Russia / Turkey | New friends or reconciled business partners?

Russia / Turkey | New friends or reconciled business partners?

Once bitter enemies, Turkish President Recep Tayyip Erdo?an and Russian President Vladimir Putin have surprised international spectators by publicly vowing to rebuild their country’s damaged relationship.

Such a meeting was hard to imagine just a couple of months earlier. Pale-faced and somewhat bewildered, Erdo?an was thanking Putin for giving him a call shortly after the failed coup d’état in Turkey a few weeks before. Meanwhile, the Russian president darted suspicious glances at Erdo?an, perhaps recalling how dramatically their relations had deteriorated after a Russian military aircraft was shot down by the Turkish military on its border with Syria in November last year. A few hours later, at a press conference, the two leaders vowed to repair ties between their countries and resume trade and several ambitious business projects.

There are multiple factors underpinning this development. Over the last couple of years, both Russia and Turkey have lost a number of allies in the international arena and are now in need of new ones. With centuries of wars between the Ottomans and the Russian Empire behind them, Turkey’s relationship with modern Russia had been going reasonably well until last year’s incident. The reconciliation is unlikely to make Putin and Erdo?an best friends (and they have never been close). However, there are many similarities between them and their authoritative leadership styles: both presidents have harshly cracked down on their political opponents at home, whom they both often suspect of receiving support from the United States. This common ground, and possibly even some degree of sympathy, between the two leaders might have gravitated them to each other.

However, another consideration behind the Russian-Turkish reunion has to do with business, and the presidents have already agreed resumption of the two largest construction projects that were put on hold after last year’s border incident: Turkish Stream and the Akkuyu Nuclear Power Plant. But to what extent will both countries benefit from them, and what does the future hold for the trade between Russia and Turkey?

Turkish Stream is a natural gas pipeline that will run across the Black Sea, a project which Putin and Erdo?an announced in December 2014. This happened shortly after the decision to abandon South Stream, a similar proposed pipeline for the supply of Russian gas to Eastern Europe (but through Bulgaria rather than Turkey). In St Petersburg, both presidents announced that Turkish Stream would resume shortly. However, Russian officials later specified that the agreement concerns the construction of a pipeline connecting Russia and Turkey (with a completion date not earlier than December 2019) and not an extension to deliver Russian gas to EU countries. This section appears to be subject to additional negotiations between Russia, Turkey and the European Union. If these talks get stuck, Turkish Stream – which had originally been designed to make Turkey both a customer and transit country – may turn out to be unprofitable for Russia.

Another project to which Putin and Erdo?an gave the green light – the Akkuyu Nuclear Power Plant in Turkey’s Mersin Province – has also been subject to criticism since its launch in 2010. A number of observers voiced concerns that Russia was taking unnecessary risks associated with the construction. Quite unusually for this type of project, the Russian government is responsible for its financing (through a $20 billion loan) as well as its execution, which is being handled by nuclear state corporation Rosatom. It is interesting to note that in 2012 the Russian Institute of Energy released a study concluding that the project is not in the country’s economic interests. The project is also at odds with Russia’s usual principle of never building nuclear plants in countries that purchase Russian natural gas.

The Akkuyu plant faced criticism in Turkey as well, primarily due to environmental concerns as the construction site is said to be located too close to olive trees and the sea shore, in breach of national legislation. The national media also disapprove of the agreement, which stipulates a fixed price of $0.1235 per kWh for power energy generated at the plant for Turkish customers over the next 25 years, and which they claim is too high. This price arrangement has also been criticised in Russia for a similar reason, as it does not take into account inflation, currency and other risks. The first unit of the power station was originally scheduled to start operations in 2020.

The shooting down of the Russian jet in 2015 triggered an embargo by Russia on food imports from Turkey. According to official customs data, in January-June 2016 Russia’s imports from Turkey amounted to $898.6 million, having plummeted by 56.5% year-on-year. The food trade ban is still in effect and is expected to be lifted by the end of the year. Another moratorium set by Russia in late 2015, on charter flights to Turkey, has already been scrapped. Ankara has just approved 63 weekly charter flights from Russia to Antalya, a favourite holiday destination for Russians.

These two large projects, especially the Akkuyu Nuclear Power Plant, are first and foremost political investments by the Kremlin that were designed to pay political dividends. The next few years should show how significant such dividends will be. Setting these aside, the easing of tensions between Russia and Turkey is likely to bring tourism and other interstate trade to pre-crisis levels within about six months.

However, the political agenda will continue to dominate Russian-Turkish relations, and Syrian affairs will be the key topic. Deliberately excluded from this discussion, Turkey’s late August ground operation in Syria has added further disturbance to the delicate balance of interests of different parties involved in the conflict there, including Russia. In this light, any possible stand-off between Russia and Turkey in Syria (or elsewhere) may have a similar if not a greater effect on their relations than last year’s shooting down of the Russian military aircraft.

Image: Vladimir Putin meeting with Prime Minister of Turkey Recep Tayyip Erdogan in St Petersburg in 2016 /, Creative Commons 


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Author: Dmitry Sachkov, Senior Associate, Buisness Intelligence
Published: 21st September 2016
Categories: Company News