The Current State of Trade and Economic Relations between Russia and Turkey

Economic ties between Russia and Turkey were in the ascendant over the past two decades as trade grew, mutual investment increased, Russian tourists visited in droves, energy cooperation expanded and cultural ties strengthened. Then an incident on the Turkish-Syrian border caused substantial damage not only to political but also to economic relations.

Economic ties between Russia and Turkey were in the ascendant over the past two decades as trade grew, mutual investment increased, Russian tourists visited in droves, energy cooperation expanded and cultural ties strengthened. Then an incident on the Turkish-Syrian border caused substantial damage not only to political but also to economic relations.

Russia and Turkey’s social and economic models experienced profound changes during the 20th and 21st centuries. In the early 1980s, Turkey started building a modern economic system and settled on a liberal path of development. Today Turkey is a regional leader both politically and economically and one of the most developed Islamic countries, while it is closely tied to the European market and is aspiring to become a full-fledged EU member one day. It was largely thanks to market reforms and an export-oriented development model that Turkey accomplished that. Positive GDP growth and qualitative shifts in the industry composition of its economy, as well as comprehensive development and encouragement of exports all helped boost foreign trade and change its structure and geographical coverage.

Russia, on the other hand, after the break-up of the Soviet Union settled on the path of radical market reforms aimed at replacing the socialist economic model with a market-oriented, or capitalist, one. The abrupt shift led to an economic disaster and a slump in many of the country’s macroeconomic indicators from the 1990s until 2007. It was only in 2008 that Russia managed to claim back its erstwhile GDP, yet despite growth, its economy is still heavily dominated by commodity mining, wholesale and retail trade and real estate transactions, with a low share of hi-tech and R&D-intensive industries [1].

It took Turkey a fairly short time to transform itself from an agrarian-industrial economy into a manufacturer of hi-tech products. The Soviet collapse facilitated closer cooperation between Russia and Turkey in various economic areas, elevating bilateral ties to a qualitatively different level of development. Russia has become one of the largest investors in Turkey’s economy and one of Turkey’s key trading and economic partners. Cooperation has been expanding in many areas of foreign economic activity (scientific & technical and cultural ties, international tourism, foreign investment, and trade), in line with the strategic interests of both Russia and Turkey.

Foreign trade. A high share of export quotas reflects the openness of an economy and the importance of exports on the national-economy scale. As a result of foreign trade liberalization and policies encouraging investment, Turkey’s export quota increased thanks to manufacturing and Russia’s thanks to commodities.

An analysis of trade between Russia and Turkey shows a steady increase in volumes, which recovered after a certain decrease during the period of the 2008–2009 crisis (see the table below). Turkey runs a trade deficit, i.e. its imports from Russia exceed its exports there, mainly due to Turkey’s purchases of Russian energy. In 2015, Russia accounted for 2.5% for Turkey’s exports and for almost 10% of its total imports, in other words, for almost 7% of Turkey’s trade, i.e. 24 USD billion. Turkey, meanwhile, accounted for 6% of Russia’s exports and for 3% of its imports in 2015, i.e. for almost 4% of its trade turnover.

In terms of the product breakdown, Russia’s exports to Turkey are dominated by oil, oil products, natural gas, coal, various metals and metal products, which between them account for more than 70% of total exports. At the same time, Russia’s imports from Turkey include textiles (around 20%), food (around 22%), machinery and equipment (23%) and household appliances. Yet after the introduction in November 2015 of temporary restrictions on Turkish imports, which mostly affected agricultural products, 15% of Turkish exports to Russia ended up under sanctions according to preliminary estimates [2]. Clearly the trade restrictions touched upon some very sensitive Turkish exports, yet it’s worth noting that in monetary terms the damage was minimal.

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While the temporary deterioration of relations between Russia and Turkey had a negative effect on bilateral trade, the factor of an unfavorable situation in the Russian economy added to the negativity. Still, there is an urgent need to restore economic ties to where they were before, especially as the current global market situation is only exacerbating the effect on the cooled relations. Thanks to the resolve of the leaders of both nations, it can be confidently said that a positive trend has started to emerge after the Turkish leader apologized. It is quite possible for Russia to lift its food product sanctions as the next step.

