Turkish-Russian economic ties: Down but not out

What is the damage to economic relations of the ongoing spat between Russia and Turkey? Not insignificant, one should think. Moscow implemented many measures to punish Ankara for the downing of its fighter jet earlier in November.

It has blacklisted certain agricultural products, suspended visa-free travel, annulled charter flights bringing Russian tourists to Turkey’s Mediterranean and Aegean resorts, harassed lorry drivers at border crossings, signalled that the number of transport permits will be slashed, and imposed restrictions on Turkish citizens employed or living in its territory.

Aleksandr Novak, the energy minister, announced that negotiations on the Turkish Stream natural gas pipeline were halted.

Dmitry Medvedev, the Russian prime minister, even threatened to pull the plug on “major projects”. Soon after Aleksandr Novak, the energy minister, announced that negotiations on the Turkish Stream natural gas pipeline were halted. Rumours have spread that the pre-construction work for the Russian-contracted Akkuyu nuclear power plant in Turkey is off. Turkish construction companies doing lucrative business in Russia are at risk, too.

Mutual loss

Turkey has good reasons for concern. Having failed to reap significant trade benefits from the Western sanctions on Russia, it is now taking a blow. Like hotel owners in Antalya or fruit and vegetable growers in the next-door Adana province, Russian consumers are sure to share the pain.

Shoppers in Yekaterinburg or Pskov will soon be paying more for the tomatoes in the local supermarket as up to 20 percent come from Turkey. But as losses will be spread thinly across millions of consumers in Russia, Turkish exporters are the more vulnerable party.

There is a fair reason to expect that energy, the backbone of Russian-Turkish trade links, will continue to go strongly.

Let’s start with Turkish Stream. The decision to call it off is less significant than it appears. The project was announced by Russian President Vladimir Putin in an off-the-cuff remark during a visit to Turkey in December 2014, much to the surprise of both Turkey and the Gazprom management. But the natural gas pipeline has not been making much progress.

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Moscow and Ankara have been locked in a protracted dispute over the price of natural gas. In late October, BOTAS, the Turkish natural gas utility, announced it was taking Gazprom to international arbitration.

Russia had already backtracked on its commitment, scaling down the pipeline’s annual capacity from 63 to 32 billion cubic metres (bcm). Turkish decision-makers were taken aback when Novak signed a memorandum of understanding with Panagiotis Lafazanis, Greece’s energy minister, in June to extend the Turkish Stream pipeline into Greece, leading to a trading terminal on the Greek side of the border.

Dating back to the 1980s, the extensive natural gas trade between Russia and Turkey cannot be simply swept aside. Turkey takes about one fifth of Russian deliveries to Europe, and is Gazprom’s second largest market after Germany.

Consumption might soar 1.5 times early in the next decade.

Unlike in the European Union, demand in Turkey is growing robustly thanks to factors such as demography, industrial growth and the expanding gasification of households.

Consumption might soar 1.5 times early in the next decade. Between 1990 and 2012, power generation from natural gas rose tenfold and the upward trend is projected to go on at least until 2030.

For all the political meddling in Gazprom’s commercial decisions, the company will cling to the 60 percent share it has in the Turkish market for as long as possible. A typical example of how interdependence constrains not only buyers, but also exporters.

Energy dependence

Can Turkey wean itself from dependence on Russian natural gas? Perhaps it can. There has been feisty talk about shifting away from Russia and Iran (Turkey’s second largest supplier) and towards the Kurdistan Regional Government in Iraq, Azerbaijan,Turkmenistan, and the Eastern Mediterranean.

Can Turkey wean itself from dependence on Russian natural gas? Perhaps it can.

Liquefied natural gas from Qatar, Algeria and even Nigeria is on offer too. In recent days, Ahmet Davutoglu, the Turkish Prime Minister, visited Azerbaijan while President Recep Tayyip Erdogan was in Doha to contract additional liquefied natural gas volumes.

Thanks to its geographical location, Turkey aspires to become a transit country or even a trading hub along the so-called Southern Corridor linking Europe with the Caspian and Central Asia.

In Baku, Davutoglu announced that the Transanatolian Pipeline (TANAP) will be completed in 2018, a year ahead of schedule. However, the inflow of 6bcm of Caspian gas will hardly overhaul the Turkish market and squeeze Gazprom out, though it could certainly drive prices down.

Only if TANAP’s overall capacity goes from 16 to 31bcm – something that the Turkish government insists – could it turn into a bona fide game-changer.

Nuclear power

What of the Akkuyu nuclear plant? The $20bn project has never had a smooth ride because of the financial model it is based upon and its sheer scale.

The Turkish government has been reluctant to provide financial guarantees or tax breaks to Rosatom, which owns 100 percent of the company that will build and operate the facility. If the project is cancelled, the party in breach would need to pay hefty compensation of up to $15bn.

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Turkey and Russia are therefore playing cat and mouse; neither wants to be the spoiler and face indemnity. Rosatom has made a substantial investment in Akkuyu, having already spent $1bn – or considerably more, according to Turkish officials.

At the same time, contrary to its rhetoric, Turkey might struggle to find another company to take over the project. In other words, It is too early to write the deal off. There is an ironic twist, too, that the nuclear energy will reduce demand for electricity from power stations burning (Russian) gas.

Russian-Turkish economic ties are going through a rough patch. Yet, the fundamentals have not changed that much. Do not believe those who say it is all over. It isn’t.

Finally, when it comes to oil, Turkey is not dependent on Russia. Imports of Russian crude account for a mere 3 percent of the overall volume. What’s more, Russian exports have largely been diverted from the Black Sea and the Turkish Straits to the Baltic.

Certainly, Russian-Turkish economic ties are going through a rough patch. Yet, the fundamentals have not changed that much. Do not believe those who say it is all over. It isn’t.

Related

The lifting of economic and trade sanctions in relation to Iran’s nuclear programme means that the Islamic Republic should be able to export its oil freely to a wide range of customers, just as it did before the imposition of sanctions. Since Iran was not a negligible producer, other producers fear that the timing of its comeback to the market is bad news, as it may lead to lower oil prices for longer, especially if OPEC sticks to its existing strategy. The key questions that the international community is subsequently debating are: will Iran flood the oil market and, more importantly, is it able to do so? As this article argues, the sanctions were only partially responsible for Iran’s energy problems, and their removal will not solve the country’s long standing impediments to production, which, in the absence of sound and robust reforms, will prohibit a rapid expansion in Iranian capacity, as they have done for decades now.

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