Russian bonanza or ‘Russian roulette’ for Turkey?

With Turkey’s agricultural output already hit by drought, a deal to increase agricultural exports to Russia threatens to fuel the country’s unruly inflation.

al-monitor A Turkish flag decorates a grocer's stand on a street in Istanbul, Nov. 10, 2007. Photo by REUTERS/Fatih Saribas.

Topics covered

vladimir putin, turkey, trade, sanctions, russia, embargoes, business

Aug 25, 2014

“There will be major and very quick developments in trade with Russia, but I won't be able to give any details at this moment,” Turkish Economy Minister Nihat Zeybekci told Al-Monitor in a late July interview.

Less than a month after this cryptic statement, Russian President Vladimir Putin announced a ban on imports of meat, fish, milk, other dairy products, and fruit and vegetables from the United States, the European Union and Australia in retaliation for sanctions imposed on Russia over the Ukraine crisis. Russia then quickly began talks with Turkey as an alternative supplier of the said goods.

Did Zeybekci have any prior knowledge of the Russian move? Was it the reason why he spoke of an imminent and major increase in trade with Russia?

According to information obtained by Al-Monitor, Turkey had no prior knowledge of the ban, but Russia did raise the possibility of boosting bilateral trade, conveying especially its interest in buying more food and agricultural products. Preparations were even launched for a comprehensive cooperation framework, involving Turkey’s indirect integration into the customs union between Russia, Kazakhstan and Belarus.

12 billion euros

In 2013, Russia’s imports of food and agricultural products from the European Union alone were worth 12 billion euros ($15.8 billion). From the United States, meanwhile, Russia imported $310 million worth of poultry, $172 million worth of dried fruit, $157 million worth of soy and $149 million worth of meat. Following the embargo, Russia will now buy those products largely from Turkey. Earlier this month, a delegation led by the head of Russia’s Federal Service for Veterinary and Phytosanitary Control (Rosselkhoznadzor), Sergei Dankvert, held talks with Turkish counterparts in Ankara and struck a deal to increase imports. Last year, Turkey exported $876 million worth of fresh fruit and vegetables to Russia. This year’s figure will now reportedly go well beyond the year-end estimate of $1 billion, with an additional boom expected in fish and poultry exports.

Inflation risk

The planned increase in exports to Russia, however, threatens to upset the supply-and-demand balance on Turkey’s domestic market and lead to considerable price hikes for Turkish consumers.

The head of the Turkish Agriculturalists Association, Ibrahim Yetkin, issued the following warning: “Turkey will now become the supplier of the products that the EU used to sell to Russia. It will have virtually no competition on this market, which is an incredible opportunity. Yet, I have a concern: Turkey has no planning with regard to output and marketing. If exports increase without simultaneous measures to prop up the domestic market, this could lead to an abnormal increase in prices. Inflation, too, could shoot up. A balance should be struck between exports and domestic prices. One way to do this could be the introduction of certain quotas on export products.”

Agricultural product prices have already shot up in Turkey this year because of drought. Yetkin said fruit and vegetables prices had risen close to 50% in the first seven months of the year, with prices of cherries, hazelnuts, peaches and lemons up about 300%. The impact of increased exports to Russia is expected to drive prices to new highs by the year-end.

Faced with a similar threat of inflation, The Russian government is reportedly drawing up measures to avert excessive price hikes on food and agricultural products under the pressure of the embargo.

And what about Turkey? Is it considering any measures? Food, Agriculture and Husbandry Minister Mehdi Eker said last week that Russia was demanding especially animal products, milk and dairy products, white meat and fish. He offered the following explanation on how Ankara would restrain inflation while meeting the Russian demand: “We are paying attention to two things. First, we are trying to avoid any planning mistake that could lead to increased idle capacity and leave us in suspense. Second, we will not allow speculators to take advantage of the situation and hurt consumers by causing price hikes.”

Market players, however, are of a different opinion. The head of the Istanbul Retailers Association, Mustafa Altunbilek, insisted, “Exports to Russia will result in price hikes especially on white meat and fruit and vegetables.” Milk exporters, for their part, expect a price hike of about 2-3% in early October.

Professor Tayfun Ozkaya, a scholar of agricultural economy at Ege University’s Agriculture Faculty, noted that crops were already bound to shrink this year because of drought and natural disasters, and the added impact of exports to Russia would push domestic prices up.

How will United States, EU react?

Despite the misgivings, the head of parliament’s agriculture commission, Ibrahim Yigit, who met with the visiting Russian delegation, insisted the deal would be “very profitable” for Turkey. “We have to take advantage of this opportunity,” he said. The lawmaker, a member of the ruling Justice and Development Party (AKP), said he did not expect the United States and the European Union to raise objections to the deal, but even if they did “Turkey wouldn’t care.” Technical work is already under way in the wake of the deal, he added. “Our total exports amounted to 3.346 million tons, now they will reach 5 or 6 million tons. We used to supply 1.1 million tons of fresh fruit and vegetables to Russia, now the amount will reach 3 [million to] 4 million. The list of Turkey’s producer companies has already been submitted to the technical teams,” he added.

"Made in Turkey"

According to media reports, some European producers have begun to tag their products as “Made in Turkey” in an attempt to break the Russian embargo. Others want to sell their products to Russia via Turkey, but Turkish exporters, wary of attracting Russia’s wrath, are cool to the idea.

Making up for Iraq downturn

Russia, the largest buyer of Turkish agricultural products, used to be followed by Iraq. But with the Islamic State (IS) blocking trade routes, Turkey’s exports to its southern neighbor are on the decline. Current and future demands by Russia, Kazakhstan and Belarus present an opportunity to make up for the shrinkage.

For a country with a chronic current account deficit problem like Turkey, boosting exports is of huge importance. Yet, Turkey needs to not only boost exports but to also lower inflation. According to a Central Bank survey of expectations in August, year-end consumer inflation is expected to reach 8.7%. The latest developments on the export front were not factored into this projection. With output already down because of drought, any inflationary impact caused by increased exports of food and agricultural products will become clear in about four and a half months.

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