BGA Global Brief: Turkey

Political Risks for Business & Investors – Q1 2017 

BGA’s Global Briefs are produced regularly to provide high-level overviews on international business and finance related policy issues relevant to investors. 

1.     Domestic situation in Turkey
1.1 Introduction of the presidential system 

On April 16, 2017, 51.4% of the Turkish electorate voted for the constitutional change proposed by the AKP. The result paves the way for Turkey’s transition from a parliamentary to a presidential system.  The reform will shift executive powers significantly in favor of the president. The state of emergency, which was established after the July 15 coup attempt, was extended for another three months following the referendum.  
 
The referendum result shows the deep division of Turkish society. One the one hand, Erdoğan continues to enjoy strong support among his voters. In addition, people’s longing for stability and security appears to have been a driving factor amongst “Yes” voters. The AKP campaign used this by suggesting that a return to stability and security could only be achieved through a strong leadership by establishing a presidential system. They had successfully used a similar strategy in the November 2015 parliamentary elections, when the AKP regained its absolute majority. On the other hand, almost half of the electorate voted against the reform – much more than the government anticipated. This is even more significant in light of the fact that the referendum took place under the state of emergency, a vigorous “Yes” campaign and a significantly impeded “No” campaign, the closure and seizure of many media outlets and the arrests of critical journalists, intellectuals and opposition politicians.
 
AKP leaders claim that a one-leader executive system will now streamline many of the reforms the AKP has pushed for over the years, but have been stymied by bureaucracy and political opposition. However, as political uncertainty seems to vanish, polarization and societal conflicts continue to intensify. 
 
1.2   Constitutional changes in the referendum  
The Turkish government has propagated that the constitutional reform was necessary to stabilize the country and strengthen its political system. In practice, however, the new system erodes the system of checks and balances and significantly weakens the parliament. The referendum vote brings the following changes to the Turkish constitution:
 
The prime minister’s office and the cabinet will be abolished 

  • The president will become the head of the executive branch and will be allowed to issue decrees (except in cases affecting civil and political rights, rights to freedom and those cases that are explicitly regulated by law)
  • The president will be allowed to retain ties to a political party
  • The presidential and parliamentary polls will take place simultaneously, every five years
  • The parliament will lose its right to interpellation
  • The president will have criminal liability 
  • The president will have significant influence on the composition of the high council of judges and prosecutors

 
While the president gains significant executive powers, the legislative and judiciary are weakened. Even though legislative powers remain in the hands of the parliament, it is severely limited by the president’s legal ability to issue decrees that do not need parliamentary approval. In addition, as the president is allowed to hold the position of party leader at the same time, he has crucial influence on the party’s electoral ticket and hence on the composition of parliament. Simultaneously, the parliament loses a crucial instrument to check the executive and hold it accountable as it loses its right to interpellation. As the president will gain the right to nominate 6 out of 13 members of the high council of judges and prosecutors. The council is responsible for the disciplinary control of the courts and personnel decisions. The president’s strengthened influence over its composition threatens its sovereignty and the impartiality of the judiciary.
 
 BGA Analysis 

  • While Erdoğan’s constitutional victory strengthens his authoritarian grip over the country and erodes its democratic structures, it clears the political uncertainty that had been lingering over the country. As a result, initial reactions by investors and financial markets have been rather positive. As political uncertainties vanish, it is expected that urgently needed economic reforms will move back to the top of the government’s agenda. However, stability is very fragile as polarization and social conflicts continue – if not intensify.  This is also fueled by disputes over potential election fraud and illegitimate vote counts during the referendum. While the constitutional changes will not take effect until 2019, unless early elections are scheduled, the renewed 90-day state of emergency will continue the decrees that have been issued since the failed coup last July. Threats against civil liberties are likely to remain as more than 100,000 people have been detained and suspended from their jobs to continue to climb. 

 
1.3   Conflict with the PKK 
Some observers have expressed hope of a potential resumption of the peace process in the aftermath of the referendum. The argument is that one key driver for the AKP government to abandon the peace process in 2015 was to gain support from nationalist MHP voters in the November 2015 elections. While cooperation with the MHP was essential to pass the resolutions in parliament that paved the way for the referendum, MHP voter support for the constitutional reform was limited. Now that the referendum has passed, AKP commitment to the alliance may weaken and its stance on the Turkish-Kurdish issue softened. However, it is also possible that instead of regaining Kurdish support, Erdoğan will try to win back MHP voters, which would impede a potential return to peace talks. The government’s position will also much depend on developments in Northern Syria and Iraq. In the short-term, anti-terror campaigns by the Turkish government and military will continue against the PKK. These anti-PKK operations are taking place domestically throughout Turkey in both rural and urban areas. These operations are viewed as part of a larger anti-terror campaign that includes suspected members of the Gülenist movement, Daesh (ISIS), and the Syrian People’s Protection Units (YPG).  

