Persistent sanctions may reduce Turkey’s GDP growth in 2016 by 0.3 - 0.7 percentage points, impact on Russia likely to be limited, say EBRD economists
Following last month’s downing of a Russian military jet by the Turkish air force, Russia has imposed a set of economic and other sanctions against Turkey. Some measures are being put into effect immediately, while others will apply from January 2016.
According to an assessment by EBRD economists of the impact of the measures on economic ties between Russia and Turkey and on the short-term growth and inflation outlook, the sanctions may reduce Turkey’s GDP growth in 2016 by around 0.3 - 0.7 percentage points, if they persist over the next year and are fully applied, with most of the impact related to tourism and occurring around the mid-year.
The impact on Russia’s GDP will be limited, with some moderate pressure on import prices and inflation.
Since the incident on 24 November, the Russian government has issued a decree and a resolution imposing the following measures:
- A ban on imports of certain foodstuffs (mainly fruits, vegetables and poultry) from Turkey, as well as certain works and services (to be further clarified on 10 December);
- A curb on future economic activities of Turkish firms in Russia, although these measures appear to be carefully chosen not to affect current construction activities;
- A ban on new employment of Turkish nationals in Russia (existing employees are not affected and their contracts can be rolled over);
- A ban on charter flights between Russia and Turkey, with advice to Russian tour firms not to sell any Turkey holidays to Russian citizens;
- A major reduction in the number of international road transport permits for Turkish companies (from 8,000 in 2015 to 2,000 in 2016), and the introduction of tighter safety controls in Russian waters and seaports;
- The suspension of bilateral economic cooperation programs and commissions between the two countries;
- The suspension of visa-free travel for Turkish citizens travelling to Russia.
Turkey’s economy is linked to Russia through several major channels:
- Russia is Turkey’s main energy supplier. Turkey imports 98.8 per cent of its natural gas consumption, with Russia accounting for 56 per cent of these (Figure 1). Turkey’s energy imports from Russia, including oil and natural gas, amounted to US$ 16.5 billion in 2014, which was around 30 per cent of Turkey’s total energy bill, 65 per cent of total imports from Russia, and 2.1 per cent of Turkey’s GDP. Besides energy, other major imports from Russia include metals and grains (Figure 2).
- Russia is the 7th largest exports market for Turkey. In 2014 Turkey’s exports to Russia accounted for 3.8 per cent of total exports and 0.7 per cent of Turkey’s GDP. Foodstuffs made up 20 per cent of total exports to Russia, with other major items including textiles, vehicles and machinery (Figure 3).
- The Turkish tourism industry has strong ties with the Russian market. Tourists from Russia made up around 12.2 per cent of the 37 million tourist arrivals to Turkey in 2014, and spent an estimated US$ 3 billion or 0.3-0.4 percent of GDP (Figure 4). Tourism from Russia is highly seasonal, with more than 600,000 monthly Russian tourist arrivals to Turkey in the summer and below 100,000 monthly arrivals in the winter.
- Turkish contractors, especially in the construction industry, have large operations in Russia. The total value of new contracts signed by Turkish construction contractors in Russia in the three years to September 2015 is estimated at around US$ 10-12 billion or 1.2-1.4 per cent of Turkey’s GDP. Assuming the average length of contracts is around 3-5 years, the estimated annual cash flow from the existing projects amounts to around 0.3-0.4 per cent of GDP. For projects in Russia, Turkey’s contractors largely employ Turkish citizens. Out of ca. 87,000 Turkish nationals working in Russia, 55,000 are estimated to be working in Turkish construction companies.
- Russia was the 4th largest foreign direct investor in Turkey in 2014. Russian foreign direct investments in Turkey were around US$ 730 million or 0.1 per cent of Turkey’s GDP in 2014. These exclude property-related investments of Russian nationals, which are estimated at around US$ 400-450 million annually. In addition, there are several mega projects planned by Russia in Turkey, such as the Akkuyu nuclear plant, which is under construction, and the so-called Turkish stream pipeline, which is still in the initial planning stage.
