Economics of stand-off between Turkey and Russia

December 2, 2015 12:10 PM (UTC+8)

 

The rapidly escalating tension between Turkey and Russia after the downing of the Russian jet by the Turkish air force has reached a new level with Kremlin issuing an executive order containing a number of “special economic measures” against Turkey on November 28.

Russia can't afford to cut off
It does not make sense for Russia to cut off gas to Turkey

These measures appear draconian in every sense as they include a limitation of imports of Turkish goods and services, prohibition on the employment of Turkish citizens by Russian companies, annulment of the visa waiver agreement between the two countries, suspension of the sale of Turkey travel packages to Russian citizens, ban on charter flights between Russia and Turkey, and increased controls over the activities of Turkish trucks on Russian territory.

Turkey is yet to respond with measures of its own, and while Ankara appears, at least for the time being, to prefer to contain the tension without further economic complications, Moscow’s economic measures are likely to inflict damage on bilateral relations, particularly in the short run.

In the medium to long run, however, the picture will be different. The eclectic nature of Kremlin’s economic measures, together with the early signals on how they are going to be implemented in practice, shows that while Russia is willing to play tough against the Turkish government, it is also aware of the limits on how far it can go with these measures, given the economic interdependence between the two countries.

To start with, the economic measures leave out the vital core of the economic relationship between the two countries, i.e. the gas trade, where Turkey and Russia are dependent on each other. Turkey sources almost 60% of its imported gas from Russia, and although Turks are considering alternatives, such as buying more gas from Azerbaijan and Iran and/or opting for the more expensive liquefied natural gas from Algeria and Nigeria, Russia’s share in the Turkish energy basket is significant and irreplaceable.

Turkey uses the gas not only for household heating, but also for industry and power generation; uninterrupted supply of gas is of vital importance, and without Russia this will simply not be possible.

In the meantime, for Russia, Turkey is the second largest market after Germany. Immediately after the jet incident, Russia’s Deputy Minister of Energy Anatoly Yanovsky announced that gas supply to Turkey would continue without interruption.

It does not make sense for Russia to cut off gas to Turkey because given the economic weaknesses Russia is facing, Moscow cannot afford to lose a well-paying customer like Turkey, while at the same time the gas supply is guaranteed under existing intergovernmental agreements. Cutting off the gas would only result in Turkey taking the case to international arbitration.

Turkey is not only a customer, but also a crucial transit route for Russia, through which its gas can be transported to consumers in the West. Before the jet incident, Russia was actively lobbying for the proposed Turkish Stream project that would carry Russian gas through a pipeline from Russia to Turkey and Europe across the Black Sea, and an intergovernmental agreement was expected to be signed this month.

Although the fate of the project seems unclear for the moment, not only was Turkish Stream not included in the Kremlin decree on measures against Turkey, but Russian officials are also implying this will not be the case.

Recently Russia’s Minister of Economic Development Alexey Ulyukaev stated that the Turkish Stream is a project of the Russian gas company Gazprom and therefore it is not covered by the measures taken by the government. Turkey needs to buy Russian gas, and projects like the Turkish Stream help Turkey achieving its goal of becoming an energy hub at the heart of Eurasia.

But at the same time, Russia also needs to sell gas to Turkey, and more importantly it needs to turn the Turkish Stream project into concrete reality as soon as possible, as given the geopolitical complications in the region, Moscow does not have many alternatives left for carrying its gas to consumers in the West.

The Kremlin decree includes limitations on imports from Turkey as well, but a closer look at the composition of the trade between the two countries reveals that Russia has not much to gain in this field either.

In 2014, Russia’s exports to Turkey totaled $25.3 billion, while its imports form Turkey amounted to a mere $5.9 billion. In the same year, $16.8 billion worth of Russian exports to Turkey comprised of hydrocarbons, mainly natural gas. Major Turkish exports to Russia in the same period were fruits and vegetables (Turkey having a surplus of $1.1 billion here), textile and apparels ($1.2 billion), machinery and equipment ($1.5 billion).

Losing the Russian market in these areas would be a significant blow to Turkish economy. But to what extend Russia can afford this is another question. For instance, in the food sector, Russia relied more on imports from Turkey after embargoing the European producers following the Ukraine incident.

Now, the direction needs to change once again and Russia will be required to find new sources of fruits and vegetables, which will inevitably raise the prices for Russian consumers, who are already suffering from an annual increase in the food prices index by 19%.

On December 1, Russia’s Deputy Prime Minister Arkady Dvorkovich declared that import bans will not cover Turkish industrial products, and measures on food products will commence with a delay due to the inflationary risk. In other words, while Russia’s measures are likely to hurt Turkish exporters, the likelihood of self-inflicted damage is also real and evident for Russia.

Turkey earns $4 billion in tourism revenues annually from Russian tourists. According to experts on the Turkish tourism industry, this figure might go down to $1 billion due to the measures, and this is a real threat for Turkey, given the vital importance of tourism revenues for a country which is suffering from a current account deficit.

However, there is another side to the story. The Associaiton of Tour Operators of Russia has announced that losses of its member companies resulting from the ban on the sale of Turkey travel packages to Russian citizens will be as high as “hundreds of millions of dollars”. In other words, profits were mutual, and so will be the losses.

The business communities of both countries are fully aware of the situation. The peak organization of the Turkish private sector, Turkish Union of Chambers and Stock Exchanges, has launched a “Russia crisis desk” and announced that every measure needs to be taken “to prevent economic relations from being undermined by conjectural fluctuations.”

This is a feeling shared by the Russian corporate sector as well. At the moment, Turkey and Russia find themselves in a downward political spiral; borrowing the words of Brookings Institution scholars Samuel Charap and Jeremy Shapiro, it is a case of a dangerous “competitive machismo” between two leaderships who are unwilling and to a large extent unable to step back and compromise.

Economic interdependence between the two countries imposes limits on how far economic measures can be taken. However, a possible escalation in this field, including the cancellation of the Turkish Stream, can be harmful for both sides and can lead to reactions domestically.

As the best case scenario, one can hope the economic interdependence between the two countries will reverse the measures taken by Russia and have positive spillover effect on the political realm. If this is too much to ask for, at the minimum, the two sides can do more to isolate economy and politics from each other, continue to do business together, and solve their differences through non-economic means.

Dr. Altay Atlı is a lecturer at the Asian Studies program of Boğaziçi University in Istanbul and a senior research associate at Turkey’s International Strategic Research Organization (USAK)

(Copyright 2015 Asia Times Holdings Limited, a duly registered Hong Kong company. All rights reserved. Please contact us about sales, syndication and republishing.)

Comments