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Michael Byers holds the Canada Research Chair in Global Politics and International Law at the University of British Columbia, and is currently a visiting senior research fellow at the University of Lapland's Arctic Centre.

In Lapland, Finland, many citizens sleep with rifles ready. Russia, the proverbial bear of international politics, growls nearby.

Last month, the Russian military sent 3,000 troops to reopen an airbase in Murmansk Oblast, just a two-hour drive east of Rovaniemi, a city of 60,000 people.

The Russian Air Force conducts daily exercises along the Russian-Finnish border, occasionally penetrating its neighbour's airspace. Although most of these exercises involve aged Tupolev 'bear' bombers, Russia's capabilities have been boosted by the recent arrival of a new generation of highly manoeuvrable Sukhoi fighter jets.

Most of Russia's nuclear weapons are deployed on submarines based north of Lapland on the Kola Peninsula. Up to five new subs will be launched this year, as Russia rebuilds capabilities it lost after the Cold War ended and the Soviet Union crumbled.

Despite their proximity to Russia, most Finns do not actually fear it. With a population of only 5.5 million, Finland has 350,000 army reservists and one of the highest levels of military spending in Europe. It has also experienced Russian aggression in the past.

In 1939-1940, the Finns repelled a Soviet invasion in what became known as the 'Winter War'. Although more than 40,000 Finnish soldiers died, Soviet losses were five times as high. Stories of white-clad troops on cross-country skis, silently outmanoeuvring Soviet tanks, are a source of great pride in this Nordic nation.

Finland outlasted the Cold War as a neutral state positioned strategically between East and West. Its uncritical stance towards the Soviet Union allowed it to access a vast market, while trading extensively with NATO members.

This policy of combining military deterrence with political neutrality and economic engagement became known as 'Finlandization.'

Finlandization has continued after the Cold War. During the 2000s, Helsinki – just three hours by train from Saint Petersburg – became a major destination for Russian tourists and investors. Trade increased, particularly in chemicals and high-tech manufactured products.

Finlandization also explains the country's ongoing refusal to join NATO. Russia was much aggrieved when the former Soviet republics of Estonia, Latvia and Lithuania signed up to the Western alliance. Today, the three Baltic States, with their significant Russian-speaking populations, worry that they might be the next targets for Russian intervention.

Finland, in contrast, believes that it has protected itself against Russian military aggression by staying out of NATO, forging close economic ties with its powerful neighbour, and maintaining an army that is large and capable enough to substantially punish an invader.

At the same time, the changing landscape of Europe has required adjustments to the policy of Finlandization. Finland joined the European Union in 1995, the borderless Schengen Area in 1996, and the eurozone in 1999.

As a result of Finland's membership in the EU, it is bound by the union's economic sanctions on Russia, and has been hit by a retaliatory Russian ban on meat and dairy imports from Europe. Finnish products intended for export to Russia are being dumped on the domestic market, including a popular cheese that is being sold at half the regular price – earning it the nickname 'Putin cheese' from grateful shoppers.

The Finnish and Russian economies are also being driven apart by the dramatic drop in world oil prices, which has reduced the value of the ruble by more than 50 per cent against the euro. Russian tourism and investment in Finland has suddenly dried up.

The Finnish economy appears to be coping with the change, as Chinese tourists replace the Russians. One of the biggest draws has been the branding of Rovaniemi as the 'official home of Santa Claus'. More than half a million people visit Santa Claus Village annually, a theme park complete with snowmobile rides, a sled dog park, authentic reindeer, and a post office that franks cards from the Arctic Circle.

The Finnish economy has also benefited from an outstanding education system that has led to a remarkable growth in knowledge industries. Just one example is that most of the world's new icebreakers are now designed in Finland.

However, the strength of Finland's economy has not prompted the nation to turn its back on Russia. The Finnish government, cognizant of the role that trade plays in its good relationship with Russia, is seeking exemptions for Finnish products from the EU sanctions. It is also working hard to maintain cross-border co-operation on environmental protection, transportation, search and rescue, and immigration controls.

The gap between Finland and Russia is likely to widen as the former grows into an even more vibrant, democratic, and functional economy, and the latter slides further into stagnation and frustration. But Finlandization – a combination of military resolve and pragmatic engagement – still keeps the Russian bear at bay.