Türkiye After the Earthquake: Why Not to Expect a Change in Russia Relationship

While Türkiye is still reeling from the Feb. 6 earthquake, NATO is not letting up on its push to peel Ankara away from Moscow.

NATO chief Jens Stoltenberg was in Türkiye last week to declare that the alliance would send “tens of thousands of tents” and that “in your time of need, NATO stands with Türkiye.” He also continued to insist that Ankara drop its opposition to Finland and Sweden joining the alliance.

Türkiye has demanded that Sweden stop supporting what it considers Kurdish terrorists and made specific requests, including extraditions. Sweden has said it will not meet these demands, and the Quran-burning protests against Türkiye in Stockholm last month almost certainly made it politically untenable for Turkish President Recep Tayyip Erdoğan to agree to any deal.

US Secretary of State Anthony Blinken also visited Türkiye to discuss earthquake support, as well as the war in Ukraine and Sweden and Finland NATO bids. Greek Foreign Minister Nikos Dendias was the first European official to visit Türkiye and express condolences.

There has been media chatter about the earthquake altering the trajectory of the current NATO-Türkiye-Russia dynamic. A brief summary:

Türkiye long felt underappreciated by the West. One example being the refusal of NATO to give Türkiye Patriot missiles despite multiple requests. In 2017 Türkiye turned to Russia. It purchased Russian S-400 missile defense systems, which enraged Washington and strained ties. Since the beginning of the hot phase of NATO’s war against Russia in Ukraine, Türkiye has refused to open access to the Black Sea to NATO and opted against joining sanctions against Russia. Trade between Türkiye and Russia has boomed and ties have strengthened despite pressure from Washington involving threats of sanctions and arming of Greece and Cyprus in an effort to destabilize the Eastern Mediterranean. Türkiye has also frustrated NATO by blocking Sweden and Finland bids until its terms are met.

The political fallout from the earthquakes for Erdogan is clear, as Ahmet T. Kuru, Professor of Political Science at San Diego State University writes at The Conversation:

Erdoğan’s party appears concerned that popular anger over handling of the disaster may affect the upcoming elections.

Bülent Arınç, an AKP founder and former speaker of Turkish Parliament, publicly called for the postponement of elections for a year. The Turkish Constitution, however, allows the postponement of elections only during a war. Hence, Arınç defined the Constitution “not sacred” and called for disregarding it.

Erdoğan has a major dilemma. If he allows the elections to take place as planned in June 2023, he is likely to lose them. Even before the earthquake, polling suggested that he would lose against one of three possible competitors in the presidential race.

What about the economic fallout? Türkiye’s economy had begun to stabilize prior to the earthquake. A rundown from The Middle East Institute: 

Three factors were key to the stabilization of Türkiye’s economy in second-half 2022. The first, corporate capital restrictions, follows a decision taken in late June 2022 by the Banking Regulation and Supervision Agency (BRSA), under which companies with an obligation to conduct an external audit can borrow Turkish lira loans if their foreign exchange (FX) financial assets do not exceed 10% of their net sales or total assets. This was the strictest capital restriction since 2001 and forces companies to sell their FX cash holdings and deposits or convert them into FX-protected deposit accounts. Loans with interest rates around 10-15% from the state banks are quite attractive as inflation expectations exceed 30%. Many companies have not hesitated to transfer their FX deposits to FX-protected deposit accounts as both maintain value in hard currency terms. The introduction of FX-protected deposit accounts in late 2021 had already halted dollarization. This new regulation began a process of de-dollarization and the Central Bank of the Republic of Türkiye (CBRT) pulled most of the FX deposits to support its weak FX reserves. The cost of this tool is high, however: The Treasury has made 92.5 billion liras ($4.92 billion) in payments to deposit holders so far. The CBRT has also made similar payments, but the total amount has not been disclosed.

The second important factor, informal cash inflows from abroad, is outside of the government’s regulatory power and monetary policy tools. The Turkish government has received funds from overseas by leveraging its bilateral relations, particularly with Russia. External cash inflows not recorded as part of any financial or commercial transactions have long been a means of offsetting foreign deficits; since the war in Ukraine began, these inflows of unknown origin have become a major funding source. During a period of high energy prices that have pushed the current account deficit to $48.8 billion, Türkiye received $24.2 billion in informal funds, making it the second-largest source of FX after the tourism industry.

