Turkey’s balancing trade and geopolitics in relations with Russia … – bne IntelliNews

Turkey finds itself in a delicate position, caught between its support for Ukraine’s territorial integrity and its desire to maintain ties with Russia, writes Natalia Konarzewska, a political analyst for the Central Asia-Caucasus Institute in an analytical note.

While Turkey has supplied Kyiv with significant amounts of weapons, it has also increased its trade exchange with Russia, leading to accusations from the West that these economic ties support the Russian war effort. However, Turkey’s trade co-operation with Russia is vital for its own economic stability, and it is unlikely to alter course.

According to the Turkish Statistical Institute (TUIK, or TurkStat), trade volumes between Turkey and Russia witnessed a significant surge in 2022. Russia became Turkey’s top import partner, with imported goods valued at $58.85bn, double the amount from the previous year. Similarly, Turkey’s exports to Russia also saw a substantial increase, reaching $9.34bn in 2022, compared with $5.8bn in 2021, according to the United Nations COMTRADE database on international trade.

These trade figures align with Turkey’s efforts to strengthen its economy and improve household purchasing power. Facing challenges such as double-digit inflation, soaring living costs and a weakened currency, the Turkish government and financial institutions have been desperate to prop up the economy and boost economic growth.

“The overall value of Turkish exports in 2022 was at a record high and hit $254bn, which was publicly announced in early January 2023 by Turkey’s President Recep Tayyip Erdogan,” says Konarzewska.

“The Turkish government and financial institutions have been desperate to prop up the faltering Turkish economy, which grapples with double-digit inflation, soaring costs of living and a weak currency, by improving household purchasing power and financial stability, as well as boosting economic growth. Economic concerns were the chief reasons why Ankara declined to join Western sanctions against Russia and decided to use the disruption of the trade flows created by them as a leverage to boost Turkey’s economic and trade opportunities. This approach is unlikely to change in the near term, especially since rebuilding the provinces that were devastated by February earthquakes requires spending astronomic sums,” Konarzewska adds.

The surge in trade volumes between Turkey and Russia has raised questions about Turkey’s role as an intermediary for Russia to circumvent Western sanctions. Turkish authorities vehemently deny any exports or facilitation of trade involving sanctioned goods or items that could aid Russia’s war efforts in Ukraine. In early June, Turkey’s foreign minister, Mevlut Çavusoglu, attributed the spike in trade to an increase in the volume and cost of Turkey’s energy imports, firmly denying any exports of goods like chemicals and microchips that could be used in Russia’s military endeavours, contrary to the evidence indicating that is exactly what is going on.

The energy trade has been especially important. Turkey’s increased imports of Russian oil, natural gas and coal in 2022 can be attributed to Russia’s need to reroute energy exports away from the European Union due to sanctions. Ankara has seized this opportunity, taking advantage of discounted prices and the EU energy ban to double its oil exports from Russia compared to the previous year. Negotiations are also underway to secure a substantial discount on natural gas purchases from Russia via a mooted “gas hub”, serving as a back door for Russian hydrocarbons to enter European markets. Volumes up to 100bn cubic metres a year have been mentioned, which would take up Russia’s entire stock of unsold gas following the destruction of the two Nord Stream 1&2 pipelines.

Turkey has emerged as one of the largest importers of Russian hydrocarbons and coal since the onset of Russia’s invasion of Ukraine. The Centre for Research on Energy and Clean Air (CREA) estimates that Turkey is now the third-largest consumer of Russian fossil fuels, following China and Germany. Since February 2022 Turkey has purchased approximately $14.8bn worth of Russian crude oil, $7.5bn worth of natural gas and $3.6bn worth of coal, according to CREA.

“Energy Intelligence also reports that Turkey has been buying unusually large volumes of cheap Russian diesel, which it uses for domestic needs and exports its own production to the EU, which banned Russia-produced refined products starting from February 5, 2023. Such a mechanism is called an “origin swap’’ and is not explicitly banned, because Russian diesel does not reach the European Union market. However, such operations, which can be very profitable for the refiner, nonetheless demonstrate how Turkey benefits from being the intermediary between sanctioned Russia and the West,” Konarzewska reports.

