ISTANBUL BLOG: Will Erdogan’s overtures to Russia and Israel save Turkey’s economy?

ISTANBUL BLOG: Will Erdogan’s overtures to Russia and Israel save Turkey’s economy?
Turkey’s newly pragmatic president, Recep Tayyip Erdogan.
By bne IntelliNews July 1, 2016

Turkey’s newly pragmatic president, Recep Tayyip Erdogan, will shrug off all criticism at home for making embarrassing foreign policy U-turns in a bid to restore deeply severed ties with Russia and Israel, as he is more focused on reaping the expected benefits of the normalisation of relations.

Erdogan’s bankrupt and adventurist foreign policies have isolated Turkey in the region, inflicting costs on the country’s now floundering $720bn economy. The tensions with Russia, in particular, have deprived Turkey of much-needed export and tourism revenues that are instrumental in plugging the economy’s declining but still sizeable current account deficit. Erdogan also hopes that the agreement with Israel will help Turkey reduce its energy dependency on Russia and that joint energy projects with Tel Aviv will lower the country’s energy import bill in the medium to long term.

He is now trying to sell the deal with Israel as a “win-win” situation, even though he actually has settled for less than what he initially wanted. Erdogan also expressed regret – he “apologised”, according to the Kremlin – over the downing of a Russian bomber last November, backpedalling from his earlier stance. But Erdogan will ignore what his opponents say, as he looks more worried about the health of the economy that is heading for a slowdown this year and about the economic and political fallout from Brexit for Turkey.

According to the International Monetary Fund (IMF), Turkey’s GDP growth will slow to 3.8% this year from 4.0% in 20015. A wave of terror attacks and tensions with Moscow have kept foreign tourists and Russian holidaymakers away from Turkey, costing the country billions of dollars in tourism revenues that normally help Turkey finance its current account deficit, the economy’s Achilles’ heel.

Turkey’s current account gap narrowed to $32bn last year from $64bn in 2013 and $44bn in 2014. In January-April, the deficit declined by 25% year on year (y/y) to $10.8bn, thanks to lower energy prices. Exports were down 7% y/y to $49bn in the same period. Net tourism revenues plunged by 33% y/y to $2.7bn, according to the central bank’s latest balance of payments data.

True, the poor export performance could be attributed to crawling growth rates in its main export markets and geopolitical problems – ie, Europe and Middle East – but tensions with Russia also played a role here.

Bilateral trade between Turkey and Russia was $33bn in 2012, declining to $24bn last year. The impact of the feud with Moscow on exports is difficult to ignore. In the first five months of the year, exports to Russia nosedived 59% y/y. The share of Russia in the country’s total exports was 7% in 2013, but it dropped to 0.6% in May. Russian tourist visits to Turkey plunged by 83% y/y to 139,000 in January-May. In May alone, the decline was a staggering 92% y/y. “A similar drop in the remaining months of the year would see just 0.4mn Russian tourists visit the country in 2016, compared with 3.6mn in 2015. This would translate to a drop of $2.0-2.5bn in tourism revenues,” the brokerage DenizInvest said in an emailed note on June 30. Net tourism revenues were $21.2bn last year, financing 66% of the country’s current account deficit.

Following Erdogan’s letter and phone conversation, Putin asked his government to start talks with Turkey on the resumption of trade and economic cooperation. As a first step, Moscow has lifted tourism restrictions.

But even Turkey’s exporters do not expect a quick recovery, as mending ties depends on a number of economic and political factors. First, the Russian economy is struggling. The IMF predicts that Russia’s economy will contract 1.8% this year, which means weak demand for Turkish products. Turkey mostly sells auto parts, chemicals, machinery, textile and food products to Russia.

Mehmet Buyukeksi, head of the Turkish Exporters’ Assembly (TIM), admits that a recovery in exports to Russia will take some time. Analysts at DenizInvest agree. “We would need to see the Russian economy bounce back for Turkish exports to stage a full recovery,” they said. Yet, improving relations and its reverberations over trade relations serve for Turkey's energy security and a possible discount in Gazprom’s natural gas supplies could also be in the cards in the period ahead, they noted.

