Turkey is facing a tough balancing act in the Ukraine-Russia crisis as it has good ties with both and worsening of the standoff bears risks, as its Black Sea neighbors are also among its most important economic partners.

Ankara has swiftly reacted and criticized Russia’s decision this week to recognize two breakaway regions in east Ukraine as independent. But it stopped short of announcing any punitive measures.

The threat of war between the two countries carries the potential to harm Turkey's economy, given its deep energy, defense and trade relations, while both markets are its crucial tourist sources.

The current risk has the potential to negatively affect Turkey's inflationary balances, said Enver Erkan, chief economist at Istanbul-based Tera Yatırım.

"The most compelling factor, of course, will be the rise in oil prices," Erkan told Daily Sabah.

"Of course, strategic balances are also important. The fact that Russia is an important economic partner for Turkey in terms of energy flow and tourism directly concerns the state of the country."

Turkey is in a unique bind: It has close relations with both Ukraine and Russia but also opposes sanctions in principle. Moscow’s move has prompted swift backlash and sanctions from Western powers, although they fell short of expectations.

President Recep Tayyip Erdoğan on Wednesday said Turkey could not abandon its ties with Russia or Ukraine, given its close economic links, among others.

Speaking to reporters on a flight back from Africa, President Recep Tayyip Erdoğan repeated his offer to mediate between Russia and Ukraine and said NATO member Turkey would take steps that do not harm its bilateral ties.

"It is not possible for us to abandon either (country)," he said. "Our aim is that we take such a step that, God willing, we sort this out without abandoning either one."

The crisis leaves Ankara balancing those relations while also protecting its economy.

Tourism

Any prolonged conflict could lower tourist flows to Turkey this summer, assuming Russian and Ukrainian tourist arrivals stay the same as in 2021 or dip a bit.

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 share jumped from 24.55% in 2020 and 19% in 2019.

Turkey's tourism revenues doubled to almost $25 billion (TL 345 billion) last year and the standoff constitutes risk as the country expects the income to match that of 2019, when it stood at $34.5 billion.

"The negative impact on tourism revenues may further strain Turkey's foreign exchange needs," Erkan said.

"With the rising geopolitical risk, the expected inflow of foreign exchange from the tourism sector may fall below expectations and the negative pressure on the lira may increase in the short term," he noted.

The Turkish lira has been broadly stable since the start of the year following a 44% decline in 2021.

The currency has been hovering around 13.5 against the U.S. dollar since hitting a record low of 18.36 in December.

It weakened as much as 1.5% against the dollar on Tuesday, nearing its weakest level since mid-January, on concerns over economic fallout from the Ukraine-Russia standoff, including for the country's tourism sector.

It slid as far as 13.9 before trimming its losses to 13.85 during the day. It traded at 13.80 as of 1:40 p.m. local time on Wednesday.

Energy

The slide late last year triggered a surge in annual inflation to nearly 50% for Turkey's import-dependent economy, adding to the concerns regarding energy import costs.

Oil prices rose to their highest since 2014 after Moscow ordered troops into eastern Ukraine, adding to supply concerns that are pushing prices towards $100 a barrel.

Russia supplied some 46% of Turkey’s gas last year and Ankara is looking to strike shorter-duration gas deals with Moscow to relieve import costs.

On the inflation front, Erkan said although the volatility in the exchange rates has eased as Ankara acted to stabilize the currency, "we think that additional effects from energy prices may pose a risk and adversely affect the current account composition."

The current account deficit narrowed nearly 60% to $14.88 billion last year. Reining in the gap is a big priority and Erdoğan is seeking a shift to a current account surplus under his government's new economic policy, which is focused on low-interest rates and stronger exports, investments and credit.

The annual foreign trade deficit dropped 7.5% year-over-year in 2021 to $46.13 billion. But the shortfall deteriorated in January, jumping 240.7% year-over-year to $10.44 billion, mainly due to energy imports that nearly quadrupled compared to a year ago.

Trade

Turkey's trade with both Russia and Ukraine reached a record high in 2021. The volume with Russia reached $34.7 billion, while the turnover with Ukraine jumped to $7.4 billion.

Figures jumped from $22.3 billion and $4.7 billion in 2020, respectively, according to Turkish Statistical Institute (TurkStat) data.

Russia and Ukraine are both global agricultural heavyweights and important wheat providers for Turkey. Escalating tensions could drive up world food prices, which are already near multiyear highs.

The two countries account for around 29% of global wheat exports, 19% of world corn supplies and 80% of world sunflower oil exports.

Striking the balance Turkey employed for decades, Erdoğan often highlights his friendship with President Vladimir Putin but has warned Russia against an invasion and offered to mediate the crisis. He has also criticized the West’s handling of things as a hindrance to peace.

On Tuesday, Turkey called Russia’s recognition of Ukraine’s separatists an unacceptable violation of Ukraine’s territorial integrity.

Erdoğan, who visited Kyiv this month, rejected it and called on parties to respect international laws, likely his sharpest language towards Moscow since a crisis over Turkey’s downing of a Russian jet near Turkey’s Syrian border in 2015.

Erdoğan and Putin have since warmed and Turkey bought Russian S-400 air missile defense systems in 2019, which prompted U.S. sanctions. Since then, Ankara has opposed sanctions against any country.

"Sanctions against Russia are useless. You only postpone the problems," Turkish Presidential Spokesperson Ibrahim Kalin told Die Welt at the weekend, adding "new rules and principles" were needed for both Russia and the West to "feel safe."

"Russia feels threatened by NATO," he added.

While cooperating with Russia in energy and trade, Turkey has also sold armed drones to Ukraine and inked a deal to co-produce more, in a move that disturbed Moscow.

Turkey opposes Russian policies in Syria and Libya even as it forges cooperation on the ground there. It also opposes Russia’s 2014 annexation of Crimea, and its recognition of the Abkhazia and South Ossetia regions in Georgia as independent.

Can Kasapoğlu, director of security and defense studies program at EDAM, said Turkey had made clear it backs Ukraine. But a Russian troop buildup in the Black Sea should "really worry" it, especially the risk of a change of leadership in Ukraine, he told Reuters.

"In this case, defense technology cooperation with Turkey may be suspended, as Russia is uncomfortable with a NATO nation’s defense technological and industrial base developing ties with the post-Soviet space," he said.