to USD 1,372 million, a decrease of almost 90% compared to a year earlier (in 2022, total FDI inflows amounted to USD 13,275 million). Most foreign capital arrives in Finland from Sweden, the Netherlands and Luxembourg. In terms of sectoral distribution, manufacturing is the main sector attracting capital, followed by finance-insurance and IT and communications (OECD, 2022). In Finland, in addition to a highly skilled workforce, a knowledge-based and innovative economy and tax incentives create the conditions for attracting capital imports. US capital does not form a significant stock in the country, which also indicates that Finland is a potential expansion point mainly for European countries and China.
China’s highest FDI outflow to date was in 2019, when USD 4,180 million worth of FDI flowed to Finland. However, China’s share of Finnish capital inflows has been gradually increasing since the early 2000s. The Finnish government has repeatedly considered whether it is worthwhile to block Chinese capital inflows, but so far they have concluded that they prefer to tighten regulations on inward investment from China, mainly because of certain security risks (Kaupilla and Cappelin, 2023).
Russia is a more significant source of capital for the Nordic state, both because of its geographical proximity and the shared history described above. While data for 2022 and beyond are not yet available, the experience of the years 2014-2015 suggests that the deterioration of Russian-Ukrainian relations in recent years may have led to a resumption of significant Russian capital outflows from Finland. In addition, as sanctions have been imposed by the European Union against Russia, Moscow’s response has been similar: it has been channelling FDI investment to Asia and CIS countries instead of Europe and OECD countries. This change in the direction of capital flows also has an impact on Finland, as the relatively high levels of capital previously originating from Russia are no longer being invested here.
Finland’s capital flows are sufficiently diversified to be considered neutral, but the changes in the Russian-Finnish relationship in recent years are also having an impact in this area. If we look at the situation before 2022 – before the intention to join NATO –, we can see that Finland had been able to maintain its previous policy in this segment as well, so that it had not pulled towards any of the major powers to an excessive extent.
The third aspect on the basis of which we examine Finnish neutrality in the present case is the issue of energy dependence and energy supply. Finland has one of the lowest levels of fossil energy use in Europe. In 2022, the share of renewable energy sources in energy production was 52.2%; however, oil still accounts for a high share of the total energy supply, 22%. In the total energy mix, oil accounts for 21.9%, coal for 6.8%, natural gas for 4.4%, nuclear for 27.6%, hydropower for 4%, and biofuels and biomass for 31.3% (IEA Finland, 2024). In the Finnish foreign trade product structure, oil represents high value in both crude and refined form. In 2022, crude petroleum accounted for 7.63% of total Finnish imports, while refined petroleum accounted for 4.94% (OEC World, 2024). Prior to the Russia-Ukraine events of 2022, more than 70% of the country’s crude oil imports came from Russia, but from 2022 onwards the primary purchasing market became Norway, with Russia’s share falling to 13.1% (OEC World, 2024). In 2023, Russia’s share of Finnish energy imports shrank even further, to 1%, a drastic drop compared to previous levels (Statistics Finland, 2024).
Meanwhile, the US share of Finnish energy imports has been slowly increasing, and the 2023 figures show that US energy imports have been high in the country, alongside Swedish, Estonian and Norwegian imports. Previously, Finland mainly bought coal briquettes from the US, but from 2020 onwards, refined petroleum and fuel started to make up an increasing share of its import mix. According to 2022 data, USD 367 million worth of crude oil was imported from the US to Finland (OEC World, 2024).
Finland has a high energy exposure, as it imports a significant amount of oil, electricity and other energy sources, and previously mainly imported oil and electricity from Russia. As a consequence of the shift in foreign policy stance, Moscow’s role in Finnish imports is diminishing due to the rebalance. This also means that the Russian “dependency” before 2022 has been transformed, involving countries with a similar geopolitical orientation to Finland in energy purchases.
