With close ties to Kyiv and Moscow, Ankara faces a difficult balancing act

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Turkey faces a difficult balancing act in the Ukraine-Russia crisis, as it enjoys good relations with both countries and the deepening impasse carries risks, as its sea neighbors Noire are also among its most important economic partners.

Ankara reacted quickly and criticized Russia’s decision this week to recognize two breakaway regions in eastern Ukraine as independent. But he refrained from announcing punitive measures.

The threat of war between the two countries is likely to harm Turkey’s economy, given its deep energy, defense and trade relations, while the two markets are its main sources of tourism.

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 rising 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 situation: it has close relations with Ukraine and Russia, but also opposes sanctions in principle. Moscow’s decision prompted a swift reaction and sanctions from Western powers, even if they fell short of expectations.

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

Speaking to reporters on a flight home from Africa, President Recep Tayyip Erdoğan reiterated his offer to mediate between Russia and Ukraine and said NATO member Turkey would take action which do not harm its bilateral relations.

“It is not possible for us to abandon either (country),” he said. “Our goal is for us to reach such a milestone that, God willing, we sort this out without giving up on either one.”

The crisis leaves Ankara to balance these relations while protecting its economy.

Tourism

Any protracted conflict could reduce tourist flows to Turkey this summer, assuming Russian and Ukrainian tourist arrivals remain the same as in 2021 or decline a bit.

Some 4.7 million Russians and 2.1 million Ukrainians arrived in Turkey last year, according to data from the Ministry of Culture and Tourism. They accounted for 27.34% of the total 24.7 million foreign tourists arriving throughout the year. The share fell from 24.55% in 2020 to 19% in 2019.

Turkey’s tourism revenue doubled to nearly $25 billion (TL 345 billion) last year and the stalemate poses a risk as the country expects revenue to match 2019 , when they stood at $34.5 billion.

“The negative impact on tourism revenue could further weigh on Turkey’s foreign exchange needs,” Erkan said.

“With the rise in geopolitical risk, the expected inflow of foreign currency from the tourism sector could be lower than expected and the negative pressure on the lira could increase in the short term,” he noted.

The Turkish lira has been broadly stable year-to-date after falling 44% in 2021.

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

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

It slipped as high as 13.9 before paring losses to 13.85 on the day. It was trading at 1:80 p.m. from 1:40 p.m. local time on Wednesday.

Energy

The drop at the end of last year triggered a spike in annual inflation to nearly 50% for Turkey’s import-dependent economy, adding to concerns about energy import costs.

Oil prices hit their highest level since 2014 after Moscow sent troops to eastern Ukraine, adding to supply issues that are pushing prices towards $100 a barrel.

Russia supplied around 46% of Turkey’s gas last year and Ankara is seeking shorter gas deals with Moscow to ease import costs.

On the inflation front, Erkan said that although exchange rate volatility has eased as Ankara moved to stabilize the currency, “we believe that additional energy price effects may present a risk and negatively affect the composition of the current account”.

The current account deficit narrowed nearly 60% to $14.88 billion last year. Closing the gap is a big priority and Erdoğan is looking to move to a current account surplus as part of his government’s new economic policy, which focuses on low interest rates and exports, investment and credit. stronger.

The annual foreign trade deficit fell 7.5% year-on-year in 2021 to $46.13 billion. But the revenue shortfall worsened in January, jumping 240.7% year-on-year to $10.44 billion, mainly due to energy imports which nearly quadrupled from it a year ago.

Exchange

Turkey’s trade with Russia and Ukraine hit a record high in 2021. Volume with Russia reached $34.7 billion, while turnover with Ukraine jumped to 7, $4 billion.

The figures rose from $22.3 billion and $4.7 billion in 2020, respectively, according to data from the Turkish Statistical Institute (TurkStat).

Russia and Ukraine are both global agricultural heavyweights and major wheat suppliers to Turkey. Escalating tensions could drive up global food prices, which are already near multi-year highs.

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

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

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

Erdoğan, who visited Kiev this month, rejected it and called on the parties to respect international laws, probably his most scathing language towards Moscow since the crisis caused by Turkey’s destruction of a Russian plane near the Syrian border in 2015.

Erdoğan and Putin have since warmed to each other and Turkey bought Russian S-400 missile defense systems in 2019, prompting US sanctions. Since then, Ankara has opposed sanctions against any country.

“Sanctions against Russia are unnecessary. You are just postponing the problems,” Turkish President Ibrahim Kalin’s spokesman told Die Welt over the weekend, adding that “new rules and principles” were needed to make Russia and the West “feel safe “.

“Russia feels threatened by NATO,” he added.

While cooperating with Russia in energy and trade, Turkey also sold armed drones to Ukraine and signed a deal to co-produce more, which bothered Moscow.

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

Can Kasapoğlu, director of the security and defense studies program at EDAM, said Turkey has made it clear that it supports Ukraine. But a build-up of Russian troops in the Black Sea should “really worry him”, particularly the risk of a leadership change in Ukraine, he told Reuters.

“In this case, defense technological cooperation with Turkey could be suspended, because Russia is not comfortable with the defense technological and industrial base of a NATO country developing ties with the post-Soviet space,” he said.

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