Russia and Turkey: the future of economic relations after the downed plane

The Prospect Of Trade Flows Between Both Countries

Turkey is generally pro-western in its approach to Russia. Adam Balcer (2014) in his article Dances with the Bear: Turkey and Russia After Crimea[1], argues that the two countries should never be considered as real partners as they are both rivals in all major regional conflicts. For Turkey the EU and US are far more significant partners in terms of trade, politics and security than Russia.

However, sometimes that is not clear as it has been observed during in the Ukrainian crisis. The complexity of relations between Russia and Turkey, limit both countries’ moves. The two nations referred to each other as strategic partners in multiple occasions. However, following the plane incident on Novermber 24th 2015, in which the Turkish Army downed a Russian SU-24 warplane, Russia reacted immediately. They imposed economic, political and academic sanctions on Turkey. The political and economic measures taken by Russia was publicly declared by Prime Minister Medvedev on Thursday 26th, just two days after of the incident. His declarations were accompanied by a serious of measures announced by Russia’s Federal Agency for Tourism and Minister for Agriculture Alexander Tkachev. Actions were taken instantly leading to the cancelation of the visa free regime, holiday packages and charter flights to Turkey and banning certain import products. (Click for the official list of banned products from Turkey in Russian). The conflict seems to continue as both countries’ governments are more focused on geopolitics than macroeconomic gains.


Turkey is Russia’s 5th biggest trade partner (See Figure: 1). The trade volume is constituted by Russia’s $24 billion exports, which mainly constitutes of natural resources, while for Turkey Russia is its 6th biggest export destination with over $7 billion in 2014[1]. Russia is cumulatively the biggest exporter to Turkey for the last 5 years with an approximate volume of $140 billion (See Figure: 2). Top Russian exports include, from highest to the lowest volume; oil and oil products, wheat and grains, aluminium, scrap metal and gas products.

ConsilienceRussiaTurkey2Additionally, Turkey is the second biggest of natural gas customer after Germany, importing 55% of its gas from Russia (See Figure: 3). Turkey also accounts for nearly a quarter of food imports in Russia with Russia being the second biggest export destination for food products following Iraq (See Figure: 4). Significantly, most citrus fruits and tomatoes imported come from Turkey, an area that further developed following the EU sanctions. As a result both the previous EU sanction and current bans are already causing inflation in food prices in Russia.

On the other hand, there is a general misconception that both countries’ trade partnership in agribusiness is limited to a one-way flow, from Turkey to Russia. However, the trade volume is not only based on Turkish food imports. Turkey is one of the largest wheat importers from Russia, which is why Russian agricultural imports will be affected as well as Turkish food producers (See Figure: 5).

ConsilienceRussiaTurkey3Another sector that will be strongly affected is tourism. Which is already hit by the cancellation of holiday packages and charter flights, which were the main means of transport for tourists from Russia. The effects will be mostly felt when the holiday season will start towards the summer of 2016. Turkey is the 6th most visited country in the world, hosting over 39 million tourists following Italy with over 48 million tourists with Turkey ranking 12th in tourism receipts[2]. This is an indicator that Turkey has opportunity to increase its ConsilienceRussiaTurkey4income by increasing revenue made from existing arrivals. In this case Russian tourist arrivals were approximately 4.5 million in 2014[3], which can be translated as an income of $4.2 billion.

All developments mentioned earlier in this article indicate that the recent conflict will affect the Turkish small to medium size enterprises and Russian consumers in their day-to-day life. However, the effects of the conflict will be felt more slowly on corporations. Russian businesses will be affected less as the trade volume will mainly be constituted by giant corporations like Gazprom, Sberbank and Severstal.

Recent developments in businesses operating in Consilience’s circles indicates similar effects, which can be summarised as a clear bust in the two countries’ trade relations and overall hardship in delivering day-to-day business activities. This will not only be felt by Turkish businesses but also by international companies, which utilise both countries in a highly integrated way in their supply chain. For instance, recent production interruptions of the Bosch Siemens Home Appliances factory and the interruption of the construction project of the US Embassy in Moscow by Turkish conglomerate Enka, stand out as clear examples of the difficulties that companies face day to day. Both aforementioned incidents were caused by the in ability to mobilise Turkish technicians or materials from Turkey as planned.

Consequently, both countries are limited in their manoeuvres based on gas exports and mutual dependency on gas trade. However, these measures will do permanent damage on bilateral relations, which were constructed progressively since the earlier 1990s, after the collapse of the Soviet Union.

Turkish small businesses initially will be initially hit to a certain extent on in micro levels with their day-to-day operations being effected, while macro level businesses will continue with a smaller momentum given the huge trade relation on energy. However, other Turkish micro level businesses are likely to seek new markets and improve current commodity trade with Germany, UK, Italy, France and the Netherlands.