Overall, Finnish neutrality until 2022 had provided the country with a number of economic benefits that had a positive impact on growth. In addition to extensive trade relations, there is also a sufficiently diverse picture of capital investment from partner countries. In the case of energy imports, Russia was the main import partner until 2022, but after that the supply routes diversified.
Austria
Austrian neutrality has provided a predictable perspective for Austria for almost 70 years. Under the state treaty signed on 15 May 1955, Soviet troops were withdrawn from the country, allowing Austria to regain its sovereignty. The perpetual neutrality enshrined in the constitution gave Austria a new chance to continue as an independent, sovereign state through the decades of the Cold War and the period following the fall of communism. The state treaty became a foreign policy cornerstone, an integral part of Austrian identity. Since then, the neutrality treaty has been amended only once: on 7 November 1990, amendments were adopted that allowed the country to expand its international engagement opportunities, including enabling its accession to the European Union in 1995 (Horváth, 2007).
Neutrality has put Austria in a better position both economically and politically. Although it could not become a member of the European Coal and Steel Community, it still managed to put its economy on a firm footing during the unstable years of the Cold War. In addition, it had to be careful not to assess the global political developments excessively, and thus adopted a ‘bold but not provocative‘ attitude towards Moscow (Ruggenthaler, 2019). The country’s well-considered foreign policy decisions also had a positive impact on its economy, which grew steadily until the oil crisis of the 1970s. During these years, Austrian foreign policy shaped Austria into a state that became a kind of meeting point between East and West. The role of Vienna is also crucial in all this, as both as a capital and as a business and economic centre, it has been able to make good use of its potential. Despite changing world politics, Austria continues to pursue a policy of neutrality, whereby it expresses its views on certain events, but is able to do so without damaging its economic relations.
Its relationship with the US goes back more than two centuries. After the Second World War, US involvement was instrumental in the reconstruction of the country and in the aforementioned state treaty. Their commitment to each other was reinforced in a reaffirmation agreement in 2023, which could foster an even greater dialogue between Vienna and Washington (US Embassy in Austria, 2024). Their trade relations are also favourable: for Austria, the US is the second largest export destination after Germany, and for the US, Austria is an excellent entry point to the European Union market. All this is underlined by the numerous bilateral economic agreements and the extent of trade and investment relations between the US and Austria.
Austria formally recognised the People’s Republic of China in 1971, so the relationship between the two countries goes back more than half a century. Relations between Beijing and Vienna are mainly focused on trade and economic areas. In 2018, efforts were made to involve Austria in the Belt and Road Initiative, but this later failed (FMRA, 2024). China occupies a special position for the Austrian economy. With nearly €15 billion in goods imports and €5.1 billion in goods exports, China is not only Austria’s most important trading partner in Asia, but also the second most important overseas market after the US.
Austria’s trade relations, like Finland’s, are diversified but mainly concentrated in Europe.
Figure 6: Breakdown of Austrian foreign trade by continent in 2022 (in million USD). Source of data: OEC World, 2024.
On both the export and import side, German and Italian partners are in first place, with a significant share. Among non-European countries, there is significant trade with China and the US, with 2.56% of Austrian exports going to China and 6.89% to the US in 2022. On the import side, the share of these two countries is much smaller, and the picture is more diversified among Asian countries, with Vietnam, Turkey and South Korea having a greater presence. The share of pharmaceuticals, electricity, and vehicles and transport equipment among the products exported is significant, but there is a strong balance between products. The composition of imported goods is similar, with gold standing out alongside vehicles and refined petroleum.
Figure 7: The value of Austrian exports to Russia, China and the US, 2010-2022 (in million USD). Source of data: OEC World, 2024.
