Turkish business takes steps to mitigate Russian sanctions

Turkish business takes steps to mitigate Russian sanctions
By Menekse Tokyay December 3, 2015

On December 2 President Recep Tayyip Erdogan vowed that Turkey would not retaliate against Russia's “emotional” sanctions over the downing of a Russia bomber that had apparently strayed into Turkish airspace.

However, the country, whose textiles, tourism and agriculture sectors will be first to suffer, is scrambling to assess the likely affects of the sanctions and devise steps to mitigate them. Like other European countries that are already dealing with Moscow’s sanctions, it will accelerate diversification into new markets – a process that had already started due to the recession in Russia.

The measures announced by Russia so far include strict bans on Turkish agricultural products and on charter flights between the two countries, the cancellation of the visa-free regime with Turkey, a prohibition on hiring Turkish nationals for work, as well as a recommendation for Russians not to travel at all to Turkey. The quota for Turkish trucks entering Russia will also be cut from 9,000 to 2,000 for 2016.

The volume of Turkish textile exports to Russia is worth about $1bn per year, and textiles, already suffering from the Russian recession, are likely to be one of the first areas to be severally harmed by the sanctions.

Ismail Gulle, chairman of Istanbul-based Gulle Textiles, an integrated enterprise that manufactures cotton yarn and knit fabric, says his firm has been a big exporter of high-quality textiles to Russia. “Last year, our export volume reached $850mn, but this year there has been already an export decrease by half due to the economic slowdown in Russia. The effect of this latest crisis will deepen this shrinkage,” Gulle tells bne IntelliNews. “Our clients are cancelling their orders, without providing any justification.”

Gulle, who also serves as president of the Istanbul Chemicals and Chemical Products Exporters' Association, is working with his team to evaluate the cost of the damage, and will present their findings to the Turkish government in order to design together a ‘Plan-B’.

The Turkish construction sector has also been a big beneficiary of growing ties between the two countries since the 1990s. Russia’s need for construction services made it one of the biggest players in global landmark projects, such as the Moscow International Business Center “Moscow City”, the building of other skyscrapers in Russia’s major cities and the reconstruction of the State Duma.

Between 1989 and 2014, Turkish companies carried out more than 1,900 projects with a total value of more than $60bn, making Russia by far the most important market for Turkish construction services. In the first nine months of the year, Turkish construction companies were awarded eight projects in Russia worth $2.3bn. The Russian authorities have announced that current contracts with Turkish companies that are signed before December 31 would be valid, while new deals would be subject to government approval.

Erdogan Gunduzpolat, president of Unique Projects Group (UPG), a Turkish-Russian construction company that has been active in construction mostly in Moscow for more than a decade, underlines the need to immediately open up communication channels between the two countries. “We temporary stopped our construction works as a precaution,” Gunduzpolat tells bne IntelliNews.

However, he adds: “If this crisis continues as such, the Turkish construction sector is likely to change its course toward African and Latin American markets that are also highly lucrative.”

Biting the hand that feeds it 

Russia is banning an exhaustive list of Turkish agricultural products from January 1 that include fruit and vegetables such as tomatoes, onions, cucumbers, broccoli, oranges, grapes, as well as some chicken and turkey products. It has also stopped over 1,250 Turkish trucks at the border since the downing of the jet on November 22, most of them carrying perishable goods.

Bilateral trade in agricultural goods reached $4bn last year, helped mainly by a Russian trade embargo on EU foodstuffs. But preserving this level of trade looks like a pipe dream now for Turkish food exporters.

Hakan Akgun, owner of Akgun Tarim, an agricultural company based in the northwestern city of Bursa, saw an immediate loss of about TRY200,000 (€66,000). “Our main export product was quince and now they wait inside the trucks at the custom gates,” Akgun tells bne IntelliNews.

Akgun Tarim has been one of the main quince providers to Russia since 2001, with annual trade worth about TRY4mn-5mn. The company is considering diverting its exports to Germany to compensate for this loss.

With its 143mn consumers, Russia is currently discussing how to substitute Turkish agricultural items with alternative suppliers such those from South Africa, Israel, Morocco, Egypt or Iran. According to Esen Caglar, an economist with the Ankara-based think-tank TEPAV, some agricultural items and cities like Antalya and Mersin that mainly produce them are going to be hit hard in the short term. “For instance, 33% of Turkey’s export of citrus, 65% of tomato and 20% of grape exports go to Russia,” Caglar tells bne IntelliNews.

However, Caglar doesn’t expect large-scale economic turmoil in Turkey following these sanctions. “The Turkish economy is a diversified one with its large production and export range. We are producing a wide range of products and sell them to various markets,” he says.

But, as underlined by many experts, Turkey should adopt a proactive strategy to minimize the direct and indirect effects of these sanctions. “For instance, we could divert our citrus exports to United Arab Emirates (UAE) and reduce our prices to become competitive with South Africa, the main trading partner of UAE,” suggests Caglar. “But we should take bold steps in avoiding potential anti-dumping lawsuits against Turkey.”