Eurasianism or Western re-orientation… What is next for the Turkish economy?

It is no secret that thorny Turkey-U.S. relations will get even more strained with the start of a sanctions-busting trial in New York this week.

Turkish financial markets have been shaken by the possible implications that range from a sizeable fine imposed on a number of Turkish banks, to the possible involvement of the Turkish leadership in the dealings of Iranian-Turkish gold trader Reza Zarrab, defendant turned state’s witness in the case.

Such volatility coincides with the twin deficits on external financing and fiscal accounts that have been threatening the future course of the Turkish economy. Even the positive mood stemming from strong economic growth this year has long evaporated because of the severe volatility in Turkey’s politics and economy.

Amid the current stormy waters of President Recep Tayyip Erdoğan’s relationship with Western countries and looming presidential elections at home; a closer look is perhaps needed into Erdoğan’s apparent efforts to steer Turkey toward Russia, because such efforts serve both to contain the rise of the Kurds in the Middle East and criticism of Erdoğan’s march towards further consolidation of power. 

Yet, whether such warming relations between Russian President Vladimir Putin and Erdoğan, who have met six times this year alone, will alleviate Turkey’s severe external financing needs in the short to medium term should be the focal point. 

A photograph of Putin, Erdoğan and Iranian President Hassan Rouhani holding hands in the southern Russian city of Sochi, taken just days after Putin’s warm embrace of Syrian President Bashar Assad perhaps marked the beginning of a new period in the Middle East. Moscow has successfully managed to reclaim its seat at the geopolitical power table in the region.

As for Turkey, a total reversal from its stand on Syria is now more apparent.  From supporting the Sunni rebels alongside the U.S. administration against Assad, Turkey has shifted to bolstering the position of the Assad regime by aligning with Russia and Iran. Thus, the Russian-Turkish crisis back in 2015, stemming from Turkey’s felling of a Russian warplane and consequent economic sanctions by Russia, is now firmly in the past. Erdoğan is even moderating his tone on Syria’s Kurds to help lay the foundations for a political settlement.   

Turkey and Russia have established deep economic ties since the 1990s. Turkey currently imports more than half of its natural gas from Russia, ranking it as Russia’s second biggest gas export market after Germany. Trade volume between Turkey and Russia reached a record high of $34 billion in 2008, when both sides began talking about a $100 billion target. Growing co-dependency took a hit in 2016, when Russia barred Turkish exports and curbed the flow of tourists to Turkish resorts. Trade volume dropped around 50 percent from its 2008 peak. Then, Erdoğan effectively shelved his long-standing vision of becoming a natural gas hub through a trans-Caspian pipeline and instead bowed to Russian demands for an alternative, making Turkey a transit for Russian gas.

The two countries are now making progress on the new Turkish Stream natural gas pipeline and on plans for Russia to build Turkey’s first nuclear power plant at a cost of some $20 billion. The two countries have also joined forces to develop oil and natural gas fields in Iran. The most controversial development in bilateral relations, however, was Turkey’s agreement to buy S-400s; Russia’s most advanced air missile defence system, for $2.5 billion.

Turkey-Russia Economic Relations
Turkey-Russia Economic Relations - Türkstat

Turkey, with the second-largest standing army in NATO, is now siding with Russia and Iran on Syria, and to a great extent on Middle Eastern issues in general, creates tension with its Western allies. Now a major discussion point is whether Turkey will reconsider its NATO membership - the question has been raised by a number of Erdoğan’s senior aides.

Turkey seems to be playing the Russia and the U.S. cards simultaneously and currently seems to be shifting its allegiance eastwards. With Turkey’s relations with the United States perhaps at their lowest point in 50 years, engaging with Russia becomes an attractive option for both political and economic leverage. 

Eurasianism is defined by Putin as establishing Russia’s dominance over Central Asia and the Caucasus and developing a stronger grip on the Middle East.  Though the concept of Eurasianism is also an integral part of Turkey’s foreign policy, its definition is quite different. Plus, Erdoğan’s vision of making Turkey an influential member of the Shanghai Cooperation Organisation appears to conflict with Putin’s ambition of imposing Russian power over this eastern alliance. Furthermore, positive developments in Turkish-Russian relations cannot eliminate the fact that the two countries had 17 wars since the 15th century, Turkey tried to draw Central Asian republics away from Russian influence throughout the 1990s, and it was at least sympathetic to Turkic Muslim Chechens during their rebellion against Moscow, hosting Chechen leaders in Istanbul.

While Turkey and Russia now seem to have joined forces through their leaders’ common mistrust of Westerns countries, there have been centuries of competition between the two countries.          

Putin’s perspective of Eurasianism and Erdoğan’s perspective of political Islam is likely to clash at some future point, meaning Turkey is unlikely to turn its back on the Western world, totally or for some time to come. 

Moreover, Turkey is not likely to be “kicked out” of NATO anytime soon primarily because the alliance does not have a mechanism to oust a member. NATO also cannot afford to lose Turkey with its sizeable military stationed in a key geographical region. Despite worsening relations between the United States and Turkey, which are likely to weaken due to the Zarrab case and the U.S. failure to hand over exiled cleric Fethullah Gülen, the rapidly-changing security picture in the Middle East means that Turkey will remain in NATO and as a strategic partner to the United States for the foreseeable future.

Sources of FDI and LT Funds to Turkey-by Country (2016 - Hürriyet)
Sources of FDI and LT Funds to Turkey-by Country (2016 - Hürriyet)

It appears that Erdoğan plans to play Russia’s game of Eurasianism until the presidential and parliamentary elections, due in 2019, and as he attempts to prevent the establishment of an independent Kurdish state in Syria. Yet, a lasting four-nation alliance between Turkey, Iran, Russia and Assad’s Syria would be too volatile given the characteristics of each country. Cooperation at one side would be met with competition at the other.

Consequently, given its established economic ties to the West, and indeed Turkey’s structural rigidities that make Western flows of funds crucial for keeping the economy afloat, Turkey re-orienting itself as a pro-Western country in the medium to long term with stronger connections to the East seems a more likely scenario for the future. Turkey currently receives 75 percent of its foreign direct investment from the European Union and 68 percent of its long-term loan creditors are from the West.

Though Russia is currently a useful strategic counterweight, ultimately, Turkey will be unwilling to re-orientate itself away from the EU and the United States.