Russia will continue to have many immature industries like banking, automotive, construction, home ware, textile, food and beverages, which present huge opportunities. But it’s not always easy to keep up with the obstacles the market imposes. For instance recent developments in the banking sector are a good example. For instance, the sale agreement between the Royal Bank of Scotland and Expobank LLC after a year of sanctions is not a surprise. In addition, other international banks like HSBC and Santander already relocated their staff with an unclear next step.

Turkish conglomerates will act similarly to diversify their risks, while staying in Russian market at minimum costs. The companies which are the strongest in the Russian market are: Zorlu Enerji, Enka, Anadolu Grubu, Koç Holding , Şişe Cam, Denizbank, Arçelik (Beko), Vestel Erdemoğlu Holding, Ant Yapı, Rönesans, Gama, Soyak, Tepe, Alarko Holding.

Russian conglomerates are likely to continue business as usual as they are not bureaucratically involved in the Turkish market in comparison to Turkish companies in Russia. Significant Russian businesses in Turkey are: Gazprom, Sberbank, Severstal, Aeroflot, Lukoil and Yandex.

Amongst these companies Sberbank bought Denizbank from Dexian, a French and Belgian bank in 2012 and experienced significant growth as much as 40% in 2013 and currently with over 12,9% return in equity in 2015. Yandex on the other hand, became the first company to gain over 8% of the market share in a country dominated by Google.

Even though there is no significant change expected, the Turkish government started to look into other gas suppliers like Azerbaijan, continuing projects like TANAP and Leviathan pipeline.

On the Russian side, nothing seems to be changing as Russia is obliged to show supplier credibility by continuing gas supplies to Turkey while keeping Gazprom’s price monopoly protected amongst other companies. The protection is provided within the government, through members of the energy ministry such as deputy minister Kirill Molodtstov, by keeping locally successful competitors like Noavetek and Rosneft out of international trade.

Food imports would likely cause similar effects on the market as previously experienced in the case of the Russian ban of European food products in certain types of food and beverages. These were counter-sanction measures after its European counterparts sanctioned the country, an effect the Europeans did not expect when the sanctions took place, on August 7th, 2014. When the impact was felt throughout the sector in June 2015, European Commission for Agriculture and Rural Development had to help farmers decrease the negative effects of the sanctions. According to these developments new supply routes were explored and different solutions such as re-exporting from non-sanctioned countries like Serbia, Belarus or Azerbaijan were not enough to replace the traditional trade routes. During a recent event, December 10th, 2015, at Chatham House, London, Adam Szubin, acting undersecretary of the U.S. Treasury Department for Terrorism and Financial Intelligence, said that Russian sanction will be renewed as long as Minsk Agreement is not implemented. This means that Russian consumers will notice the inflation until Russia replaces current suppliers. On the other hand, while Turkish and EU exporters will need to explore different markets, Turkish authorities might implement aid structures similar to those devised by the European Commission for Agriculture and Rural Development. Russia will not do much regarding import bans as it already have established suppliers of fruits and vegetables such as Azerbaijan, Armenia, Kazakhstan, Uzbekistan, Iran, Algeria, Morocco, South Africa, Brazil and Argentina. However, replacing Turkey in the tomato and citrus fruit imports will take a while and cause significant inflation after the implementation of the Russian governments new measures on January 1st, 2016.

So, food exports from Russia to Turkey will likely change their destination. The slump of wheat production in Saudi Arabia in order to preserve its drinking water reserves creates a significant opportunity opportunity in Russia to redirect its wheat exports to Saudi Arabia and neighbouring countries, which used to heavily depend on Saudi wheat. This provides a significant commodity flow opportunity, given that the world’s former biggest wheat exporter will be a net importer towards the end of the 2016.

Regarding tourism in Turkey, cities like Antalya, which receives nearly 80% of the 4.5 million Russian tourists will be effected. The authorities and the businesses should immediately look into channels to diversify its tourist country of origin mix while increasing high value adding commercial activities to generate more revenue from visitors.

The developments analysed above indicate a slow recovery and the persistent influence of the conflict on bilateral relations. From small enterprises to large corporations, this conflict again proves the importance of market diversification for continuous growth an element mentioned by scholars like Jean-Emile Denis (1985)[4] for the last 30 years. In the future it is obvious that enterprises belonging to both countries will diversify their destination markets and suppliers. In any circumstances, it is evident that Russia has the leverage over Turkey in various sectors either as provider of gas or wheat and forming the majority of tourists in certain provinces. However, both countries need to find a common ground between geopolitical ambitions and macroeconomic gains as the positive effects of macroeconomic activities are clear and significant in the daily lives of Russians and Turks, while geopolitical ambiguities are less significant and impossible to predict.

[1] Euromonitor, 2015

[1] Aydin-Düzgit, Senem. Global Turkey In Europe III. Roma: Nuova cultura, 2014. Print.

[2] UNWTO Tourism Highlights, 2015

[3] TurkStat International Trade Statistics, 2015

[4] Denis, Jean-Emile, and Daniel Depelteau. “Market Knowledge, Diversification And Export Expansion”. Journal of International Business Studies 16.3 (1985): 77-89. Web.