Turkey hopes the conflict between Russia and Ukraine will end as soon as possible, the treasury and finance minister said on Friday, as fears grow over the fallout of the crisis.
Nureddin Nebati’s remarks are the first detailed evaluation by an economic official on the potential impact of Moscow’s aggression on its southern neighbor on Turkey’s economy.
Nebati also addressed the government’s new economic policy, recent steps as well as concerns over inflation.
Turkey shares a maritime border with Russia and Ukraine and has good ties with both. It cooperates closely with Russia in energy, trade and defense. It has deep defense links with Ukraine. And both markets are among the country's most important tourist sources.
"Of course, the duration and size of the war are important in the impact of this undesired geopolitical tension on our economy," Nebati was cited as telling Anadolu Agency (AA).
"It is our greatest wish that this war ends as soon as possible."
Ankara is facing a tough balancing act as its Black Sea neighbors are also among its most important economic partners. It has criticized the invasion as unacceptable but avoided the harsher rhetoric of other alliance members and opposes their use of sanctions, seeking ways to mediate in the crisis.
"The most important thing for increasing prosperity not only from the point of view of our country but also in terms of the region where we live is that the climate of peace and tranquility prevails. This is for the benefit of all of us," said Nebati.
Impact of 'great importance'
Turkey’s trade with both Russia and Ukraine reached a record high in 2021. The volume with Russia reached $34.7 billion (TL 494 billion), while the turnover with Ukraine jumped to $7.4 billion.
Russia ranked 10th among its biggest export markets last year and came in second when it comes to imports. Ukraine stood 20th in exports and 13th in imports, Nebati said.
"The share of these two countries in our exports is 3.9%, while their share in our imports is 12.4%," the minister noted.
The geopolitical developments in recent history have affected the Turkish economy like other countries, Nebati said.
But he stressed the impact of the Russia-Ukraine war "is of even greater importance, considering the size of our commercial and tourism relations with the two countries and our contracting services."
Some 4.7 million Russians and 2.1 million Ukrainians arrived in Turkey last year, according to the Culture and Tourism Ministry data.
They accounted for 27.34% of the total 24.7 million foreign tourists that arrived throughout the year, the minister said. The share jumped from 24.55% in 2020 and 19% in 2019.
Energy and inflation
On the energy front, the conflict has raised the prospect of even higher inflation in Turkey, an importer of oil, natural gas and grains, the prices of which have surged due to the tensions.
"For our country, which is an energy importer, the rise in energy prices, especially oil and natural gas, and the increase in other commodity prices have a negative impact on the current account balance and inflation," Nebati said.
Turkey’s annual inflation rose to 54.44% in February, official data showed on Thursday, a two-decade high was fueled by a slide in the Turkish lira late last year and higher commodity prices.
The annual producer price index soared to 105%, reflecting the rise in commodity prices amid the Russia-Ukraine conflict.
He attributed the high course in both consumer and producer prices to the pressures caused by energy and other commodity prices.
"I would like to especially emphasize that the fight against inflation is one of our most important policy priorities. We remain committed to this issue to the fullest extent," the minister added.
In an effort to soften the impact on households, the government last month cut tax on basic goods to 1% from 8% and subsidized a significant amount of electricity bills.
It also announced a value-added tax (VAT) cut on electricity used for residential and agricultural irrigation purposes to 8% from 18%.
It also introduced a set of measures to reduce surging power bills, including readjusting the level under which higher electricity tariffs for households and some businesses using more energy kick in.
"We are determined to maintain our holistic perspective that prioritizes the fight against inflation in the coming period in order to complement these steps we have taken," he said.
FX-protected scheme
Russia has been the top market for Turkish contractors, Nebati said, accounting for 36.4% of the projects builders undertook abroad, according to 2021 data. Ukraine ranked fourth with a 5.2% share, he added.
The lira has been broadly stable since the start of the year following a 44% decline in 2021 and was hovering just below 14 against the United States dollar.
But it topped the level last week as volatility returned over rising tensions between Moscow and Kyiv.
It had hit a record low of 18.4 in late December but rebounded after the government’s announcement of a scheme to boost lira deposits by protecting them against depreciation.
The volume of deposits under the lira protection scheme has reached TL 535 billion as of Thursday, Nebati said, up from some TL 200 billion in late January.
The authorities have been pursuing a new economic policy, dubbed Turkey’s Economic Model, based on low-interest rates to boost credit, exports and investments, saying it would help the country weather inflation.
President Recep Tayyip Erdoğan says the policy will also eventually help Turkey solve its chronic current account deficit problem and contribute to stabilizing the lira.
To support the drive, the central bank had brought down the benchmark policy rate by 500 points since September to 14% but paused the easing cycle in January and kept the one-week repo rate unchanged last month again."
We will achieve a value-added growth performance by providing high employment with the new economic model, which focuses on investments, production and exports," said Nebati.
Turkey’s economy bounced back from the COVID-19 pandemic to grow 11% last year, its highest rate in a decade. The gross domestic product (GDP) grew 9.1% year-over-year in the fourth quarter.
"In this context, the indices for the first quarter of 2022 indicate that the positive outlook for growth will continue," Nebati said.