NEWS ARTICLE        29/10/2018

Turkey and its economy appears to be pulling slowly but inexorably away from the West

Turkey’s President Recep Tayyip Erdogan, in a speech on October 4th, 2018 at the TRT World Forum, said that the European Union (EU) had kept Turkey waiting for membership since 1963, and renewed his call for a referendum to determine if Turkey will continue with its EU membership talks or end them once and for all. Erdoğan also called on the EU to declare whether it really wants Turkey as a member. Erdoğan has however brought up the possibility of a referendum on this issue before, and his recent new call may yet again be political rhetoric to consolidate his nationalist and religious base, which has traditionally looked on Europe with resentment and suspicion, ahead of the March 2019 local elections in Turkey. 

 

Erdoğan greatly extended his authority in the presidential and parliamentary elections on June 24th, 2018, and is now in effect ruling Turkey as a one man show with a tight grip over the judiciary and the press. Erdoğan is not likely now to look on the EU with much enthusiasm since the high EU standards on democracy and human rights, which are ostensibly prerequisites for membership, will now be seen as threats to state authority in Turkey with its powerful central executive. 

 

Despite the fact that there are some members of the Turkish government and the ruling Justice and Development Party (AKP) which look favourably towards the EU, membership of the EU has never been part of Erdoğan’s political platform. Erdoğan has continually lambasted the West in recent years especially and his rhetoric has created a rift with many western nations which will not be easy to heal. His anti-Western rhetoric, in addition to being for the benefit of his political base in Turkey, has also however brought him votes and great support from expatriate Turks in Europe.

 

Though Erdoğan has never at any time shown any real inclination or determination to join the EU, he does not want to write off Europe altogether. After all, Turkey is geographically advantageously located between the West and East, and benefits greatly from being a bridge between the two divides, and almost half of Turkey’s exports go to Europe. Turkey’s economy has also received a great deal of investment from Europe over the last 15 years during which time Turkey has strived to become part of the global economy. Erdoğan is aware of the importance of Europe as a trading partner, and it as a source of new technology and finance to help Turkey develop.

 

The ending of Turkey’s application to join the EU is unlikely to damage trading relations between Turkey and the EU, and Turkey’s customs union agreement with the EU  is likely to proceed and eventually be upgraded. However, there will be a psychological negative effect since European nations will no longer look on Turkey as a potential close political and strategic partner, and may realign their long-term economic strategies accordingly.

 

Over the last 15 years that Erdoğan and his AK party have been in power, economic relations, despite occasional political tensions, have greatly improved with the East.

 

Both political and economic relations with Russia are developing such that Turkey will soon be taking delivery of Russia’s S400 missile defence system, much to the dismay of NATO and the USA. The USA is also watching very closely the warming political relations of Turkey with Russia and Iran with whom Turkey is partaking in discussions over the Syrian conflict. Russia is building Turkey’s first nuclear power station in Mersin on Turkey’s Mediterranean coast and the new TurkStream gas pipeline project running along Turkey’s Black Sea coast and being built by Russia’s Gazprom is fast moving to completion. Russia supplies some 70% of Turkey’s energy resources in the form of natural gas and as a result is Turkey’s second largest importer behind China in the first 8 months of 2018 with USD 14,862 million (9.4% of Turkey’s total import bill). As Turkey’s economic recession sets in and Turkey’s import of non-essential goods falls, so will Russia’s gas dominated imports take the lead amongst Turkey’s imports. Finally, over 15% of tourists to Turkey are from Russia. Most of these go to the all-inclusive but luxurious hotels of Antalya on the Mediterranean coast, and a large number of Russians have bought property in this region over the years. Russia has not historically been an ally of Turkey and recent stronger ties between the two countries have been more out of necessity rather than out of a common bond. In 2013, out of frustration with the European Union, Erdoğan called on Russian President Vladimir Putin to help Turkey join the Shanghai Cooperation Organization, which is an Eurasian political, economic and security alliance between China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan and Uzbekistan. Though nothing came out of this request at that time, Turkey’s membership of this alliance could well be reconsidered should Turkey’s membership bid for the EU be dropped.