  BGA Analysis 

  • Turkey’s heightened anti-PKK campaign has greatly reduced the chances of a return to peace talks. Nonetheless, some observers have expressed hope that a resumption of the peace process may be possible in the aftermath of the referendum as the AKP MHP alliance may be weakened. Much will depend on the AKP’s strategic alliances and developments in Northern Syria and Iraq. At least in the short-term, confrontations between the PKK and Turkish security forces are very likely to continue. 

 
2.     Economic outlook and business climate 
President Erdoğan’s crackdowns are continuing to have a negative effect on Turkey’s economic outlook and business climate in Q1. In addition to the suspension and detainment of journalist, academics, and civil servants deemed to be a threat to the ruling AKP party, the government has issued more than 380 arrest warrants and seized more than USD 50 billion in assets from businessmen accused of having financial ties with exiled cleric Fethullah Gülen and suspected involvement in the July coup attempt. Also among Erdoğan’s numerous decrees is a ban on bankruptcies. 
 
Because of the continued government purges, unemployment has increased slightly since Q4 2016 and Turkey’s long-term sovereign credit rating continues remains negative or downgraded from major rating agencies.  The Turkish Central Bank has resorted to taking unorthodox measures, including an attempt to prevent the lira’s slide and contain inflation by increasing the overnight lending rate, but to little avail in early Q1 results. Consumer confidence and tourism are continuing their 2016 slides, including a near 10% decrease in visitors from this same time last year.
 
2.1   Unemployment 
According to the results of the household labor force survey for January 2017 (moving average of December 2016, January 2017, and February results), the unemployment rate rose to 13.1%, up from the 12.7% of its last results from the December 2016 survey. The crackdowns taking place during the existing state of emergency and continued suspensions of employees in the public, private and academic sectors continue to play a role in the uptick.
2.2   GDP 
Turkey’s GDP increased by 3.5% in the fourth quarter of 2016 and 2.9% in 2016 compared to the previous year. Among the activities that constituted the increase include the agricultural sector, which increased by 1.3% in the fourth quarter of 2016 compared with the same quarter in 2015, the industry sector which increased by 5.0%, the construction sector increase of 3.7%, and the services sector increase by 1.8% year to date.
 
2.3   Credit Rating 
On January 27th, S&P upheld Turkey’s BB long-term foreign sovereign credit rating and its “negative” outlook from its last rating on November 4. There is also concern over the growing lack of independence Turkish institutions have from the ruling party.  On the same day, S&P revealed its rating and outlook; Fitch downgraded Turkey to BB+ rating down from its BBB- from August 19th, but upgraded the outlook from “negative” to “stable”.  A negative rating of Turkish credit was expected to continue into Q1 2017 as political and security risks continue to undermine the country’s economic performance and the inability of policymakers to implement measures to halt inflation and the fall of the lira. On March 17th, Moody’s downgraded Turkey’s outlook from “stable” to “negative” and kept its Ba1 rating from the rating agency’s last assessment in September 2016 citing the political climate following the failed coup attempt is negatively affecting private sector confidence. With political uncertainty vanishing in the aftermath of the referendum, Turkey’s outlook may improve over the course of the year.  
 
2.4   Currency & Monetary Policy 

The lira lost 16% over the course of 2016, the second worse emerging market currency (Argentine peso was first). In Q1, the currency has fluctuated from its record-low drop against the US dollar of 3.7790 in January to its brief February gains only to fall back down following the extension of the state of emergency. In the immediate aftermath of the referendum results the lira jumped 2% against the dollar, as news of a “yes” vote spread. However, the gains were short lived and confidence in Turkish assets remains modest as referendum results are being contested by opposition parties CHP and HDP and the state of emergency in place.
 
On January 24, the Turkish Central Bank kept its one-week repo rate at 8%, but raised its overnight lending rate to 9.25% from 8.5%, and held its borrowing rate at 7.25%. The central bank is trying unorthodox measures to tamp down rising inflation, which in March hit 10% for the first time in nearly five years. This is well above the 5% inflation target, which has not been reached, in 6 straight years.  The spike in inflation is putting more pressure on policy makers to raise interest rates again. The central bank’s decision to keep interest rates unchanged is disappointing for investors, who hoped for a rate rise to support the lira. Keeping the interest rate unchanged brings into question the central bank’s independence of the ruling party, despite the insistence of government officials.
 
2.5   Consumer Confidence   
Turkey’s consumer confidence slid from 66.9 to 65.7 in February 2017, which is still well below the 100-point threshold, which differentiates between optimism and pessimism. This drop correlates with general views of the deteriorating economy as well as where households assess where they will be financially in the next year.  
 
