Tensions between Turkey and Russia have been running high since Turkey shot down a Russian fighter plane in November 2015 for alleged violation of its airspace. Amid a war of words from leaders of both countries, Russia has issued threats of economic retaliation against Turkey. This article looks at the existing business relationship between the two nations, and assesses how badly Russia can damage the Turkish economy. (For more see, "Turkey Shoots Down Russian Jet and Investors Panic.")
Russia-Turkey Political Relations
Politically, Turkey is aligned with the military treaty group NATO (the North Atlantic Treaty Organization) and is a strong ally of the United States. Within the 28 NATO states, the size of Turkey's military is second only to the United States. Russia, obviously, is a dominant world leader and a military powerhouse. Despite the fighter plane incident, both countries will avoid any direct conflict with each other but will use diplomatic and economic strategies to spar. (For more see "Is Turkey a developed country?")
Between the two nations, Russia appears to be better placed to hit Turkey's economy where it hurts. After Turkey shot down the plane, Russia immediately suspended all military collaborations with Turkey.
Russia-Turkey Business Relations
The two countries have a long and healthy past of cultural, political and economic cooperation. They share business interests in several sectors of industry, including tourism and commodities trading. According to the foreign trade statistics from the Turkish Statistical Institute, in 2014, Turkey exported $5.9 billion worth of goods to Russia and imported $25.2 billion of goods and utilities from Russia. During a meeting between the presidents of the two nations in September 2015, Turkey expressed a hope to diversify and expand bilateral trade relations to $100 billion by the year 2023. The Russian jet fighter incident has made such expansion unlikely in the near future.
Economic Impact on Turkey--the Road Ahead
Russia has already threatened to pull out from many of the two nations' joint projects. Such projects include establishing a joint free trade zone, building the TurkStream gas pipeline to circumnavigate Ukraine, and constructing a nuclear power plant with four 1,200-megawatt reactors in Turkey with the Russian aid. Given the current economic situation of both countries, the abandonment of these joint projects will have far greater impact on Turkey than on Russia.
The two countries have a visa-free travel agreement for their citizens. After Germany, Russia sends the second largest chunk of international visitors to Turkey. In total, Russia contributes $6 billion per year to the Turkish tourism industry, a significant boost to the Turkish economy. After the jet plane incident, Russia imposed a ban on Turkish tourism for its residents, including suspension of several flights to Turkey. The tourism ban is expected to deal a major blow to the Turkish economy.
Russia is the largest foreign market for Turkish food, fruit and vegetable produce. Textile forms the other primary sector for Turkish exports to Russia. Exports to Russia constitute 4% of total Turkish exports, which are worth $6 billion. As a result of the recent conflict, Russia quickly imposed additional checks on importing Turkish agriculture products, and a more restrictive ban on food products took effect on January 1, 2016. Trucks and ships with loaded containers are reportedly lying stranded since the rise of the conflict.
Turkey is the largest buyer of Russian wheat and semi-finished steel products. It may now be forced to look for alternate sources to feed its population as wheat is a primary staple requirement. Turkey is also heavily reliant on Russian gas with 60 percent of Turkey's gas needs being fulfilled by Russia. Amid straining trade relationship, a cut in gas supply by Russia will result in severe energy shortfall leading to economic challenges for Turkey. Though Turkish authorities are already exploring alternative sources including those from Iran, Iraq, Qatar and Turkmenistan, the challenge also lies with lack of storage capacity within Turkey. Reuters reports that Turkish storage capacity stands at only 6 percent of the consumption (the recommended standard is 30 percent). With such a lack of storage capacity, the existing energy infrastructure in Turkey is built for and relies on a regular inflow of gas. Though Turkey may source gas from distant alternate locations, it will struggle with storage.
Turkey also has few alternative energy options. If Russia decides to contain the gas supply, Turkey will have a hard time meeting industrial and energy household demands.
Visible Impacts So Far
The Hurriyet Daily News, Turkey's oldest English language daily newspaper, reports a possible loss of around $20 billion for Turkey. This is equivalent to 3 percent of the Turkish gross domestic product (GDP).
Since the fighter plane incident, the Turkish lira (TRY) has plunged against the U.S. dollar, and Turkish bond yields have risen by around 20 basis points. The iShares MSCI Turkey ETF (TUR) too went down by around 10 percent. (For more see, "ETF Analysis: iShares MSCI Turkey (TUR).")
Turkey has had its share of challenges in recent past. The ongoing ISIS crisis in the Middle East, the large influx of migrants, high inflation above eight percent, and a depreciating Turkish lira (TRY) have weakened the Turkish economy leading to widening current account deficit. Turkey will further suffer as Russia's economic sanctions ripple through the overall Turkish economy.
The Bottom Line
Sporadic armed conflicts between nations may result in long-term diplomatic and economic consequences. Though debate continues over who was at fault leading to the incident of Turkey shooting down the Russian plane, economic responses have already made a visible impact on both economies. The Turkish fruits and vegetable exporters were hit quickly while Russian tourists and tour operators are switching to alternate destinations. Russia is in a much stronger position to damage Turkey economically. Though Turkey remains a close ally of NATO members and is backed by the United States, the ongoing geopolitical situation and challenges imposed by Russia will have a considerable effect in mid- to- long- term for the Turkish economy.