 

Turkey has also developed closer political and economic relations with its neighbour Azerbaijan, which culturally, linguistically and historically has much in common with Turkey. Azerbaijan is also a Muslim state, and has an autocratic government controlled by one family, which one suspects Erdoğan looks on with some admiration. The State Oil Company of the Azerbaijan Republic (SOCAR) opened its giant new oil refinery in the Aliağa district of İzmir, Turkey, on October 19th, 2018. The new Star Refinery, built at a cost of some USD 6.3 billion, is the first new oil refinery to be built in Turkey in 30 years and will, by boosting Turkish refining capacity by over 30%, help cut Turkey’s dependence on imported refined oil products. In the opening ceremony attended by Erdoğan and his Azeri counterpart President Ilham Aliyev, Erdoğan said that the new refinery “will take brotherly strategic ties to the next level” between the two countries, adding that the “refinery will enable Turkey to make USD 1.5 billion in savings in its import bill on an annual basis” and that more than 1,100 jobs will be created at the refinery. The SOCAR company had previously purchased 51% of Petkim Petrokimya A.Ş. with its partner Turcas Petrokimya A.Ş. on May 30th, 2008, providing it with two large petrochemical facilities, one in Yarımcı, Izmit and the other in Aliağa, Izmir. On October 14th, 2018, it had also been announced that APM Terminals had agreed to sell its franchise in the Petlim port container port terminal in Aliağa, Izmir to SOCAR.

 

Perhaps the most important project involving Azerbaijan in Turkey is the Trans Anatolian Natural Gas Pipeline (TANAP) project which was officially inaugurated on June 12th, 2018 in the central Anatolian Turkish city of Eskişehir, again by Erdoğan and the Azerbaijan President Ilham Aliyev.  TANAP is a natural gas pipeline stretching from the Turkish-Georgian border to the Turkish-Greek border to supply natural gas to both Turkey and also European countries. TANAP is the central and longest section (1,850 km) of the Southern Gas Corridor (SGC) (3,500 km) which was inaugurated on May 29th, 2018 in Baku, Azerbaijan. The main aim of the SGC is to connect the giant Shah Deniz gas field in Azerbaijan to Europe through the South Caucasus Pipeline (SCP), TANAP, and the Trans Adriatic Pipeline (TAP). The SCP runs from Azerbaijan to Turkey through Georgia and the TAP starts in Greece and runs to Italy through Albania and the Adriatic Sea. TAP, which is currently under construction, will have a length of 878 km. TANAP, with a total investment of around USD 8 billion, will deliver 6 billion cubic meters (bcm) of Azeri gas to Turkey and 10 bcm to Europe annually. TANAP's capacity is expected to increase to 22 bcm based on demand, and further to 31 bcm with additional investments. The European part of the project is expected to be operational in 2020. At present, the State Oil Company of Azerbaijan Republic (SOCAR) holds a 51% share, Turkey's BOTAS a 30% share, BP a 12% share, and SOCAR Turkey with the remaining 7% share. This pipeline is of special strategic importance to Turkey because it offers an alternative to Russian natural gas, reliance on which poses great risks as became apparent during the feud between Turkey and Russia in 2015 following Turkey’s downing of a Russian jet fighter and resulting in Russia imposing a wide range of sanctions against Turkey.

 

China has a special interest in Turkey because the latter is located at the end of its prestigious One Belt, One Road Investment which is aimed to link China up economically by land to the West, spanning over 65 countries. China’s Industrial and Commercial Bank of China (ICBC), established in Turkey in 2015, is playing an important role not only in financing projects related to this strategic investment, but also in helping to expand China's investments and business operations in Turkey in other sector such as energy, logistics, tourism, transportation, infrastructure and e-commerce. To this end, ICBC has also agreed in July 2018 to provide a USD 3.6 billion package for the Turkish energy and transportation sectors. ICBC Bank has also been authorised in July 2018 to organise refinancing for the USD 2.7 billion loan for Turkey's two mega-projects, the Yavuz Sultan Selim Bridge and the Northern Marmara Highway Project, which connect Europe and Asia over Istanbul’s Bosphorus. China is currently the biggest importer of goods to Turkey with USD 23,302 million (10% of Turkey’s total import bill) in 2017, and USD 15,160 million (9.6%) in the first eight months of 2018.

 

Turkey’s neighbouring countries on its southern and south-eastern borders have been an important outlet for Turkey’s exports. Though trade with Syria has minimalised because of the civil war conflict there over the last 7 years, Iran and Iraq have remained important markets for Turkish goods. Iraq was Turkey’s 4th largest export market with USD 9,055 million in 2017 and Iran was its 11th largest export market with USD 3,260 million. Imports from these two countries are also significant. Imports from Iran in 2017 were USD 7,472 million (Turkey’s 7th largest import country) and were USD 1,528 million from Iraq. With the ending of the insurgency in Iraq last year, the Iraq market offers great potential for growth as life gets back to normal there. Turkey is an important outlet for Iran’s petrol, and despite the tightening sanctions being imposed on Iran by the USA, Iran will remain an important trading partner of Iran. Iran and Iraq have populations of over 82 million and over 39 million respectively, and their proximity to Turkey will undoubtedly bring about a surge in trade in future years so long as geo-political tensions remain at a minimum. 

