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Source: Getty

Commentary

Boomerang Sanctions: Russia Punishes Turkey

Turkey is one of Russia’s strongest trade partners. Imposing economic sanctions on yet another country is likely to hurt Russia itself the most.

Link Copied
By Andrey Movchan
Published on Dec 9, 2015

Russia’s memory for conflict resolution appears to be remarkably short. A year ago, its response to Western sanctions imposed in the wake of the conflict in Ukraine was one of outright derision. But when it comes to punishing Turkey for downing one of its warplanes, Moscow’s reaction has been curiously similar: the best it can come up with is to introduce sanctions of its own.

The Turkish embargo will be purely economic, and Russia certainly won’t gain anything financially. On the contrary, the sanctions will serve only to damage the Russian economy, which is currently even weaker than Turkey’s.

Turkey is one of Russia’s most robust trading partners, generating around $15 billion a year for Russia. (Incidentally, this amounts to more than Russia’s arms sales revenues, a source of immense pride for Russia.)

However, if we subtract Russia’s significant gas (and insignificant oil) shipments to Turkey, Russia would be left with a $2.5-billion deficit. No one is yet talking about cutting energy supplies to Turkey, which means that short-term losses from Russia’s “principled stance” won’t be as serious as they might have been. Nevertheless, the losses cannot be ignored.

It’s in other sectors that the sanctions will hit hard. Restrictions on Turkish imports will come as a blow to food distributors. Russia buys $1.1 billion worth of produce from Turkey annually, about 4 percent of total food imports. This rises to 17 percent in certain categories, such as vegetables.

The trade embargo is bound to cause shortages of food products that Russia traditionally imports from Mediterranean suppliers. Turkey, one of the few countries in the region still trading with Russia after the latter imposed food sanctions, supplies olives and olive oil, fish, and citrus fruit to the Russian market.

Turkey has long been a popular tourist destination for Russians, second only to Egypt: just under 3 million Russian tourists visited Turkey in 2014; just over 3 million visited Egypt. Every year, Russian tourists take $1.5 billion out of Russia and spend it in Turkey.

Seventy percent of Russians book their tours through travel agencies. In 2014, an average tourist paid $700 per tour, 15 to 20 percent of which went to a travel agency or tour operator. Sanctions will mean that the Russian tourist industry stands to lose $600 million in potential revenues (over 0.05 percent of GDP) in 2016.

It’s unlikely that domestic tourism will be able to replace Egypt and Turkey: Russian resorts lack sufficient infrastructure and transportation, and their price-to-quality ratio is abysmal. Most likely, prices at the few Russian resorts that do exist will skyrocket, and Russian tourists will flock to other destinations, such as the Baltics, Cyprus, Tunisia, Morocco, Southeast Asia, and India. As a result, the average price of a trip will increase, and more currency reserves will leave the country.

In 2014, Turkish construction contracts in Russia amounted to $1.5 billion, or 0.13 percent of GDP. The total Turkish investment in Russian real estate is around $10 billion. In all likelihood, Russia will not confiscate investors’ property, but, in the worst case scenario, property could be forcibly sold off. The danger is that Russia would lose one of its few quality contractors.

Air travel could become more fraught, with the possibility that each country might close its airspace to the other. Planes that fly over Turkey would have to deviate west of their regular routes (going east is also dangerous, and Ukraine’s airspace is off-limits). This would result in enormous time and fuel costs.

Maritime transit may also be affected. While Turkey can’t ban Russian vessels from its waters (it can only do so if there is a military threat), it might substantially delay the passage of Russian vessels by carrying out lengthy and unnecessary inspections.

The Russian steel sector could also suffer losses. In response to the sanctions, Turkey may choose to close its market to Russian exports, which amount to $4 billion a year.

Russia additionally faces the potential loss of Turkish atomic energy contracts. Atomic energy is one of the few high-tech fields in which Russia remains a leader: now its flagship Rosatom Corporation stands to take a big hit.

Finally, any plans to revive the stalled Turkish Stream gas pipeline project across the Black Sea will now officially be shelved.

But what does Turkey stand to lose in its conflict with Moscow? Ankara’s main problem is preserving Russian gas shipments. The Blue Stream pipeline, which runs beneath the Black Sea, and Russia’s trans-Balkan shipments, which run through Ukraine, supply Turkey with about 60 percent of its gas. Western Turkey is almost entirely dependent on Russian gas: its liquefied natural gas (LNG) processing plants are woefully inadequate, and storage facilities there cannot hold more than 5 percent of annual gas requirements.

It would be extremely difficult for Russia to impose an embargo on gas shipments through Ukrainian territory; for their part, the transit states would help Turkey by re-exporting this gas, meaning that the real deficit would be unlikely to exceed 35 to 40 percent. Nevertheless, Turkey would suffer gas shortages for some time, potentially causing its GDP to fall by between 2 and 3 percent.

As a result, the Turks would want to diversify their gas supply options. New LNG processing plants and storage facilities would be built, and the Azerbaijani-Turkish TANAP pipeline would be further expanded.

Turkey will now redouble its efforts to overthrow Syrian President Bashar al-Assad’s regime, since this would make a pipeline through Syria and Jordan possible. Ankara will want to negotiate with Tehran on European gas transit from Iran. In the past, Turkey has demanded the right to purchase gas at the border, thus controlling its supply to Europe.

All this would lead to Russia’s greatest fears being realized: that alternative suppliers would enter the Turkish market and gain access to gas sales to Europe. In a matter of a few years, Gazprom stands to lose not just Turkey, but potentially the whole of Southern Europe, which would get its gas from, say, Azerbaijan and Iran. Russia’s Blue Stream pipeline would then be redundant.

The loss of Russian tourists is Turkey’s second problem, though it’s not as serious as some would like to believe. Russians made up less than 10 percent of the total number of tourists visiting Turkey in 2014. Last year, the number of Russian visitors was already down by 13.5 percent, and this year it has fallen another 24 percent. So, while the total number of foreigners visiting Turkey has remained almost constant, Russians now comprise only 7 percent of the total.

The food embargo against Europe has demonstrated that food suppliers can easily circumvent the sanctions. Turkey will undoubtedly be able to sell its goods on other markets, as well as in Russia itself by way of Azerbaijan, Belarus, and other Russian allies. But, again, Russian citizens will be the ones paying higher prices.

Underlying all of this is Russia’s hypocrisy. Just a year ago, Western countries accused Russia of supporting terrorists in the east of Ukraine and of downing a Malaysian Airlines passenger flight. As a result, the United States and Europe imposed sanctions against Russia. Now, barely a year on, Russia has done the same, accusing Turkey of terrorist tactics and imposing sanctions.

The EU-U.S. embargo drove up Putin’s approval ratings and fueled popular hatred towards the West. It was a great opportunity for the Kremlin to blame the country’s economic problems on the West: as a result, Russia’s foreign policy has become even more belligerent and militaristic.

But the consequences of the knee-jerk sanctions imposed on Turkey are likely to hurt no one more than the Russians themselves.

About the Author

Andrey Movchan

Former Nonresident Scholar, Carnegie Moscow Center

Movchan is a nonresident scholar at the Carnegie Moscow Center.

Andrey Movchan
Former Nonresident Scholar, Carnegie Moscow Center
EconomyTradeForeign PolicyMiddle EastTürkiyeRussia

Carnegie does not take institutional positions on public policy issues; the views represented herein are those of the author(s) and do not necessarily reflect the views of Carnegie, its staff, or its trustees.

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