Reports also indicate that Turkish companies have supplied essential items, such as plastics and rubber, used in the production of military armaments to Russian firms sanctioned by the US They have also exported equipment covered by US sanctions, including electric generators and semiconductors, which can have military applications. Additionally, Turkish warehouses have reportedly received large shipments from the EU and the Far East destined for Russia. These cargoes, often unregistered as imports, are transported by Turkish cargo companies to Russia via air, land and rail routes.

“According to WSJ in 2022 at least 13 Turkish companies sold a variety of items including plastics, rubber items and vehicles worth around $18.5mn to a number of Russian companies which were sanctioned by the US for their role in Russia’s aggression towards Ukraine,” says Konarzewska.

WSJ also revealed that Turkish companies have sent to Russia millions of dollars-worth of equipment such as US-manufactured electric generators, elevators, circuit boards, conveyors, steering wheels for trucks and others which also fall under US sanctions. Additionally, according to Voice of America sources in 2022, Turkey surprisingly started exporting a substantial number of semiconductors to Russia, while in 2021 these exports were minuscule.

In late February 2022 the US imposed a ban on the sale to Russia of technologically advanced products such as semiconductors, which can be used both for private and military purposes, in order to prevent Moscow from getting access to the high-end technology. As bne IntelliNews has reported, the technology sanctions on Russia have largely failed thanks to loopholes and willing partners like Turkey.

In addition to the sanctions-busting trade, Turkey has also become a safe haven for wealthy Russians and their money. This includes oligarchs, politicians and dissidents who aim to evade Western sanctions or circumvent capital controls imposed by their own country.

There are also legitimate refugees fleeing Putin’s Russia. Many young Russians who fear military conscription or imprisonment have also sought refuge in Turkey. The country has welcomed these cash inflows and facilitated money transfers, enabling Russians to navigate the restrictions imposed by Western sanctions that limit access to popular bank cards and exclude certain Russian banks from the Swift system.

The influx of Russian funds has had a positive impact on Turkey, stabilising its currency, the lira, to a degree. The lira has experienced massive devaluation against the US dollar in recent years, while also addressing the foreign trade deficit.

Russians are also registering companies in Turkey and investing in various sectors, particularly real estate, which have helped reduce Turkey’s historically high foreign trade deficit, particularly since the start of the war in Ukraine.

Turkey firmly maintains its position that it will only support sanctions against Russia if they are authorised by the United Nations, as Ankara believes that joining Western sanctions would have a negative impact on the Turkish economy. This stance allows Turkey to position itself as a mediator in the Russo-Ukrainian conflict and reap benefits from facilitating trade between the West and sanctioned Russia, even involving the supply of prohibited goods.

“Turkey, however, is not the only country which has refused to impose sanctions against Russia and that has positioned itself to reap economic benefits from the tectonic shifts in trade caused by Western bans on Russia’s economy. This group of countries also includes China, India, Saudi Arabia as well as countries in the South Caucasus and in Central Asia,” says Konarzewska.

What has emerged is a tug-of-war between West and the Global South, where the West has been trying to enforce its embargo on Russia through the use of carrot and stick, whereas countries of the Global South have been resisting this pressure and trying to navigate a middle path that focuses first and foremost on their national interests. Russia remains an important source of raw materials, arms and energy technology for many countries in the developing world.

Washington has expressed concerns to Turkish authorities and industry representatives, highlighting the suspicion that certain trade ties between Turkey and Russia may contribute to Moscow’s military efforts in Ukraine, but many countries of the Global South consider this to be a European problem that is none of their concern. The US has explicitly warned that companies and individuals engaging in business with sanctioned Russian entities could face secondary sanctions. Western pressure has had some impact, leading several prominent Turkish banks to abandon their initial plans to join the Russian Mir payment system. However, Turkey remains committed to trade co-operation with Russia, considering it crucial for its own economic interests, and is unlikely to change that approach in the near future.