Energy cooperation between Russia and Turkey stands on a solid basis: tankers carry oil from Russian Black Sea ports to international markets through the Bosphorus and the Dardanelles, and the Akkuyu nuclear power plant project is under construction. In its turn, Turkey is a large consumer of Russian natural gas that is delivered there by two pipelines, the Blue Stream and the Trans-Balkan. Even as relations soured briefly, an intergovernmental agreement on the construction of the Turkish Stream gas pipeline was signed at the World Energy Congress in October 2016. This has become one of the first steps towards normalization of relations between the two countries. Russia, like Turkey, needs to diversify its natural gas transit routes – the former to ensure stable exports to European markets and the latter to achieve energy security.

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Investments. As Russia’s economy grew rapidly from the early 2000s, Turkey was one of the places Russian capital sought to tap. A breakthrough in investment cooperation took place over the past ten years. Foreign direct investment went both into manufacturing (metals, energy, etc.) and in services (tourism, banking, etc.). According to Turkey’s 2015 balance of payments data, Russia accounted for 6.2% of its total foreign direct investment and for around 1% of outbound external investment. Examples of projects that have already been completed include the acquisition by Magnitogorsk Metals, the world’s largest steelmaker, of a Turkish steel mill in Iskenderun and Russia’s Sberbank’s purchase of Turkey’s Denizbank; Credit Europe, an effectively Turkish bank, operates in Russia’s banking market, while developers ENKA and Renaissance Construction are carrying out a number of investment projects in Russia’s territory.

Tourism. Turkey is a favorite destination for the Russians, who accounted for 10% of all visitors there in 2015. Yet even before the ban on charter flights, the flow of tourists from Russia shrank to 3.6 million according to 2015 data. That said, an analysis of data from January–August of 2015 and from the same period of 2016 shows a dramatic drop in the numbers of tourists from Russia, from 2.6 million to 0.3 million. Revenues from tourism (accounting for almost (20% of total exports) are crucial for successful development of Turkey’s economy, including the optimization of its balance of payments. That’s why the drop in tourist flows from Russia has affected this industry, and apparently no quick turnaround is to be expected.

Number of tourists visiting Turkey

Source: Balance of Payments, 2016. URL: www.tcmb.gov.tr

In the aftermath of the 2008–2009 global financial crisis, economic ties between Russia and Turkey only started recovering gradually in 2013. However, they never rebounded to the pre-crisis level, mostly due to a global economic slowdown.

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The incident involving the downing of a Russian jet on the Syrian-Turkish border and the resulting sanctions imposed by Russia almost a year ago that affected almost all sectors of Turkey’s economy served as a serious test of resilience for the relations between Russia and Turkey. The latest meeting between the leaders of the two countries has demonstrated the intentions of both parties to rebuild relations to their former level. Without a doubt, this is a positive signal, as given an adverse global economic situation, any restrictions are having an adverse effect of their national economies.

Besides, in our opinion, the signed agreement on the Turkish Stream is unlikely to be carried out any time soon. Russia will be using the project as a tool to put pressure on its Western partners in the “war of sanctions”, while Turkey, in its turn, depending on the state of relations with its European counterparts, will be bargaining with Russia for better terms for natural gas supplies. But on the other hand, energy cooperation, in the form of construction of the new pipeline and the nuclear power plant, is highly likely to become a new driver pushing for normalization of political and economic ties between the two neighboring nations. Also, let’s not forget about the restrictions on agricultural products from Turkey, which is interested in regaining its lost positions in Russia’s domestic market. As to the tourism industry, which is an important sector of the Turkish economy, the flow of Russian tourists is unlikely to recover within the next few years for a number of reasons, mainly due to an economic slump in Russia, but also because of a jittery domestic political situation in Turkey itself. On top of all that, both sides urgently need to rebuild confidence of the business community, as the lingering uncertainty could lead to a long pause in investment cooperation, which Russia badly needs amid Western sanctions.

1. Masumova N.R. Features of the socio-economic development of Turkey at the turn of 20-21 centuries. Moscow, 2015. P. 256.

2. Masumova N.R. Turkey’s Foreign Trade as a Driver of Economic Development // Vestnik-MGIMO-University. 2016. №2 (47).