Severing economic ties with Turkey could cost Russia a great deal, analysts say

Published 30.11.2015 16:13
Updated 30.11.2015 16:16
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Analysts from both within and without Russia said that the country risks economic pain by freezing its economic relations with Turkey.

Vladislav Inozemtsev, who heads a center studying post-industrial societies in Moscow, said that any rash decisions may prove detrimental not just Turkey but Russia too, in an interview with Komsomolskaya Pravda on Nov. 27.

"Russia would also be a big loser if as a result of the current tensions Turkey moves more aggressively to diversify energy imports away from Russia -- as Ukraine is currently doing. This could mean increased efforts to rationalize/reduce consumption and to seek new energy suppliers in the region. Net-net, Russia needs to be careful in how far it seeks to damage political and trade relations with Turkey," wrote London-based Nomura credit strategist Timothy Ash in a note sent via email Monday.

For now, further sanctions are being worked out. Economic Development Minister Alexey Ulyukayev told Russian television Monday: "We may suspend work on some major projects agreed with Turkey. It includes a five-year bilateral program from 2016 to 2020 under an agreement on free trade in services and investment, trade-economic and scientific-technical cooperation agreement to establish a joint investment fund. All those activities will be stopped."

On Sunday, Russian President Vladimir Putin signed the order imposing sanctions on Turkey. Turkish companies operating in Russia and Turkish staff employed by Russian companies will face restrictions, and there are limitations on specific Turkish exports.

The Russian move came after two Turkish F-16 fighter jets on an aerial patrol Tuesday intercepted an unidentified warplane within rules of engagement when it intruded into Turkish airspace on the Turkey-Syria border.

The intruding aircraft was warned about the violation 10 times within five minutes before it was shot down.

The Russian Defense Ministry later announced that its Russian SU-24 bomber jet had been shot down. It crashed in the Syrian region of Bayirbucak close to Yayladagi district of Turkey's southern Hatay province.

Putin's order also prohibits the employment of Turkish citizens by Russian employers as of Jan. 1, 2016. Furthermore, it also scraps unilaterally a visa-free regime for Turkish nationals traveling to Russia starting in 2016. Russian travel agencies are also to suspend the sale to Russian citizens of products that include visiting Turkey, and there are restrictions on charter flights to Russia. Ulyukaev said that these may be extended to regular flights.

But the Russian economy cannot replace what Turkey exports, commented Stanislav Tkachenko, professor in the International Relations Department of St. Petersburg State University (Russia) in a note published on Russia Direct on Nov. 26.

"The structure of bilateral trade clearly benefits Russia more than Turkey," Tkachenko wrote. "In 2014, Turkey ranked fifth among Russia's partners in terms of exports ($25 billion of mainly natural gas, metals and agricultural products). At the same time, Russia buys products from Turkey that it needs for its economy (machinery, equipment, textiles, building materials, food) that cannot be replaced overnight with Russian substitutes."

The economic cost of severing ties with Turkey could exceed $30 billion, and for some sectors of the Russian economy (energy, metallurgy) it would be a heavy blow, Tkachenko said. "The fragile shoots of economic growth in Russia, after nearly a year of recession, would be torn out of the ground," he added.

Russian wheat exports are clearly under pressure already, as stepped up controls on the sales of this commodity to Turkey have delayed deliveries, according to Daryna Kovalska, an analyst at investment bank Macquarie in London.

At stake for Russia is $4.1 billion in wheat sales to Turkey per year.

Imports from Turkey are much-needed in Russia, but replacing them will involve an operational restructuring of logistics and supplies, according to a spokeswoman for a Russian retail chain, Maria Kursonov, who spoke to Komsomolskaya Pravda on Nov. 29.

Inozemtsev warned that the banning of tourists flights to Turkey will drastically affect many tour operators in Russia. This may also lead to a rise in expenses on travel, holidays, accommodation, boarding and lodging. With tourist flights facing a ban, Russian foreign trade turnover with Turkey and Egypt will be considerably affected. He advised that instead of getting preoccupied with retaliatory measures, Russia should act in a cool and calculated manner to prevent any possible risks.

According to Alexander Razuvaev, an analyst with Alpari Company, both Russia and Turkey must cooperate with each other. It must be taken into consideration that Sberbank, Lukoil, and other Russian companies have subsidiary businesses in Turkey, he pointed out in a note published on Nov. 29.

The chief analyst of Alpha Capital, Vladimir Bregin, told Komsomolskaya Pravda on Nov. 28 that the volume of Russian exports to Turkey is far greater than what we import from Turkey. "If hypothetically the two way trade was completely halted, then we will lose more than Turkey. While Russia would be able to survive such a situation but it would negatively effect on the overall trade volume and on inflation."

One area that is unlikely to be affected, according to economist Mikhael Delyagin, is Russian gas supplies to Turkey. However, plans for the Turkish Stream pipeline, which is to carry gas through Turkey to Europe, are likely to be put on hold.

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