In the wake of the Cold War, Russia has emerged as a formidable power once again. Despite numerous political and economic crises in the 1990s, Putin’s rise has established Russia as a force to be reckoned with in the sphere of international politics. Until Russia became officially involved in Syria in September of 2015 – providing troops and other military support for the Assad regime – Turkish-Russian relations could be categorized as strong and improving. And yet, after numerous violations of Turkish airspace by Russian forces and the ensuing downing of a Russian Sukhoi fighter aircraft by a Turkish fighter jet in November of 2015, the two countries have experienced political and economic setbacks in their bilateral relations.
This recent showdown between Russia and Turkey, which can be attributed – at least in part – to Russia’s newfound involvement in and collateral resulting from conflict in the Middle East, is hampering bilateral economic relations between the two states. However, the impact of these deteriorating relations will not be immediately observed in the energy trade, as originally speculated by some pundits, but rather in construction contracts and the tourism sector. Currently, the bilateral trade volume between the two nations amounts to $31 billion, in which Turkey experiences an $18 billion trade deficit with Russia, due largely to its existing energy agreements. As it stands, Turkey represents Russia’s second largest net importer of energy after Germany, importing 55 percent of its entire domestic consumption from Russia. This lack of diversification in energy supply creates a heavy energy dependency on Russia for Turkey and limits the country’s ability to benefit from the low oil and gas prices available in other regions. However, future changes in Turkish energy arrangements are more likely to benefit Turkey than Russia. Turkey's recent negotiations with new potential LNG exporters and its urges to speed up TANAP, as well as its push for additional pipeline gas, all point toward an eventual reduction of Russian market share in Turkey’s energy sector.
The Immediate Impact on the Tourism and Construction Sectors
In 2014, roughly 4.5 million Russian tourists visited Turkey, a figure that fell by 18 percent in the following year and 55 percent further during the first two months of 2016. To be sure, based on the deterioration of the Russian economy since 2014, a decline in the number of Russian tourists was already expected by the industry, but the downturn in diplomatic relations between Russia and Turkey will only exacerbate this slump.
The construction business represents another space that has been adversely affected by the jet-crisis and ensuing Russo-Turkish embroilment. Turkish construction in Russia has a history stretching back to the late 1980s, when Turkish firms first began winning construction contracts in the country, following an opening created in the wake of the first bilateral energy trade agreements. Owing to their extensive history of operation in Russia, Turkish construction companies up until this point have been able to secure sizeable contracts. For the 2014 Sochi Winter Olympics, for example, Turkish companies completed projects worth $1.6 billion. Russia is likely to need Turkish expertise for the 2018 World Cup as well. Still, following the crisis, the economic prospects of the Turkish industry in Russia have been significantly diminished. For instance, the Russian government is considering whether to require that construction firms have at least 75 percent Russian ownership in order to operate in the country, as well as whether to limit the import of building materials. Such requirements would impose additional costs on Turkish companies, augmenting already weakened economic relations and making the fulfillment of deals in the construction space less likely.
Russia and Turkey: The Future of Energy Partnership
Beyond the tourism and construction sectors, the jet crisis will also have implications on the energy trade, especially following harsh criticism by the Russian government. When the two leaders were close and Turkey perceived Russia as a major partner, Turkey’s disproportional dependence on Russian gas was not an issue of concern for Turkish leadership. This is about to change. Turkey is set to increase the pace of its search for alternative sources of energy, while pulling away from future Russian energy projects. The cancelation of the Turkish Stream pipeline project is the first manifestation of such efforts. The pipeline would have directly supplied European markets with 63 billion cubic meters (bcm) of natural gas without relying on any transit country. The project was first conceived when the EU pushed Bulgaria to reject South Stream. When it was proposed in December of 2014, both Erdogan and Putin were enthusiastic about the initiative. It can now be considered as good as dead under current circumstances.
The cancelation of the Turkish Stream pipeline represents one initiative in a general effort on the part of Turkey to decrease its dependence on Russian gas. As mentioned above, the country relies heavily on Russia for uninterrupted gas flow, purchasing 27 bcm per year. During the onset of the Russo-Turkish political crisis, there was a large expectation that Russia would punitively cut Turkey’s supply of gas during the winter. Though this threat ultimately proved hollow. Unlike popular expectation, the measure could never have come to fruition, due to the fact that Gazprom is currently striving to maintain the image and appearance of being a reliable supplier for its customers. When discussing interruptions of gas transit to the EU in the past, Russia has consistently blamed transit countries, like Belarus and Ukraine, and has contended that it has always acted responsibly in such disputes. Therefore, any interruption of the Turkish gas supply due to political concerns would be a major blow to the image that Gazprom has been trying to cultivate.
Still, Turkey’s gas needs have been increasing in the past ten years, and the country will need to secure still more affordable gas in the future. To that end, TANAP (the Trans-Anatolian Gas Pipeline) will start supplying 6 bcm of gas to Turkey starting in 2018. Even before this project is completed, however, BOTAS, the state owned natural gas company, is reportedly negotiating to build three floating LNG terminals on the Turkish coast – two on the Aegean and one on the Mediterranean coast – to benefit from lowering LNG prices in the market, as well as securing its natural gas supply. In addition to new LNG terminals and TANAP, Turkey could also import gas from Northern Iraq and Israel in the future and start buying more Iranian gas if its price becomes competitive.
Apart from seeking out alternative sources of gas, Turkey could opt out of future renewals of gas agreements with Russia. For instance, an agreement between the two countries to supply 8 bcm of gas is set to expire in 2021. Under current circumstances, Turkey may be inclined to increase supplies from alternative sources, as well as invest further in renewables and develop its domestic coal mines.
Such improvements to Turkey’s energy security will eventually decrease Turkish dependence on Russian gas to conventional European levels, therefore softening one of the major sources of leverage that Russia has on Turkey. Energy supply dependence has been a major concern for European countries within the past decade, and Turkey is set to join Europe in attempting to mitigate the risk by diversifying its sources of energy.
Looking Ahead and Learning from the Past
Despite the recent escalation in political and economic tension between Russia and Turkey in the past few months, it must nevertheless be emphasized that throughout the history of the Turkish Republic, Turkish-Russian relations have usually been volatile. Since the beginning of the 20th century, the two states have almost always been in oscillation between periods of cooperation and tension. Thus, in the context of this historical pattern, the recent showdown between the two countries is no surprise. Congruently, in the coming years, it is reasonable to expect yet another Turkish-Russian rapprochement. Both countries are major players in the Middle East and the Caucasus and could find common interests some time ahead – as has occurred between Turkey and Israel.
Still, there are also lessons to be learned for Turkey from the events that have transpired in the past four months. The country is starting to understand the politics of natural gas dependence and to regard energy security more seriously. In light of this, in the coming years, we should expect the extreme level of dependence on Russian gas to decline. With additional LNG and pipeline projects in the works, Turkey may be able to achieve meaningful gas independence by 2020. On the other hand, if oil prices remain low – with Brent trading around $40 and the Western sanctions continuing to hamper the Russian economy – Russia may start looking to reconcile with its energy trading partners. While geopolitics trumps economic relations in the short term, Turkey is a major trade partner for Russia, and the two countries’ economies and energy flows are interdependent.