Its trade relations with Russia have changed significantly since 2014. Between 2010 and 2014, Russian imports to Austria averaged USD 1,233 million per year, but after the events in Crimea in 2014, the average annual value decreased to USD 731 million until 2021 (OEC World, 2024). The value of Austrian exports to Russia has also decreased: between 2010 and 2014, the average annual value of exports was USD 3,783 million. Between 2014 and 2021, this amount decreased to USD 2,555 million. The values show that Russian imports have fallen by more than 40% and Austrian exports by more than 30% in less than a decade in Russian-Austrian foreign trade. After February 2022, the value of bilateral trade in goods fell even more dramatically: Austrian exports dropped to USD 1,870 million and Russian imports to USD 280 million. This represents a contraction of more than 15% for exports and more than 65% for imports compared to 2021. Prior to the war, Austria mainly bought crude oil from Russia and, to a lesser extent, metals and chemicals (OEC World, 2024). For exports, Austria sent pharmaceuticals, electronic equipment, transport equipment and metals to Russia. The structure of products has not changed much since the war, but the proportion has. While in 2012 57.2% of Austria’s crude oil imports came from Russia, by 2022 this figure had fallen to 20.4%. Austria has been importing the missing quantities from Kazakhstan, Iraq and Libya since 2022. The data show that although Austria did not change its neutrality policy in the wake of the Russia-Ukraine war, as Finland did, the sanctions and individual political-economic decisions have led to a significant change in the Russian-Austrian trade relationship.
When analysing FDI, it can be quickly seen that Austria is more of an exporter of capital to the region than an FDI attractor. Although the volume of capital inflows is significant, the value of Austrian outflows is higher. The largest capital exporters in Austria are Germany (30.8%), Russia (11.4%), Switzerland (8%), the United States (6.6%), Italy (5.7%) and the United Arab Emirates (4.6%) (OECD, 2022). FDI is mainly concentrated in professional, scientific and technical activities (56.8%), finance and insurance (12.2%), trade (7.8%) and real estate (6.5%) (OECD, 2022).
Figure 8: Change in the value of Austrian FDI flows in total and in terms of individual countries between 2010 and 2023 (in million USD). Source of data: OECD International Direct Investment Statistics Yearbook 2014, 2018, 2022. UNCTAD, 2024.
The data in the graph also show that the value of Russian capital imports is significant for capital investment in Austria. After the events of 2014, the volume of Russian-origin capital investment in Austria slowed down and 2015 and 2016 saw capital outflows, but from 2017 onwards, large FDI inflows have become more frequent again. According to the latest available OECD data, in 2021 there were USD 3,018 million of FDI outflows from Russia into the Austrian economy, accounting for one fifth of total inflows into Austria (OECD, 2022). In the same year, USD 237 million of FDI from the US and USD 143 million from China were invested in Austria (OECD, 2022). The conclusion to be drawn from this is that even after the events of 2022, the relationship between Russia and Austria has not deteriorated enough to affect capital flows between the two countries. The results so far show that between 2022 and the first half of 2024, capital imports into Austria from Russia continued to increase (Vindobona, 2024). According to the Austrian National Bank, Austria has become the second largest recipient of Russian capital in Europe after Cyprus, which is linked to the fact that Vienna is still used by large Russian companies as a kind of hub and gateway to the major European economies, as it was during the Cold War years (Vindobona, 2024). This also indicates that only a small part of Russian capital remains in Austria, with a larger share of FDI flowing to other European countries.
It is also worth looking at how many Austrian companies have decided to leave the Russian market following the adoption of sanctions. Among the EU member states, most companies from Bulgaria, Hungary, Austria, Italy and Greece have maintained their previous operations in Russia even after the adoption of sanctions (Astrov, 2024). Companies of these origins tended to wait out and continue their operations, with a minimal number of those that left the Russian economy permanently. In the case of Austria, around 60% of companies with operations in Russia chose to stay, 18% chose to wait, i.e. have not yet made a final decision, while 10-15% chose to leave the market (Astrov, 2024). The figures highlight that in most cases companies preferred to maintain their previously established interests despite the sanctions. It is expected that those who did not take a final decision in the survey, i.e. waited, will also take a similar position as the previous group.