 

Turkey’s relationship and therefore trade with Arab countries have suffered because of stances which Turkey has taken with regards important events taking place in that region. Turkey’s support for the Muslim Brotherhood in Egypt and for Qatar against sanctions by the other Arab countries have resulted in Arab countries as a whole being suspicious of its motives and preferring to remain at arm’s length from Turkey. The Qatar issue has especially been detrimental with regards trade to the United Arab Emirates. Exports of USD 9,184 million to UAE in 2017 have fallen compared to USD 1,965 million in the first eight months of 2018. Likewise, imports of USD 5,547 million from the UAE in 2017 have fallen compared to USD 2,778 million in the first eight months of 2018. It would now appear that President Erdoğan is looking to mend his fences with Arab nations as has been witnessed by his recent close contacts with the Emir of Kuwait who is acting as a mediator in the dispute between Qatar and its neighbouring Arab countries. Qatar had thanked Turkey for its support by pledging on August 15th, 2018, USD 15 billion in investments in Turkey to help the latter fight off the pressure on its currency following sanctions by the USA, and then by agreeing to USD 3 billion swap deal to help Turkey shore up its financial system. This is a very meaningful move by Turkey, and shows that it is prepared to look at alternative sources from the US dominated global financial markets.

 

Though trade with the Arab world is not exactly booming at present, there is one area where relations between Turkey and the Arabs are veritably thriving. In the Economist weekly magazine’s issue of October 3rd, 2018, there was an article titled “An Arab haven in Turkey. Why dissidents are gathering in Istanbul”, which noted that as many as 1.2 million Arabs, including many of the over 3 million Syrian refugees, are in Turkey. It adds that  “A former presidential candidate from Egypt is there, along with Kuwaiti MPs stripped of their citizenship and a crop of former ministers from Yemen. Dozens of Arab websites, satellite-TV stations and think-tanks relay grievances back home. Istanbul’s Arab Media Association now counts 850 journalists as members.” Turkey has always been popular with Arab tourists, and even more so now. Turkey is after all a Muslim country, close to the Middle East, and welcomes Arabs who wish to reside in the country. Over 60% of all foreigners buying property in Turkey are from the middle and near East. Property sales to foreigners in Turkey in September 2018 were 5,615 units, which is 149.7% higher then the figure for the same month of the previous year and the highest monthly property sales figure to foreigners in Turkey recorded to date. Highest sales were to Iraq nationals with 1,351 units, followed by Iranian nationals with 538 units, Kuwait nationals with 360 units, and Saudi nationals with 312 units. On September 19th, 2018, the Turkish government eased citizenship requirements for foreigners, who can now obtain Turkish citizenship if they own real estate in Turkey worth a minimum of USD 250,000, instead of the previous USD 1 million. Many Arabs especially are taking advantage of this new proposal.

 

Turkey is also looking to improve trade relations with Far Eastern countries such as India, Pakistan, Thailand, and Indonesia, in addition to Japan and South Korea with which it already enjoys close economic cooperation. President Erdoğan has a vision, an unguarded secret, of moving Turkey to a more Eastern orbit in which he can be freed of the pressures, expectations, and pre-conditions of the West. Erdoğan wants to rule and get the job done as he knows best, and does not want anyone continually looking over his shoulder. However, there are still very strong ties to Europe, especially from an economic perspective, and Erdoğan will have to put his dream on hold for the movement as he drives the fine line between the West and East in order to overcome the many challenges which face the country.

 

Turkey’s net minimum wage has been raised 26.05% to TL 2,020 (USD 381) as of 01.01.2019       Migration communication helpline 157 available for foreigners in Turkey       Read our homepage articles on developments in the Turkish economy       Turkey’s annual inflation rate increases to 16.65% in July 2019       Turkey’s unemployment rate decreases to 12.8% in May 2019       Read our BUSINESS section for latest sectoral and corporate news       Turkey’s population is 82,003,882 as of 2018 yearend       Number of foreigners visiting Turkey in 2018 increases by 21.8% to 39.5 million       Turkey’s private sector foreign debt is USD 225.8 billion as of 2018 yearend       Turkey’s economy contracted by 2.6% in the first quarter of 2019       Turkey shows surplus of USD 538 million in its 12 month rolling current account balance in June 2019