Moscow also faces high cost of trade war with Ankara

Moscow also faces high cost of trade war with Ankara
By Nick Allen in Warsaw December 4, 2015

It didn't take long for the stakes to rise after Turkey shot down a Russian bomber at the Syrian border on November 24, leading to the death of its pilot and a marine during the rescue operation.

"If somebody may have thought that after committing a treacherous war crime - the murder of our people - it will be possible to get away with a ban on tomatoes or restrictions in construction and other industries, they are grossly mistaken," Russian President Vladimir Putin said in his state of the nation speech on December 3, vowing that Turkey would regret what it had done.

Two days earlier his government rolled out what may be the first wave of punitive measures. These include slamming the brakes on a multi-billion-dollar tourism business with Turkey and a selective ban on fruit, vegetable and meat imports (no poultry, but beef is allowed, no oranges, lemons fine). Russia also stopped over 1,250 Turkish trucks at the border since the incident, most of them carrying perishable goods.

Just the start?

Turkey's Russian grain supplies are reportedly safe for now, unless Ankara pushes back hard and Russia decides to wield a much bigger sanctions bulava (Russian medieval fighting mace), studded with nasties like a grain embargo (Ukraine quickly said it is "ready to ensure Turkey's food security") or the cancellation of the nuclear power plant Russia is building for Turkey at Akkayu.

On December 2, President Recep Tayyip Erdogan vowed that Turkey would not retaliate against Russia's "emotional" sanctions, but hardened his stance a day later: "If these reactions continue, of course we're going to be left with no option but to take countermeasures," Erdogan said during a visit to Qatar, where he discussed alternatives to Russian natural-gas supplies. Russian ships have already been subjected to long delays entering the Bosphorus Sea through the Turkish Straits.

Some Russian measures can have knock-on effects that upset Moscow's long-term plans elsewhere. Reinforcing Putin's threat, Energy Minister Alexander Novak announced on December 3 that the Turkish Stream natural gas pipeline construction project has been suspended.

Gazprom already decided to halve the project's capacity in July. But apart from the waste of $1.95bn in pipeline segments now reportedly dumped on the shore of the Black Sea, the suspension can bite deeper for Russia, which planned to use Turkish Stream to completely abandon gas supplies to Europe through Ukraine after 2018.

"If Turkish Stream went ahead, Ukraine would be more amenable since transit gas through its territory could be reduced," an unnamed source in Gazprom told Vedomosti daily.

In pure trade terms, Turkey is immediately more vulnerable and faces losses of  $764mn through the food ban next year, according to Agriculture Minister Faruk Çelik. The loss of Russian tourists also forces Turkey to scramble to entice EU visitors instead next season. But following the travel ban to Egypt for Russians due to the terrorism threat, this is also deals a blow to the lifestyles of millions of Russians and the finances of already struggling charter airlines and tour companies.

"Several options are now closed to us for known reasons, Egypt and Turkey," Prime Minister Dmitry Medvedev told a meeting with citizens after the travel ban, while also seeking a positive spin. "On the one hand, it's bad, because this reduces people's choices, but on the other hand good because it gives us a chance to stimulate our own touristic routes. We have things to see here in our own country."

Ordinary Russians aren't convinced: "Our medium-priced hotel near Yalta was like stepping back into the Soviet Union in terms of service, attitude and facilities," a Moscow housewife told bne IntelliNews after her family traded Turkey for Crimea on their last break.

To help the eight charter airlines that can no long fly to Turkey due to the government ban, the  Transport Ministry has asked legislators to remove VAT on internal flights for Russian carriers as a "temporary anti-crisis measure". This is expected to save the airlines RUB25bn ($370mn) but it also deprives the federal budget when it needs every kopek.

The sacred cow of Russia's military-industrial complex is unaffected, with Deputy Prime Minister Dmitry Rogozin tweeting that "there's no cooperation because Turkish products don't interest us". But some large individual non-military deals will founder as collateral damage in the flaring conflict.

The Magnitogorsk Metallurgical Combinate (MMK) spent more than a year negotiating the $2bn sale of its Turkish asset Metalurji. In the light of the sanctions, "A deal is hardly likely in the near future," the company's deputy general finance director Sergei Suliman told Vedomosti.

Backfiring risks grow

While the immediate effect on Turkey is harsh – almost 200,000 tons of produce for export to Russia were already backed up on the second day of the food ban – some are predicting that the measure will backfire on Russia as it tries to organise alternative supplies.

"Turkey's agricultural exports to Russia reached $1.2bn last year, about 7% of total food exports," notes Bloomberg columnist Leonid Bershidsky. "Turkish farmers probably will close the gap without much trouble ... For Russia, the loss is greater: About 20% of vegetable imports are from Turkey, as are about 90% of citrus fruit sold in major retail chains."

Adds Alfa Bank chief economist Natalia Orlova: "This effect will be even more acute now, as in winter the ability of local producers to substitute is much lower."

Potential food shortages in Russia could push up inflation, which the Central Bank has been trying to curb with some success for the past months. The imports embargo can hamper these efforts if local retailers fail to quickly replace banned produce, Minister of Economic Development Alexei Ulyukayev said on December 1.

Meanwhile, Turkey is already looking to slash its import of Russian liquified petroleum gas (LPG) by  25% next year in favour of other suppliers, Reuters reported. As yet, Russian construction of the Akkuyu nuclear power plant has not been affected, although Ulyukayev said earlier it could be abandoned if the sanctions escalate.

In the bigger picture for Putin, he may have underestimated his Turkish counterpart and painted himself into a corner with his hard line towards Ankara.

"Erdogan is as adept as Putin at using foreign threats to distract his citizens, but he doesn't have as many adversaries. He's likely to benefit more than Putin from the crisis," writes Bloomberg's Bershidsky.