The third important area when discussing Austria’s neutrality is energy procurement. Three-quarters of Austria’s electricity production is already generated from renewable energy sources, but the share of natural gas and oil consumption and procurement is still high. Oil accounted for 35% of the total energy supply in 2023, while natural gas for 19% (IEA Austria, 2024). In the analysis of foreign trade, it was already mentioned that Austria imports oil mainly from Kazakhstan, Libya, Iraq, Algeria and Germany. For natural gas, the sources of supply are less diversified. Austria was one of the first countries in Western Europe to conclude a gas agreement with the then Soviet Union as early as 1968, and the agreement is still in force between the parties, with some modifications. In addition, a new gas contract was signed in 2018, which is valid until 2040 and provides for the purchase of 6 billion cubic metres of natural gas per year from Russia (Index, 2023). The largest user of Russian gas is the Austrian energy company OMV, whose head Alfred Stern has repeatedly indicated after the events of 2022 that he has no intention of terminating the existing gas purchase contract (Index, 2023). At the same time, diversification is considered important by the company, therefore a ten-year gas purchase contract was signed with BP in 2023, with the first delivery expected in 2026.
Following the events of February 2022, most countries that had previously bought Russian gas quickly stopped importing, but Austria continues to make significant purchases. This is due to the exposure of the Austrian economy, which, without sufficient gas, would simply be unable to function as usual. As import dependency calls into question the country’s neutral position, an agreement was reached between two Austrian coalition parties in the summer of 2024 to completely stop importing Russian gas by 2027, even though the contract runs until 2040, and the Austrian side would only be able to move towards more independent energy purchases at a significant loss (Weinhardt, 2024). However, the Austrian elections at the end of September could create a new situation, as the winning Freedom Party was not part of the previous coalition gas deal, so it is likely that they will choose another way to reduce Russian dependence.
For almost seventy years now, Austria’s neutrality has proved to be timeless. Although in some areas, such as energy procurement, the Russian connection can be overwhelming, overall it is capable of a balanced foreign policy and economic organisation. Its foreign trade and capital flows are sufficiently diversified, and in energy procurement it seeks to build partnerships alongside the existing Russian relationship. In its foreign policy, one can observe certain commitments regarding global political issues (e.g. in the Ukraine situation, Vienna has clearly sided with Kiev), but this shift is not apparent in the economy.
Switzerland
Of all the European countries, including the committed neutral states, Switzerland is perhaps one of the best known examples. The country was not involved in either world war and its foreign policy has been characterised for many decades by neutral diplomatic relations, with no excessive diplomatic shift in any direction. Yet its economy is one of the most stable of any European state, and it is held up as a model to follow. Neutrality has also paid off in the geopolitical context of the last decade, as Switzerland has been able to develop favourable relations with Russia, the US and China.
Switzerland and the United States have enjoyed friendly relations since the 19th century, based on shared values such as democracy, the rule of law and respect for human rights. More than 10% of Swiss expatriates live in the United States, where some 460,000 Swiss emigrated between 1700 and 2018. At the end of 2023, 83,667 Swiss citizens were officially living in the country (EDA Switzerland-USA, 2024). The United States is essential to Switzerland’s prosperity and security and is its second largest trading partner. The US is the main destination for Swiss exports and FDI, and plays a key role in education and research.
The consolidation of Russian-Swiss relations has been dated in diplomacy since 2007, when the two countries signed a memorandum of understanding. However, the good relationship could not be sustained, as the annexation of Crimea in 2014, followed by the publicised cyber and spy attacks in 2018, and finally the events of February 2022 deteriorated the relationship (EDA Switzerland-Russia, 2023). Switzerland has repeatedly acted as a peace broker. Following the break in Russian-Georgian diplomatic relations in 2008, Switzerland acted as a mediator between the two warring parties both in Tbilisi and Moscow (DFA Switzerland-Russia, 2023).
