As Turkey struggles with inflation and the earthquake aftermath, Russia emerges as a vital trading partner. Sanctions and other trade restrictions are very difficult to enforce alone, even for a country as large as the U.S. A certain amount of badgering of friends and allies—along with veiled threats and inducements—comes with the territory. By Nathaniel Taplin in Wall Street Journal on March 1, 2023.
But the case of Turkey is particularly confounding. Turkey is a NATO ally, has supplied Ukraine with drones that made a crucial difference early in the war and helped broker the pact with Russia that keeps Ukrainian grain flowing to the world. But it has also emerged as a key transit point for semiconductors and other potentially dual-use electrical equipment into Russia, a destination for Russian tourists and for Russian airlines flying U. S-made airplanes to transit. Turkey is also a key buyer of Russian energy—all while holding up Sweden and Finland’s accession to the military alliance.
It is also a country in deep economic crisis, recovering from a devastating earthquake. Its trade with Russia has become an important economic lifeline.
All of this makes any serious effort to pressure the country into taking a stronger stance against Russia highly fraught. That probably means many high-tech goods and other key equipment will continue to flow through it into Russia. A new administration after May’s election might change that calculus, but probably only if the West and its allies are willing to step in with massive financial assistance to offset the advantages of the country’s special relationship with Russia.
The cornerstone of that relationship, unsurprisingly, is energy. In large part due to the Erdogan administration’s insistence on a highly unconventional monetary policy, Turkish inflation was already sitting at 36% in December 2021. The run-up in oil prices and trade disruptions at the beginning of the war then supercharged it: The Turkish lira dropped sharply again, and inflation spiked as high as 85%.
As bad as that already is, the situation would probably have been significantly worse without the subsidy from Russian oil imported at a hefty discount to the global benchmark of Brent crude: around $20 a barrel for much of 2022. In 2021, 28% of Turkey’s import bill for mineral fuels and oils, a trade category which includes crude oil, came from Russia, according to United Nations data. In 2022, 43% did—and nearly 60% of the net increase in spending went to Russia. Meanwhile transport, electricity and fuel directly account for close to a quarter of Turkey’s consumer-price basket.
The impact of rising exports to Russia was less dramatic, but still important in the context of a trade deficit that blew out from around $4 billion a month in mid-2021 to roughly twice that by the last quarter of 2022, and a run on the currency that forced Ankara to guarantee many lira-denominated deposits against currency depreciation. Turkey’s overall exports managed to rise 13% last year despite the inflationary blowout, according to figures from data provider CEIC, but exports ex-Russia only rose 11%. Exports to Russia itself rose 62%.
With oil prices down in early 2023, Turkish inflation is down marginally too: It was 55% in February. But the country now faces rapidly slowing growth—3.5% year on year in the fourth quarter, down from 9.6% a year earlier—and the costly aftermath of a major earthquake.
To be sure, the Erdogan administration’s highly unconventional monetary policy—cutting rates in the midst of rising inflation—and other missteps bear much responsibility for Turkey’s economic troubles. But the nation’s emergence as a vital trading partner for an increasingly isolated Russia also highlights one of the harsh realities of broad-based sanctions: Tough enforcement always entails significant political and economic costs, and sometimes in places already suffering substantial natural or man-made misfortune.
By Nathaniel Taplin in Wall Street Journal on March 1, 2023.