The third important factor, better weather, also benefited the economy. Due to weather conditions that have been much better than seasonal averages, expectations for the global economy have changed drastically in the last six months. European economies, Türkiye’s main foreign trade partners, have so far been able to avoid a deep recession triggered by energy rationing. Warm winter weather has not only lowered gas prices on the continent, but it has also reduced demand, resulting in a dramatic decline in Türkiye’s energy bill. Lower gas payments to importers and stronger-than-expected export volumes to Europe have contributed a total of more than $10 billion to the economy.

But the earthquake has upended that progress. Mustafa Sonmez writes at Al Monitor:

The disaster response now requires a significant increase in public spending to meet the needs of 13.5 million affected people — 15.7% of Türkiye’s population — and rebuild massive destruction across 10 provinces. As a result, the government’s budget deficit, projected at 3.5% of the GDP in 2023, is likely to grow to up to 5% of the GDP, threatening to exacerbate Türkiye’s current account deficit and other economic fragilities.

And the earthquake is expected to set the economy back for some time.

Türkiye quakes’ devastating humanitarian toll is still rising, and our early estimates show the disaster may shave off about 1% of GDP.

To capture the impact of the quake, we look at the sectoral hit from the 2011 quake in Van relative to a benchmark of provinces.

1/3

— Selva Baziki (@SelvaBaziki) February 15, 2023

Whatever happens with the election, it’s unlikely that the earthquake will change cooperation between Ankara and Moscow as the economic damage likely only makes ties with Russia more necessary for Ankara. Türkiye’s economy, already reeling before the earthquake, will need even more help now. And Ankara’s policy of supporting the Ukrainian military but not joining Western sanctions against Russia has turned the country into a profitable go-between for Russia and the West.

Turkish imports from Russia doubled in value in 2022, according to recently released figures from TurkStat.  And Türkiye’s top export destinations were Germany, followed by the US, Iraq, the UK, and Italy. At the same times, the trade deficit also jumped 137 percent last year to its highest level in the history of modern Türkiye.

A total of 140,229 new companies were set up last year, a 27.8 percent jump, the Union of Chambers and Commodity Exchanges of Turkiye data showed. Among them were 20,135 foreign-partnered or foreign-funded companies, marking a significant jump from 13,445 in 2021. It is believed Russia accounts for much of the bounce in an effort to work around sanctions.

Ports of the Azov-Black Sea Basin increased activity by 2.7 percent to 263.6 mln metric tons in 2022. Türkiye, despite constant pressure from Washington, has transformed into a transport, logistics, and gas hub between Russia and the West. From The Maritime Executive:

Unlike the Russian-Baltic container market, the Black Sea port of Novorossiysk has managed to stabilize the flow of import and export containers, primarily through well-developed Turkish-Russian relations in the trade and logistics sectors.

After a two-month volume fall in the port of Novorossiysk, its container terminals regained nine percent month-over-month in September. Although numbers show (below) that global shipping lines did not carry any considerable volume of shipments to/from Novorossiysk prior to the war, those liner services played a vital role for many businesses in Russia, connecting them to the remote destinations of Asia, Africa, and South America.

Going forward, whether Erdogan remains in power or not, Türkiye will still benefit from close economic ties with Russia. Being the middleman is profitable. For example, gas deliveries from Russia to Europe via Türkiye. From Reuters:

Gazprom average daily gas exports via pipeline to Europe rose 17% in the first half of February from January due to deliveries via Türkiye, according to Reuters calculations based on export data. With no Russian gas flowing through either Yamal-Europe or Nord Stream, the only routes for natural gas supplies to Europe are through Ukraine and the Turkstream pipeline across Black Sea. Gazprom’s average daily deliveries to Europe for the first 15 days of February increased to 67.8 million cubic meters against 58.1 million cubic meters per day on average in January, according to data from the European Network of Transmission System Operators for Gas (ENTSOG) and from Gazprom data on supplies via Ukraine. Gas pipeline exports to Europe in the first half of February totalled 1 billion cubic metres, according to Reuters calculations. Gazprom, which previously disclosed export data twice a month, has since the beginning of 2023 stopped publishing such data. Gazprom did not respond to a request for comment on the calculations. Gazprom, which holds the world’s largest natural gas reserves, was formed out of the Soviet gas industry ministry as the Soviet Union crumbled. It is one of Russia’s biggest taxpayers. Russia and Türkiye formally launched TurkStream with capacity of 31.5 billion cubic metres per year in January 2020. The pipeline carries Russian natural gas to southern Europe through the Black Sea and Türkiye.

Whoever Türkiye’s next president is, the economic benefits from ties with Russian will remain.