Switzerland has maintained bilateral relations with the People’s Republic of China since 1950. In 2021, the Federal Council adopted a China strategy, which sets out Switzerland’s policy goals and measures towards China for the period 2021-2024, based on the foreign policy priorities of peace and human rights, prosperity, sustainability and digitalisation (EDA Switzerland-China, 2024). Since 2007, Switzerland and China have also been engaged in a bilateral dialogue on intellectual property. In addition, since 2013, the People’s Bank of China and the State Secretariat for International Finance (SIF) have been engaged in a regular dialogue on financial issues. Since 2010, China has been Switzerland’s largest trading partner in Asia and the third largest globally after the EU and the US (EDA Switzerland-China, 2024).
Switzerland’s trade relations are highly balanced with the economies of the major nations. The continental breakdown shows that Europe leads the way, but Asia’s share is not much smaller, with China, India and Turkey occupying important positions.
Figure 9: Distribution of Swiss foreign trade by continent in 2022 (in million USD). Source of data: OEC World, 2024.
In 2022, the United States accounted for 15.3% of total Swiss exports and 10.4% of imports (OEC World, 2024). In Europe, Switzerland’s main trading partners are Germany, France and Italy, which account for almost a quarter of total Swiss exports and an even higher share of imports, 34.6% (OEC World, 2024).
Switzerland’s main export products are gold (25.2%), medicines (11.3%), metal clockworks (4%) and electricity (2.3%). In addition to the products already listed, Switzerland also imports vehicles and transport equipment (2.98%), refined petroleum (1.56%) and fuel (1.47%).
The events in Crimea and the war in Ukraine have markedly changed bilateral relations between Russia and Switzerland. The application of the international sanctions adopted during the outbreak of the war in 2014 and 2022 has also been the subject of controversy in Switzerland, where society has questioned the neutrality of the country through the application of the embargo. Russian assets worth a total of 13 billion francs have been frozen in Switzerland. According to the Swiss State Secretariat for Economic Affairs, in 2023, 580 million francs in financial assets and two properties were frozen, bringing to 17 the number of Russian-owned properties seized in Switzerland (VG, 2024). This also raises the question of whether a state can join these types of sanctions and seizures as a neutral country. Signature collection for a referendum on this question was launched in Switzerland in spring 2024 with the support of the People’s Party; the referendum would also include voting on the country not joining any military alliance, as well as the inclusion of neutrality in the constitution (VG, 2024). Although no decision has been taken on the referendum yet, the deep relationship with China and its handling in a situation similar to the Russian one has been highlighted.
Figure 10: The value of Swiss exports to Russia, China and the US between 2010 and 2022 (in millions of USD). Source of data: OEC World, 2024.
The trade data show that in the Russia-Switzerland relationship, it is mainly Switzerland’s imports from Russia that have decreased significantly. From 2013 to 2014, the amount of imports almost halved, but on the export side, there was a much smaller drop of less than 10% (OEC World, 2024). Behind this drop in imports is the decline in Swiss purchases of refined oil: in 2013, Switzerland purchased 38.9% of this product from Russia, but a year later only 9.47% of it came from there. From 2014 onwards, Switzerland started to buy the remaining missing quantities from other European countries: Italy, France, the Netherlands and Belgium (OEC World, 2024). By 2022, Russia had almost disappeared from Switzerland’s refined oil import partners, but this also highlights the fact that this attitude on the part of Bern raises the question of whether the country is neutral. Another question is where the product that the countries that have sold oil to Switzerland after 2014 have been selling originates, given that the other countries, with the exception of the Netherlands and Germany, have few oil resources.
Switzerland has a long history of attracting capital thanks to its stable economic background and predictable policy decisions. Most Swiss cantons offer significant tax incentives to encourage even more investors to choose Switzerland, and new companies can benefit from up to ten years of tax exemption. As the country is not part of the EU, and although Brussels has articulated criticism regarding the issue, Switzerland is not seeking to reduce its previous capital attraction instruments. There is no full investment screening, with FDI controls applying only to certain industries and sectors. Swiss banking secrecy, one of the most important features of the investment world, is both an advantage and a disadvantage: anonymity is the most important factor for most investors seeking to secure their liquidity, but it has also made the country vulnerable to global economic events. The reason is that attention is always focused on Switzerland in relation to conflicts, which slows down further capital inflows.
