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Hardly any other economy in the world has such a cluster risk on its leg as that of the Faroe Islands: 95% of goods exports are fish and fishery products. At present, however, the remote Atlantic archipelago is flourishing.

It doesn’t take long before you see sheep on arrival in the Faroe Islands. The first ones graze directly at the airport exit, even before reaching the parking lot at the terminal. No wonder, after all the name Faroe Islands means “the sheep islands”. On the archipelago, which consists of 18 islands, more than humans live from the would-be journeymen, and for a long time in the past they formed an important basis for survival for the small population of the islands.

Fish everywhere

Today, however, sheep farming is no longer able to meet the local demand for lamb. While the pastures have remained the same for understandable reasons – the islands cannot be inflated – since 1900 the population has grown from around 15,000 to more than three times as much. According to the locals, Faroese lamb is only passed on as a speciality within families. In the shops, however, there are goods from Iceland or even from the other end of the world, from New Zealand.

On average, however, every inhabitant of the Faroe Islands, from infants to the elderly, fetches about 10 tons of fish from the sea every year. With a population of just under 50,000, this amounts to about half a million tons. Actually, the archipelago should have been called “the fish islands” long ago.

And these impressive figures do not even include what is produced in aquaculture. The breeding of Atlantic salmon in particular is the most promising growth area. According to the Faroe Business Report, salmon exports rose from the equivalent of CHF 195 million to CHF 435 million between 2010 and 2014, with a slight cyclical decline in 2015. In terms of value, farmed salmon now accounts for about as much of Faroese fish exports as the 15 most important species of wildly caught sea fish put together. Among these, mackerel, cod, herring, coalfish and halibut are the most economically attractive species.

Learning from mistakes

The rise of Faroese salmon farming in the last 10 years is the result of a combination of environmental conditions, learning ability and favourable circumstances. The water temperature in the fjords is more stable than in other producing countries, according to Niels Winther of the Faroese Association of Fish Breeders. This favours the rearing of larger fish and thus improves profitability.

In addition, Faroese aquaculture has corrected earlier mistakes. The once fragmented production base has been tightened. The principle of “one producer, one fjord” also applies, which helps to ensure that any problems in one farm do not affect animal health in another. In general, however, following a self-imposed tightening of hygiene regulations by the industry, production no longer has any substantial problems with diseases. The company even manages without antibiotics, which is a strong sales argument, and has one of the lowest mortality rates in a cross-industry comparison.

The improvements are reflected in the production figures, which in view of the tiny domestic market are more or less also the export figures. From a practically non-existent situation just over 10 years ago in the wake of a crisis that threatened the very existence of the company, it has now reached an annual output of around 70,000 tonnes. Compared to Norway (around 1 million tonnes), this is dwarfish. Compared to the total production of Great Britain or North America of around 150,000 tonnes each, however, the actually tiny Faroese economy has a respectable volume.

Over the past year and a half, Faroese aquaculture has also received a boost at the level of international politics. Strictly speaking, this was due to the disgruntlement between the EU and Russia, which led to sanctions and counter-sanctions. The Moscow food import embargo against Western countries does not affect the Faroe Islands, making them the only European salmon producer currently able to supply Russia.

The good times for salmon farming naturally raise the question of whether production could not be further expanded. But that would be a potentially problematic way forward. “The well usable fjords are relatively full,” says Winther. Once before, one has experienced what happens when one wants too much too quickly and pays a high price for it. He means the near collapse of the industry after problems with diseases before restructuring.

Poul Michelsen, the foreign and foreign trade minister of the Faroe Islands, expresses himself in a similar way. In the late 1990s, it had been seen that aquaculture as an industry was at risk if the environment was overstrained. Just as the Faroe Islands can only keep a limited number of sheep because the number of pastures is limited, so can fish.

According to Winther, a certain expansion would still be possible in two ways. The first would be to keep juveniles longer in land-based breeding tanks and thus shorten the rotation time in the seawater networks. This is currently being worked on. The alternative would be to go further out into the open sea with the seawater nets. However, weather and waves set limits to such plans.

