Russia-Turkey commerce: unilateral dependence
Russia is Turkey’s primary energy supplier. Along with its energy reliance on Russia, the composition of Turkish exports to Russia makes Russian demand politically relevant, which increases Turkey's vulnerability in bilateral trade. Moreover, Turkey’s strategic shift toward Russia in foreign relations after its 2016 failed coup, for the most part, has proven to be beneficial to Russia, as the trade balance has further shifted in its favour.
With this week’s opening of TurkStream, a 910-km-long gas pipeline linking Russia and Turkey, Russia has modernised its gas transportation infrastructure in response to wider uptake of U.S. LNG exports to Europe. Bypassing Ukraine and diversifying its gas distribution channels increases Moscow’s ability to exert political influence on eastern European countries and help to retain its market share in Europe.
Russia is a key trading partner for Turkey, but Turkey is not as important for Russia. Turkey has no viable alternative to Russian gas, and its energy reliance on Russia has always been an issue of security of supply. While TurkStream may relieve Turkey’s energy security concerns to an extent, Russia has alternative ways to export its gas to Europe. The decrease in LNG prices and the increase in the share of Azeri Gas due to the TANAP pipeline may also help to decrease Turkey’s reliance on Russian gas, as they did in 2019, but Turkey still needs Russian gas to satisfy its ever-increasing demand.
One step taken by Turkey to decrease its dependence on Russia is shifting to nuclear energy. Ironically, a Russian firm, Rosatom, is building the first nuclear plant in Turkey, and it will continue to do so until the end of its operating life. The plant has been criticised for the high kW price in the purchase guarantee and permissions to make money transfers to its offshore subsidiary.
Turkey’s ambitions to increase the share of domestic electricity production through coal-fired energy plants are constrained by Turkey’s carbon reduction pledges at the Paris conference, and recurring sanctions on Iran limit Turkey’s alternatives.
Political spats between Russia and Turkey arising from their conflicting geopolitical interests further increases Turkey’s energy security concerns. One recent example is the crisis triggered by Turkey’s downing of a Russian warplane in November 2015. Russia imposed sanctions on Turkey, but while Turkish exports to Russia fell abruptly, Turkey’s imports remained steady, including non-energy imports that Turkey is not dependent on.
Though Russia’s share of Turkey’s total exports is not significant, it does however have the largest share by far in exports of agricultural product, particularly in fresh fruit and vegetables. Russian tourists also made up more than 10 percent of visitors and Turkish construction companies had widespread operations in Russia.
Both food exports and tourist flows stopped abruptly during the crisis. The construction firms were also forced to stop their operations in Russia. Exports to Russia decreased by 52 percent, to $1.7 billion and the number of Russian tourists fell by 77 percent to 855,000 in 2016.
The asymmetric consequences of the crisis not only stemmed from Turkey’s limited options, but the practical application of de facto non-tariff measures by Russia, which included the beating of Turkish truck drivers. It also displayed the vast influence of the Kremlin over economic actors, along with Putin’s ability to enforce his decisions. This led to an apology by President Recep Tayyip Erdoğan in June 2016, just before the failed coup.
After the resolution of the crisis, economic and political ties were boosted partly due to Russia’s political support for Turkey following the coup, despite their conflicting interests in Crimea, Syria, and recently in Libya.
Improved ties with Russia have not turned out to be economically fruitful for Turkey and the trade deficit with Moscow has further deteriorated to $18.6 billion.
Exports to Russia remain below pre-crisis levels. Turkey’s exports were $3.4 billion in 2018, from $5.9 billion in 2014. Turkish exports of agricultural products declined by one-third in 2018 compared to 2014, and Russia continues to use non-tariff barriers as a tool to limit imports. On the other hand, imports from Russia have increased significantly, including increased non-energy imports, which reached a record value of $8.9 billion.
Even though Russian tourists spent $3.7 billion in Turkey and Turkish companies earned $4.2 billion from construction projects in Russia in 2018, it is far from balancing the massive trade deficit.
With the United States threatening sanctions to Turkey, Turkey-Russia economic ties have entered a new phase, including utilising some tools developed by Russia to circumvent international sanctions. In November 2019, Ankara and Moscow signed an agreement on using national currencies in payments and settlements. With this agreement, Turkish banks and companies can participate in the Russian international payments system SPFS, which Russia introduced as an alternative to SWIFT after 2014 sanctions. This agreement would also allow the use of Russian Mir cards in Turkey, which were introduced as an alternative to MasterCard and VISA. The Turkish Central Bank has also embarked on a digital currency project mentioned in the 2020 Annual Presidential Programme, in which SPFS was considered for facilitating transactions.
Bypassing international payment systems between the two countries could intensify criticism of Turkey over its handling of financial crimes, including money laundering and terrorist financing.
Turkey's orientation towards Russia at the political level, despite their conflicting interests, has increased Turkey’s economic dependence on Russia. Turkey is vulnerable in both energy and non-energy trade, and now close cooperation in monetary and financial areas could harm Turkey’s already damaged reputation in terms of financial transparency.