During the Russian-Ukrainian war, the role of Switzerland and capital investments deposited here, mainly of Russian origin, has also been repeatedly raised. We have already mentioned the high level of Russian assets frozen in the country, but it is also worth looking at the proportion of Russian FDI outflows over the past few years.
Figure 11: The value of Swiss FDI flows in total and in terms of individual countries between 2010 and 2023 (in millions of USD) Source of data: OECD International Direct Investment Statistics Yearbook 2014, 2018, 2022; UNCTAD, 2024; National Bank of Russia, Direct Investment Statistics Abroad, 2023.
FDI flows to Switzerland, broken down by country, show that the US injects significant amounts of capital into the country in certain years and then withdraws it at a large value within a relatively short period of time. US FDI flows are directed mainly at manufacturing and production, commercial and non-banking holding companies (USTR, 2024). The relationship between the two countries has been fruitful in the past too, especially from an economic perspective. They signed a strategic partnership agreement in 2021, institutionalising high-level meetings, dialogue and a number of agreements (EDA Switzerland-USA, 2024). In 2022, Switzerland was the seventh largest foreign investor in the US, with an investment volume of USD 297 billion (EDA Switzerland-USA, 2024). Approximately 500 Swiss companies had been established in the US by 2022, creating a total of 317,000 direct jobs. Switzerland also has a high number of US companies: according to 2021 data, 1,176 US companies were operating here, employing 104,000 people (EDA Switzerland-USA, 2024). The relationship between the two countries thus goes beyond mere economic advantage; they are also strategic partners, as Switzerland represented US interests in Cuba between 1960 and 2015 and in Iran from 1980 (EDA Switzerland-USA, 2024).
Russian capital inflows are small compared to US inflows, according to the Bank of Russia (CBR, 2024). The highest ever Russian capital inflows to Switzerland, according to the data compiled here, were in 2014, worth USD 6,927 million. However, the actual Russian-originated FDI inflows are certainly higher than this amount, but as Russia prefers to use transfer countries (mainly the Netherlands and Cyprus) for capital outflows, it is difficult to estimate the real value.
The situation is similar for FDI flows from China to Switzerland. In the yearbook published by the OECD, Chinese and Russian FDI is not recorded under Swiss data, and the Chinese Ministry of Commerce publishes detailed data only in Chinese, which also records the country breakdowns. According to data from an investment prospectus, the value of China-sourced new investment in Switzerland rose to US$196 million in 2023 (Interest, 2024), making the European country the third most attractive destination for Chinese capital investment on the continent. The growing cooperation is greatly facilitated by the number of investment and trade agreements signed between the two countries in recent years. In 2009, Beijing and Bern signed a bilateral investment treaty aimed at promoting mutual investment. The main provisions of the treaty include investment protection, fair and equitable treatment and clarification of dispute settlement mechanisms (Interesse, 2024). A specific feature of the agreement is that it also includes the immediate and free transfer of funds related to investments (including returns, capital gains and compensation) in freely convertible currencies. In 2013, a comprehensive free trade agreement was concluded between China and Switzerland which includes tariff reduction, reduction of non-tariff barriers, protection of intellectual property, trade in services, and investment protection and trade facilitation between the parties (Interesse, 2024).
The overall picture of FDI flows in Switzerland is varied, but data reporting gaps and transfer countries make it difficult to assess the actual amount of capital invested in the country by a major economy. Switzerland is also often cited as one of Europe’s off-shore capital-investing countries, not coincidentally, since its tax regime is much more favourable than that of most other countries. The banking secrecy and the high level of anonymity afforded to investors make it even more difficult to decipher what and how much investment has been made in the country by either Russian or Chinese parties. This also makes for a more nuanced picture of the country’s neutrality, even as it maintains economically productive relations with all three countries mentioned above, despite its political discourses.