Energy links

The fate of lucrative energy projects – the $20bn Akkuyu nuclear power plant and the Turkish Stream gas pipeline – also depends on how the rapprochement process evolves.

Even at the height of Russia-Turkish tension, Moscow was still keen on going ahead with the Akkuyu Nuclear Power Plant project. Rosatom, which was commissioned by Turkey in 2010 to build the power plant, dismissed media reports suggesting that the company halted construction works. Its CEO, Sergey Kirienko, said in April that Rosatom had not changed its plans for Akkuyu and it would not sell its 49% stake in the project.

Gazprom has also expressed its readiness to resume talks on the suspended Turkish Stream gas pipeline project. “Gazprom is and has always been open for a dialogue on the Turkish Stream,” the company’s official representative Sergey Kupriyanov said on June 27.

In December 2014, Turkey and Russia signed a memorandum of understanding for the construction of Turkish Stream. With an estimated price tag of €11.4bn, the project’s four-strand pipeline would carry a total of 63bn cubic metres of gas per year to Turkey and to southern Europe via Greece by 2020. Turkey will receive 14bn cm of that amount and the rest would be delivered to Europe.

Security risks

No one should also expect Russian tourists to flock back to Turkey’s beaches any time soon. Turkey is still an unsafe country for foreign holidaymakers: it faces security threats from Kurdish militants and Islamic State. Since July 2015, more than 250 people have been killed, including nearly two dozens foreigners, in terror attacks carried out by Kurdish insurgents and jihadists.

The latest attack on Istanbul’s Ataturk Airport, Europe’s third busiest, which left 41 people dead, including 10 foreign nationals and more than 200 wounded, will deal another heavy blow to Turkey’s tourism industry. According to Basaran Ulusoy, head of the Association of Turkish Travel Agencies (TURSAB), the positive effects of the rapprochement with Russia on Turkey’s struggling tourism industry will only be felt in 2017. Even this could be an optimistic expectation given the complexity of the security situation in Turkey.

Violence in Turkey’s predominantly Kurdish southeast has escalated since the collapse of a two-year ceasefire with the Kurdistan Workers’ Party (PKK) last summer and shows no signs of abating. The government is not willing to return to the negotiating table with the PKK, vowing to eliminate all the militants. Meanwhile, Ankara is tightening the screws on the pro-Kurdish party HDP. If the government increases pressure on the Kurds and their representatives, it could provoke revenge attacks from radical groups like the Kurdistan Freedom Hawks (TAK), an offshoot of the PKK. TAK has also threatened to target the tourism industry. This is not just an empty threat: in Bursa a female TAK militant blew herself up on April 28 near a mosque, one of the city’s main tourist attractions. Twenty-three people were wounded in the attack.

Syrian dilemma

The Istanbul attack on June 28, blamed on Islamic State (IS), was a stark reminder that Turkey’s internal security issue has become intertwined with the situation in Syria. Turkey has become a target for IS after it joined US-led coalition forces in the fight against the radical group. Turkey’s army is shelling IS positions in Syria, and its police raid suspected hideouts inside the country, rounding up members and sympathizers of the Jihadist group, provoking possible revenge attacks.

Turkey’s ambitious – but failed – plans for Syria have been one hotly contested issue with Russia. Russia is one of the closest allies of Syrian President Bashar al-Assad, while Turkey supports opposition groups there. Russia has long accused Turkey of supporting IS, at least of turning a blind eye to the group’s operations along the Syrian border.

The question is whether Erdogan is now ready to give up on his plans to topple Assad and cooperate with Russia. Erdogan’s spokesman said on June 28 that Turkey’s position on Syria would not change, but according to Russian Foreign Minister Sergei Lavrov, Ankara and Moscow will most likely resume cooperation in resolving the Syrian crisis. It is difficult to say at this point whether Erdogan will compromise on Syria to keep the rapprochement process with Russia alive.

Ankara’s making up with Israel and Russia will definitely anger IS, risking further attacks. It is estimated that around 1,000 Turkish citizens are fighting for IS in Iraq and Syria.

If Erdogan, who is expected to meet Putin during a G20 summit in September in China, really wants to end IS terror, he will need to cooperate with Moscow. This won’t be an easy process, but as the harsh realities of economy overrides ideology, Erdogan may surprise the world once again.