How Ukraine crisis undermines Turkey's economic program

The viability of the Turkish government’s “new economic model” — a controversial policy to battle inflation without the central bank hiking rates — was already in doubt before Russia’s incursion into Ukraine. But it has clearly hit a deadlock now that the fallout of the war is undermining Ankara’s plans to bridge its current account deficit by promoting export-focused growth and steady its battered currency by safeguarding lira deposits.

With its annual consumer inflation already over 54%, Turkey stands to take some of the heaviest blows from the conflict as both Russia and Ukraine are among its major economic partners, with crucial links in tourism, agricultural trade, energy and even the defense industry. 

The impact is already tangible on various fronts. Chief among them is Turkey’s tourism industry, a vital source of hard-currency revenues, which was hoping to bounce back to pre-pandemic levels this year. Bookings from Russia and Ukraine have ground to a halt, and those from European countries have markedly dropped.

Russians were the largest group of foreign visitors to Turkey in 2021, numbering some 4.7 million or 19% of all tourists. Ukrainians ranked third after Germans, numbering about 2 million or 8%. Turkey was hoping for $35 billion in tourism revenues this year, up from $24.5 billion in 2021 and on par with its revenues in 2019 before the COVID-19 pandemic hit.

Some representatives of the tourism industry cling to the hope that the Ukraine crisis might be resolved soon and some of the canceled early bookings might be renewed before the high season starts. Though Turkey is not part of the avalanche of Western sanctions targeting Russia, the disruptions in international air traffic and payment systems loom large for tour operators.

A tourism investment consultant in Antalya, Turkey’s main tourist hub on the Mediterranean coast, speaking on the condition of anonymity said the sector’s planning for this year, based on the target of $35 billion in revenues, “had gone upside down” with the war. “The number of Ukrainian tourists was reaching nearly 2 million in Antalya alone. Antalya and the Aegean region will be hit hard,” he told Al-Monitor. “Nevertheless, we should not panic, and keep calm until May.”

The executive of a tourism association speaking on the condition of anonymity said, “The tourism sector is waiting in apprehension. It was expecting to outstrip its 2019 performance and break a new record in 2022. Provided that the Russia-Ukraine crisis is settled soon, we stand a chance to weather it without big damage.”

The problem of money transfers could be resolved by rerouting payments to Russian banks that are not subject to the SWIFT ban, according to experts. And energy payments are expected to proceed smoothly, given Gazprombank’s exclusion from the sanctions.

Haluk Burumcekci, a prominent economist, warned of “significant losses” should the war drag on. “Russians and Ukrainians account for some 30% of tourists in terms of numbers, but their share in the tourism revenues is 15%. There could be risks, yet the current account balance is the real issue here,” he told Al-Monitor.

Indeed, Ankara’s ambitious goal of a current account surplus, which officials have described as key to price stability, appears increasingly beyond reach amid the rise in global energy prices, stoked by the Ukraine crisis. Turkey’s economy is heavily reliant on imported energy and inputs, the cost of which had already soared due to the lira’s severe depreciation last year. 

The country’s foreign trade deficit — the most important leg of the balance of payments — increased 186.3% year-on-year to some $18.4 billion in the first two months of the year, owing mainly to the surging energy cost.

Russia is Turkey’s main energy supplier, meeting more than 33% of the country’s natural gas needs. In February, imports from Russia topped Turkey’s importation bills by countries.

Energy imports cost $8 billion in February out of total imports of $28.1 billion, and the foreign trade deficit stood at $8.1 billion, a 142% increase from the same period last year.

Oil prices surged by more than 20% to over $115 a barrel last week, a level unseen for many years. And every $10 rise in the price of oil adds $5 billion to Turkey’s current account deficit, economists calculate.

“The bill of our monthly energy imports has jumped abruptly to some $8 billion and is likely to climb to $10 billion in March,” Burumcekci said, recalling that monthly bills stood at $2 to 3 billion last year. “This is a harbinger of how big the current account deficit will be. Year-end current account deficit forecasts have already been raised to over $30 billion,” he added.

JP Morgan has recently doubled its current account deficit forecast for Turkey for 2022 to 2.2% of gross domestic product (GDP), while Goldman Sachs has revised its forecast to 2.5% from 1.5% of GDP.

Disruptions in supply chains and Russia’s overseas payments as well as adversities affecting Turkish exports stand out as further economic challenges for Turkey. The war has stalled goods transportation to Ukraine and disabled land routes to Russia via Ukraine. Scrambling for alternative routes, Turkish trucks reportedly formed queues of up to 20 kilometers (12 miles) at the Georgian-Russian border last week, with freight prices jumping by about 50%. 

Taking blows from the war are also textile and leather hubs in Istanbul, which rely heavily on Russian and Ukrainian buyers. According to business representatives in the district of Laleli, the heart of the garment industry and the suitcase trade, orders of more than $200 million have been canceled in a matter of days. Russian and Ukrainian markets account for 40% of Laleli’s $3 billion annual sales. A protracted war threatens billions of dollars of losses for manufacturers in the sector.

With Russia and Ukraine both major wheat exporters, the war has sent global wheat prices to record levels, threatening to aggravate food inflation globally. 

A scare of shortage of sunflower oil has already startled Turkey. The country is the world’s largest importer of sunflower seed, and Russia and Ukraine supply 70% of its sunflower oil imports. At least 15 ships carrying crude sunflower oil to Turkey are reportedly stranded in the Sea of Azov, denied exit by the Russians. In a letter to government authorities earlier this month, the head of Turkey’s Vegetable Oil Industrialists Association called for action to secure the passage of the ships, warning that existing stocks would meet the country’s needs by mid-April at best and that crude sunflower oil prices had jumped to over $2,000 per ton from $1,400 before the war. 

Food prices were already skyrocketing in Turkey and have spiked further since the invasion, as have fuel prices, boding further price hikes across the board. Even before the war, Turkey’s annual consumer inflation soared to 54.4% and producer inflation hit 105%, with energy and food prices leading the uptick. Every $10 rise in the price of oil pushes Turkey’s consumer inflation up by 1.5 percentage points, economists calculate.