Switzerland has decoupled economic growth from energy use, a huge achievement despite rapid population growth. Of the three countries surveyed, it has the lowest share of coal in total energy use, at just 0.3% in 2023 (IEA Switzerland, 2024). However, it has a high share of oil, at 34% of total energy use a year ago. In 2022, the share of renewables in energy production was 57.4% (IEA Switzerland, 2024). Among renewables, hydro and biomass are significant, the former representing 14% and the latter 12.7% of the total energy supply in Switzerland (IEA Switzerland, 2024). However, the country also needs oil to keep the economy going. Crude oil is imported from Kazakhstan, the US, Nigeria and Libya (OEC World, 2024). As Switzerland has only one oil refinery, which supplies a quarter of the country’s needs, it needs to import refined oil. To obtain it, it mainly relied on Russia before 2014, and since 2014 on Germany, France and the Netherlands (OEC World, 2024).
Natural gas is an important energy import, accounting for 10.2% of Switzerland’s energy consumption (IEA Switzerland, 2024). As the country has no natural gas reserves and no extraction potential, it relies on imports. It mainly buys natural gas from Russia, but is much more dependent on this product than it was on oil. In 2019, more than 50% of imported natural gas came from Russia, which was high even compared to the EU import share (the EU imported 41% of its natural gas from Russia in 2019). From 2020 onwards, there has been a gradual decrease in Swiss purchases of Russian gas, as Switzerland has managed to reduce the amount imported from Russia to 43% (Maslova, 2022). As the country does not have a sea exit, it is therefore not in a position to build an LNG terminal and mainly relies on pipeline gas imports. In the absence of storage capacity, an agreement was reached with neighbouring countries, leading to the creation of the Pentalateral Energy Forum, in which a political declaration was signed with Luxembourg, France, the Netherlands, Austria, Belgium and Germany on the regional coordination of gas storage (Maslova, 2022). Both the Russian-Ukrainian war of 2022 and the explosion of the North Stream pipeline highlighted the importance for Switzerland of diversifying its energy sources and developing the possibility of sourcing from more than one place.
Míg az USA-val és Kínával folyamatosak a produktív egyeztetések, addig Oroszországgal inkább egy távolságtartó, kölcsönös érdekek miatt fenntartott viszony jellemzi a külpolitika ezen szegmensét.
Overall, while Switzerland’s neutrality still has a conceptual meaning, it increasingly seems to be mainly an instrument for the exploitation of economic interests. The relationship between Bern and Moscow has not been affected in economic terms by the war in Ukraine, but the freezing of Russian assets and the adoption of international sanctions have left their mark on the bilateral relationship. While there are ongoing productive discussions with the US and China, with Russia there is a distant relationship, maintained for mutual interests.
Summary and conclusions
The issue of neutrality in economic terms has many similarities with political neutrality. It is no big secret to say that most politically neutral countries are also capable of achieving economic neutrality. However, as the three European examples have shown, this kind of balanced economic organisation also requires a high degree of composure on the part of economic decision-makers. In the case of Finland, for example, the minimisation of Russian energy imports was only possible by suitable alternative sources of supply being open to it.
The examples of Finland, Austria and Switzerland have also shown that complete neutrality cannot be achieved on the economic front, or only very rarely. A country will always be more closely linked to certain countries or continents because its primary economic interests require it. In a perfect world economy, everyone would trade with everyone else in the same way, but the reality is more nuanced. Some imports can only be sourced from one or a very small number of states, regardless of an ongoing conflict or geopolitical situation. In such cases, it is important to consider both how economic neutrality can be maintained and how far it is worthwhile for the economy to go to maintain the principle. The example of Austria shows that, irrespective of the Russian-Ukrainian war and the Vienna-Moscow relationship, it is most appropriate for it to source oil from Russia. This necessity is thus placed above principle, and the legitimacy of neutrality in this segment may be at stake.
In our global world, we face a number of geopolitical challenges, which can cause a number of problems for countries with a small and open economy. Economic neutrality can be a good solution. This requires that the economy in question is not isolated in neutrality, but can play an open, mediating role, even in the competition between the great powers.