- There are some limited links in the banking sector. Denizbank, the 8th largest bank in Turkey comprising 3.6 per cent of the banking sector assets, is owned by Russian Sberbank, while five Turkish banks have subsidiaries in Russia, each of them comprising a very small portion of parent banks’ assets and of the Russian market.
Firgure 1:Source of natural gas imports to Turkey Figure 2: Turkish imports from Russia
Sources: Ministry of Energy and Natural Resources, TurkStat; data for 2014.
Deteriorating economic ties are likely to have a non-negligible, but not major, impact on Turkey’s GDP. If the sanctions imposed so far persist and are fully applied through 2016, they may have a negative impact of around 0.3-0.7 percentage points on Turkey’s GDP in 2016, mainly through lower tourism revenues and food exports, and reduced new business for Turkish contractors in Russia. The bulk of the impact related to seasonal tourism revenues may come around the mid-year.
At this stage, a disruption to energy supply seems highly unlikely. The cost of the sanctions to the economy will be at the lower end of the estimate provided currently operating contractors and workers continue to be exempt from sanctions, and provided the affected exporters and contractors quickly find alternative markets for their goods and services.
However, a further escalation of the sanctions cannot be ruled out, in which case Turkey’s country risk premium and cost of funding could rise, causing a larger than estimated impact.
Figure 3: Turkish exports to Russia Figure 4: Foreign tourists arriving to Turkey
Sources: TurkStat, Ministry of Culture and Tourism; data for 2014.
While the macroeconomic impact on Turkey may be moderate, the impact on individual companies with close ties to Russia is likely to be larger. Tourism companies that rely on revenues from Russian tourists and exporters of banned foodstuffs (such as producers of tomatoes, onions, grapes, cucumbers, and chicken and turkey meat by-products) will be affected disproportionately by the sanctions, as will regions that host many of these companies, such as Antalya. Similarly, Turkish contractors with a significant share of their business in Russia may come under pressure.
The sanctions may put upward pressure on import prices and inflation in Russia. Turkey is the second largest source of both vegetable and fruit imports into Russia (respectively 20.3 per cent and 15.1 per cent of total vegetable and fruit imports). The ban on food imports from Turkey is likely to result in a rise in the prices of the affected products by around 25 per cent on average, reflecting in an overall rise in inflation in 2016 of around 0.1-0.2 percentage points above existing projections.
In addition, Turkey is the most important destination for Russian tourists travelling abroad (Figure 5). While the travel ban may boost domestic tourism, existing capacity constrains would lead to a substantial increase in prices. Hence, if the travel ban persists, the price of travel services may rise by up to 25 per cent over the next year, adding a further 0.5 percentage points to the inflation in 2016.
The effect of current sanctions on Russia’s GDP is likely to be limited. There may be some positive GDP impact in the short term from increased domestic production of foodstuffs and/or higher revenues from domestic tourism.
But the limited capacity in both food production and domestic tourism suggests that any benefits will be largely offset, first, by the increasing production cost in food processing industries as the price of food imports edges up, and second, by a fall in real disposable income, as food and travel services become more expensive.
Figure 5: Foreign hoiday destinations of Russia tourists Figure 6: Gas exports from Russia
Sources: Rosstat, Alphabank and IMF; data for 2014
If the situation escalates to the point of disrupting energy exports, the effect on Russia’s GDP will likely be negative. Turkey is the second biggest export market for Russian gas, with a US$ 8.3 billion volume in 2014 (around 0.6 per cent of Russia’s GDP – Figure 6), providing 18.8 per cent of Gazprom’s revenues. Any disruption to this supply in 2016, which appears very unlikely at this stage, would harm Russia’s exports and GDP.
Extending sanctions to include current Turkish construction contractors could also reduce investments and GDP in Russia. Turkish companies are currently involved in major projects such as the building of stadiums and airports for the 2018 football World Cup. As mentioned above, present measures seem to be carefully chosen not to disrupt these.