Turkey – RussiaAdversaries or Partners?

Prof. Dr. Seyfettin GürselDirector of Bahçeşehir University Center for Economic and Social

Research

IFEA, 19th February 2009

PART I

Turkey – RussiaComplementary Economics

1. A Classical Division of Labor

• Turkey exports (Russia imports) industrial goods and services (tourism and construction

• Turkey imports (Russia exports) commodities (energy and raw materials)

Turkish Exports

Turkish Imports

Commodities; 3013; 47%

Consumption goods; 2604; 40%

Investment goods; 847; 13%

Others; 18; 0%

Consumption goods; 564; 2%

Investment goods; 8; 0%

Others; 0; 0%

Commodities; 30746; 98%

Tourism

0

500000

1000000

1500000

2000000

2500000

3000000

3500000

4000000

4500000

2003 2004 2005 2006 2007

Visitors from Russia Visitors to Russia Visitors from Germany

Source:TURKSTAT, Ministry of Culture and Tourism (Turkey), Federal Tourism Agency (Russia)

0

500

1000

1500

2000

2500

3000

2003 2004 2005 2006 2007Tourism income from Russia (mil. USD) Tourism expenditure to Russia (mil USD)

Tourism income from Germany (mil. USD)

Source:TURKSTAT, Ministry of Culture and Tourism (Turkey), Federal Tourism Agency (Russia), betam

Number of Visitors

Tourism Revenues

Construction services

0

500

1000

1500

2000

2500

3000

3500

4000

4500

2000 2001 2002 2003 2004 2005 2006 2007Construction services to Russia (mil. USD)

Source:Turkish Contractors Association

• Energy exports Current Account Surplus (CAS)• CAS either appreciation of the local currency (flexible exchange

rate) or• CAS increase of the monetary base inflation (fixed exchange rate)

Loss of competitiveness

(An historical precedent of 16th century Spain)

2. Russia Suffers from the “Dutch Disease”

Oil: Curse or Blessing?

Russian Current Account Balance

0

2

4

6

8

10

12

14

16

18

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

*

% o

f G

DP

-1000

9000

19000

29000

39000

49000

59000

69000

79000

89000

99000

Bo

P,

mil

lio

n U

S$

Current account balance (% of GDP) Current account balance (million US$)

Source:BoR; IMF

Russian Reserves

110000

160000

210000

260000

310000

360000

410000

460000

510000

560000

01 05

03 05

05 05

07 05

09 05

11 05

01 06

03 06

05 06

07 06

09 06

11 06

01 07

03 07

05 07

07 07

09 07

11 07

01 08

03 08

05 08

07 08

09 08

11 08

Total Reserves exl. Gold (million dollars)Source:IFS

Exchange Rate Appreciation and Inflation

7

8

9

10

11

12

13

14

15

16

01 05

03 05

05 05

07 05

09 05

11 05

01 06

03 06

05 06

07 06

09 06

11 06

01 07

03 07

05 07

07 07

09 07

11 07

01 08

03 08

05 08

07 08

09 08

11 08

CP

I

37

38

39

40

41

42

43

44

45

46

Bas

ket/

RU

B

CPI (% change, annual) Basket*/RoubleSource:IFS

Russia is condemned to specialize in energy exportation and industrial good importation

• Russia has the 8th biggest oil reserves

• Russia has the biggest natural gas reserves

• Russian industry is specializing in non-market goods (military etc.)

• High levels of corruption• Government inefficiency• Rising inequality• Authoritarian tendencies• Concentration of state power in the hands

of ruling elits

3. Side Effects of “Dutch Disease”

4. Turkish economy suffers from a huge current account deficit

-50000

-45000

-40000

-35000

-30000

-25000

-20000

-15000

-10000

-5000

006

0607

0608

0609

0610

0611

0612

0601

0702

0703

0704

0705

0706

0707

0708

0709

0710

0711

0712

0701

0802

0803

0804

0805

0806

0807

0808

0809

0810

0811

08

mil.

US

D

Current Account Balance Current Account Balance excl. Energy

More than 1/3 of trade deficit of Turkey comes from Russia

-80000

-70000

-60000

-50000

-40000

-30000

-20000

-10000

0

2000 2001 2002 2003 2004 2005 2006 2007 2008

Trade Deficit (mil. USD) Trade Deficit (mil. USD) with Russia

Source:TURKSTAT

Turkish economy has a comparative advantage over the Russian market

Per capita GDP and Population Projections for Russia

13000

15000

17000

19000

21000

23000

25000

2006 2007 2008 2009 2010 2011 2012 2013

137

138

139

140

141

142

143

144

Gross domestic product based on purchasing-power-parity (PPP) per capita GDP, USD Population

Source:IMF

• Geographical proximity• Transportation costs• Adaptation capabilities of the Turkish firms (Laleli story)

Anyway Turkish industry should improve its competitiveness.

BUT

Russian market is comparatively less costly in terms of social costs

Russia can contribute seriously to the industrialization of Turkey.

SO

Russia can help Turkey to become a regional power.

PART II

Russia - Turkey“The Great Game”

• Free Trade Agreement

• Fair sharing of regional energy outcomes

Welfare enhancing for both societies, Making them more prosperous

1. A Cooperative Game

The cooperative game implies:

• Cooperation with the West

Joshka Fisher: “Russia must be invited to join NATO”

• Democratization of Russia

Turkey can continue its way to EU

• Russia spends considerable political, diplomatical, militaristic and economical efforts to control energy resources and their marketing (transportation) in the old Soviet area

• Russia’s ruling elite oppose to democracy

2. A Non-cooperative Game

Major fault lines are:

• The Caucasus

• Ukraine

• Central Asia

3. Conflict with the West

(USA & EU and so with Turkey)

Turkey breaks with the West

4. Russia can be tempted to choose a

cooperative game with Turkey

IF

Russia seems to follow a “stick and carrot” policy towards Turkey

Stick• Barriers and administrative difficulties to trade• No gas for Nabucco

Carrot• Solution to trade difficulties• Possible free trade agreement (trade with Rouble)• Cooperation in military and space-technology related

issues

Gül’s recent visit was symptomatic.

Instead of a conclusion let me raise a critical question?

Would Turkey break with the West?

– Is it possible?– Is it desirable?