Turkey's growing economic problems may lie behind President Recep Tayyip Erdogan’s unexpected moves to restore ties with Israel and Russia. The country’s $720bn economy is heading for a slowdown this year and the Brexit vote's impact on sentiment may put more pressure on the world’s 16th largest economy.

This challenging environment may have prompted Erdogan to act to end the feuds with Israel and Russia in a bid to prop up the economy. Erdogan is aware that a weak economy will erode support for him at a time when the ruling Justice and Development Party (AKP) seeks to change the constitution to give him more executive powers.

Ankara’s adventurist foreign policies have made Turkey increasingly isolated in the region. It has been deeply involved in the civil war in Syria, where Russia is supporting Erdogan’s foe Bashar al-Assad.

Ankara also cut diplomatic ties with Egypt after the military coup against the ex-President Mohamed Morsi. Prime Minister Binali Yildirim this week indicated that Ankara will try to improve relations with Cairo.

Iran, which is Turkey’s other regional rival, is rising. Iran may become a magnet for international investments after the lifting of international sanctions. Turkey is also trying to forge stronger trade ties with the Tehran regime.  

Erdogan’s latest attempts apparently aim at breaking Turkey’s diplomatic isolation at a time when the world markets are bracing for more shock waves from Brexit. The lira and Turkish stocks partially recovered from the initial Brexit shock, as Ankara moved to mend ties with Russia and Israel.

Trade and tourism

Turkey’s tourism industry has been hit hardest by the sanctions Moscow imposed after the downing of a Russian bomber by a Turkish jet near the Syrian border last year. As a result of these sanctions, the number of Russian tourists have fallen significantly and exports to Russia have plummeted. For example, Russian tourist visits to Antalya, once a popular destination for Russians, declined by nearly 99% in June. The latest official data show that only 31,000 Russian tourists visited Turkey in April, a significant 79% decline from a year ago. Exports to Russia plunged by 63.4% y/y and 27.4% m/m to stand at just $116mn in May.

Terror attacks carried out by the Kurdish militants and Islamic State have also hit the tourism industry, depriving the country of much-needed hard currency to finance its current account deficit. The number of foreign tourists visiting Turkey declined by 28.1% y/y to 1.75mn in April, the latest data from the tourism ministry showed. Over the first four months of the year, foreign tourist visits fell by 16.5% y/y to 5.8mn people.

The Tourism Investors Association (TYD) recently warned that the struggling tourism industry could be hit by as much as a $15bn revenue drop this year. Tourism revenues were down 8.3% to $31.5bn last year, and revenues plunged by 16% y/y to $4.07bn in the first quarter of 2016.

On the Israel front, tension between the two countries do not seem to have any significant impact on bilateral trade. In 2011, a year after Israel’s raid on the aid flotilla, Turkey’s exports to Israel was $2.1bn, up from $1.4bn in 2010. The value of goods shipped to Israel in fact increased to $2.4bn in 2013 and further to $2.9bn in 2014. Exports declined slightly to $1.7bn last year.

But, the feud affected tourism activity between the countries. In 2008, around 600,000 Israelis visited Turkey, but that figure declined to 110,000 in 2010 after the flotilla incident. In 2012, only 83,000 Israelis visited Turkey but the tourism activity picked in the following years. In 2014 and 2015, 188,000 and 225,000 Israelis spent their holidays in Turkey.

Energy

Amid tensions with Russia, Turkey’s largest supplier of natural gas, Ankara started to seek to diversify its energy supplies and it turned to Israel for cooperation in energy projects.

Ankara and Tel Aviv were already discussing building a pipeline that will carry Israeli natural gas to Europe via Turkey. The agreement on normalisation of the relations will definitely boost the prospects of lucrative energy deals. Shares in Turkish company Zorlu Energy, which has energy operations in Israel, rose 4% on June 27.

“This is a strategic matter for the state of Israel. This matter could not have been advanced without this agreement, and now we will take action to advance it,” Israeli Prime Minister Benjamin Netanyahu said of the rapprochement.

The only route big enough for Israel’s gas exportation was a country like Turkey, which is capable of providing infrastructure and further exportation to the West, Shai Cohen, the consul-general of Israel in Istanbul, recently told Turkey’s Anadolu Agency.

Batu Aksoy, the CEO of Turkish energy firm Turcas Petrol, told the Hurriyet Daily News in April that at least 15 energy companies wanted to be part of a planned consortium that will transport gas from Israel. The first Israeli gas may reach Turkey in the next five years, Aksoy said.