Middle East | Turkish contractors entering a difficult period in Russia

Turkish contractors entering a difficult period in Russia

May 4, 2016 7:51 AM (UTC+8)

 

ISTANBUL–Many business centers, hospitals, shopping malls and five-star hotels in Moscow as well as signature buildings like the Federation Tower, Evolution Tower and the International House of Music were built by Turkish contractors. But not a single structure built by them has come up there since last November.

In the annual list of top 250 construction companies of the world
In the annual list of top 250 construction companies of the world, Turkey stood second with 43 entries

Everything changed after the shooting down of a Russian jet by a Turkish fighter plane. The ensuing crisis between the two countries led Russia to impose sanctions on imports from Turkey, including imports of construction services from Turkish contractors. Projects that were in progress by the time the sanctions took effect will be finished, but no new projects will be commissioned to Turkish firms, at least for the foreseeable future.

This is real bad news for Turkey. Construction services overseas form a strong backbone for Turkey’s economy. It is primarily a major source of foreign currency revenue, which is much needed given the country’s chronic current account deficit.

Since 1972 when the Turkish contractors finished their first construction work overseas, a total of 8,755 projects were undertaken and finished in 108 countries with a total value of $325.5 billion. Construction services contribute to the Turkish economy in other ways, too.

They generate demand for Turkish exports (particularly exports of construction materials; in 2015 Turkey exported $18.1 billion worth of construction materials, mostly used in projects undertaken by Turkish companies abroad), create employment, encourage transfer of technology and know-how, and improve Turkey’s balance of payments, not only through the revenues that are made, but also through increased exports, transportation revenues and workers’ remittances.

The crisis with Russia is a major setback for Turkish contractors, and the overall outlook is not rosy either. Considering all the projects Turkish contractors have completed overseas since 1972, Russia stands out as home to the highest number of construction works undertaken by Turks, with 19.9% of the total project value around the world.

Other major markets have been Turkmenistan with a share of 14.8%, Libya with 9.0%, Iraq with 7.3%, Kazakhstan with 6.4% and Saudi Arabia with 5.2%. Most, if not all, of these markets are getting problematic for Turkey.

Russian sanctions have commenced only in January this year, and their effects will be felt by Turkish contractors for some time to come. Libya was a profitable market for Turkish companies. However after the fall of the Qaddafi regime, much business was lost to emerging competitors favored by the new leaders of the country. Central Asian markets are prone to political instability.

Iraq is too dangerous to do business in. Neither the Kurdistan Regional Government in the north of the country nor the central government in Baghdad has the means to invest in new infrastructure any more due to the costs of fighting terrorism and falling oil prices.

As a result of this increasingly unfavorable environment, Turkish contractors are witnessing a painful decline in their business volumes. In 2014, they had completed 328 projects around the world with a total worth of $26.4 billion. In 2015, these figures were 179 and $20.4 billion respectively. According to the latest available data, the first two months of 2016 have seen Turkish firms being awarded only eight new projects.

Despite increasing challenges, Turkey still has one of the strongest construction sectors in the world. In the annual list of top 250 construction companies of the world, Turkey has 43 entries, which places Turkish contractors second after China’s 65 companies (the United States comes third with 32 contractors).

The government is currently launching a number of initiatives aimed at reinforcing the global competitiveness of contractors. Turkish Eximbank’s recent project to offer alternative financing channels for contractors undertaking projects abroad is an important step in this respect, and so are the new options made available to companies for hedging against political risk.

As no easy recovery seems possible in markets like Russia and Iraq, Turkey’s contractors are also making efforts to expand into new markets. A recent report published by the Turkish Contractors’ Union states that “in order to balance the losses in Russia, Libya, and Iraq which make up 35% of total construction services abroad, prospects in sub-Saharan Africa and Latin America are closely monitored.”

Turkey’s ministry of economy, in cooperation with the representatives of the private sector, has already sent delegations to Ethiopia, Nigeria and Mozambique to study these markets. Even if Turks effectively access these markets and undertake projects there, the scale will be limited. It will take a long time before companies start making revenues there, and these projects will put them against greater competition by Chinese rivals.

Not all might be lost in the major markets. While the resumption of business requires a calming of waters between Ankara and Moscow and an end to violence in Iraq, Libya offers greater optimism. Turkish contractors are planning a “return to Libya” and the Libyans are enthusiastic too.

The prime minister designated of the UN-brokered Government of National Accord in Libya, Faiez Serraj, was in Istanbul earlier this month to attend the Summit of the Organization of Islamic Cooperation, where he said that “Turkish companies’ previous work is much appreciated” and Libyans are “looking forward to do more projects together in the future.” Maybe only words for now, but words that are strong enough to bring more hope to Turkish contractors.

Turkey’s construction services abroad are facing a tough time in major markets due to current geopolitical circumstances. Instead of waiting for these circumstances to change, Turkey’s policy makers have to address the shortcomings of the sector and open ways towards new markets.

This is required not only because construction services in international markets are a major money earner for the Turkish economy, but also because the linkages created through these services are a useful asset for Turkey’s foreign policy, which is currently in a dire need for positive instruments, especially in the Middle East.

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)

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