East wind at the back

However, even at the current level of production, salmon farming offers the Faroe Islands the opportunity to diversify their exports. They are still fish, but according to Winther, aquaculture follows different laws from deep-sea fishing, being in principle a branch of agriculture.

Nevertheless, the islands’ economy still faces a spectacular cluster risk that hardly any other economy in the world can match. Fish products from aquaculture and wild catch account for about 95% of goods exports and about 20% of the gross domestic product of the Faroe Islands. For one’s own well-being, one is dependent on world market prices, on the design of which one has practically no influence. While the very different production structures of salmon farming and deep-sea fishing mean that problems in one sector do not automatically affect the other, the risk factor of a one-sided dependence of the export industry on a single product category remains.

At present, however, there is little to criticise about the market situation. The world market price for farmed salmon is in the upper third of the ten-year average, and prices for sea fish have risen by a total of 10% over the last two years, and by around 65% compared to 2009 (see graphs). Faroese deep-sea fishing is in a phase of modernisation and is increasingly shifting to value-added processing for pelagic fish such as herring, mackerel and blue whiting, whether on factory ships or in land-based facilities.

Here, as with salmon aquaculture, the industry enjoys the tailwind of exclusive market access to Russia from a Western European perspective. According to Statistics Faroes, between 2014 and 2015 Russia’s fish and seafood exports increased by 70% to DKr 1.8 billion (CHF 270 million), while sales in the USA and Great Britain declined slightly to around DKr 600 million (CHF 90 million) each.

The Russian market for Atlantic fish, however, will not be forever the only one, as is also known in the Faroe Islands.

Small country, big challenges

Small, but fine: this is how the Faroese economy could be reduced to a handy short formula. With a per capita gross domestic product in current prices of over $50,000, the territory under Danish sovereignty belongs, according to the World Bank, to the class of high incomes. This is not a matter of course for an isolated group of islands far out in the Atlantic Ocean, which is somewhat smaller in area than the Canton of Zurich and whose entire population would find a comfortable place in Wetzikon and Uster.

In the capital Torshavn, however, one can easily forget that there are at least 300 kilometres to the next mainland, except for fish and some lamb, everything has to be delivered by ship or plane and an impressive bare wilderness begins at the last house on the outskirts of the village. Torshavn is a prosperous small town as you would find it elsewhere in Scandinavia. Because fishing has always been a major source of income for the Faroe Islands, the self-governing archipelago made use of an opt-out clause in 1973 when Denmark joined the then European Economic Community. To subordinate oneself to the European fisheries policy was unfavourable for Torshavn. Today, the Faroe Islands are neither part of the EU nor of the Schengen area. They regulate their economic relations through bilateral agreements, and there have already been tangible conflicts with the EU on fisheries issues in particular.

Hopes for economically interesting oil reserves in Faroese waters and thus for a second substantial source of income alongside fishing have not yet been confirmed. It is true that a small marine supply industry, which was established with a view to possible oil deposits, contributes to service exports. Other major activities in the industrial sector are repair yards, which in turn are dependent on fishing and merchant shipping.

Hopes for economically interesting oil reserves in Faroese waters and thus for a second substantial source of income alongside fishing have not yet been confirmed. A small marine supply industry, which was established with a view to possible oil deposits, contributes to service exports. Other major activities in the industrial sector are repair yards, which in turn are dependent on fishing and merchant shipping.

One particular challenge is securing energy supplies. Due to their great distance from mainland infrastructure, the Faroe Islands are left on their own. Although wind is available extensively as a resource and is increasingly used, the problem lies in ensuring supply and grid stability.

This is particularly important for the economically important salmon farming sector. The creation of possibilities for the storage of reserve energy, whether in batteries or pumped storage facilities, is therefore an urgent task. Overall, with a target of 75% renewable energy in their mix by 2020, the Faroe Islands are a pioneer in Europe in the use of green technologies.

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