2.6   Tourism 
An attack on a famous nightclub in Istanbul on New Year’s Eve, and heightened general security fears are continuing to take a toll on the tourism industry in Turkey. The Ministry of Culture and Tourism announced the number of visitors arriving and departing in January 2017. The number of foreign visitors in Turkey in February 2017 saw a one-month increase of .9% to 1,159,833, up from 1,055,474 in January 2017, but an overall decrease of 6.51% compared to February 2016.
  
BGA Analysis 

  • Despi
    te the referendum vote, ongoing security risks including domestic terrorist attacks and offensive campaigns against perceived enemies of the government are leading to greater uncertainty in Turkey’s global economic outlook. These will have continued negative effects on the economy in the short and medium term, but expect GDP growth to pick up modestly early in Q2 in the first month after the referendum vote. One area to also keep an eye in Q2 2017 is monetary policy. The next interest rate decision by the Turkish Central Bank is scheduled after the referendum vote on April 26. The central bank’s independence is highly questionable as it has to balance Erdoğan’s push to keep interest rates unchanged with investor calls for raising rates to tamp down rising inflation. Consumer confidence remains to be well below desired thresholds and tourism remains down after terrorist attacks in Q4 2016 and Q1 2017, including the New Year’s nightclub attack and the assassination of the Russian ambassador to Ankara. As political uncertainties vanish, long-needed economic reforms may be pushed back to the top of the government’s agenda in an effort to return Turkey to the high-growth era it experienced just a few short years ago, especially in expectation of elections in 2019. 

 
3.     Turkey-EU relations 
The first months of 2017 has seen Turkey gravitate closer to Russia and to some extent China and further away from the EU as was expected in Q4 2016. The mutual feeling of disappointment from both sides is still prevalent. In the run-up to the Turkish referendum as well as elections in the Netherlands, France and Germany, rhetoric between Turkey and EU countries has become increasingly hostile and confrontational.
 
Concurring areas of contention between Turkey and the EU include: the death penalty, the full implementation and ensuring of the EU-Turkey agreement, European countries’ refusal to comply with Turkish extradition requests of (supposedly) Gülen and PKK supporters, and Cyprus.
 
In attempt to smooth relations with Dutch investors after Turkish Deputy Prime Minister Numan Kurtulumus raised the possibility of imposing economic sanctions on the Netherlands, Turkey’s Minister for the EU Omer Celik attempted to reassure them that their investments are secure.
  
3.1   Refugee deal  
Although the refugee deal is controversial in Turkey and in the EU, revoking it would be a logistical and political disaster for European countries. France and Germany are holding elections this year with right-wing populist groups holding a stake in each. Following Germany’s initial openness to take in refugees, the tide has gradually turned. Especially in the wake of attacks in Düsseldorf (Q1 2017) and Berlin (Q4 2016), anti-immigration agendas have gained popularity. A growing influx of refugees could hurt German Chancellor Angela Merkel and strengthen the agendas of the AfD as well as Marine Le Pen in France. 
 
At the same time, growing tensions between the EU and Turkey and Turkey’s questionable status as safe third country make a full implementation of the agreement very difficult. Visa liberalization for Turkish citizens cannot be implemented as long as Turkey refuses to adapt its anti-terrorism laws, the outlook of the accession talks looks even more grim in expectation of the implementation of the presidential system and Erdoğan’s prioritization of reintroducing the death penalty. At the same time, returns of refugees from Greece to Turkey have been very small in number as the processing of asylum requests is slow and Turkey’s status as a safe third country is questioned by Greek courts.
 
Nonetheless, it appears very unlikely that either side will revoke the agreement as both have a vested interest even in only a gradual implementation.
 
3.2   EU Membership 
Turkey’s ascension to full EU membership can be a long-term goal at best. The implementation of the presidential system reinforces Turkey’s moving away from EU norms and make EU accession nearly impossible. The potential reintroduction of the death penalty would most likely seal the end of current accession talks.
However, as Turkey and the EU will continue to share vital interests, irrespective of the outcome of EU accession talks, cooperation between the two will unquestionably continue. This may either take the form of a “special partnership” – a concept that has become increasingly popular amongst Turkish politicians since Brexit – or a simple transaction based relationship that focuses on areas of common interests.
 
3.3   Greece  
The Cyprus conflict has been one of the longest standing areas of contention between the Turkey and Greece/the EU. While peace talks seemed very promising early this year, tensions flared up again in March in light of the commemoration of the 1950 referendum in Cypriot classrooms which caused outrage among Turkish Cypriots and led Turkish Prime Minister Binali Yildirim to call on the Greek Cypriots to correct their “mistake.” The 1950 referendum saw 95% of Greek Cypriots vote in favor of a union with Greece, which many Turkish Cypriots blame as the cause of Cyprus’ post-independence problems. In consequence, Turkish Cypriot representatives walked away from the negotiation table, potentially threatening the most successful peace process so far. Greek Cypriot President Nicos Anastasiades claimed that the reaction was simply an attempt by his Turkish Cypriot counterparts to try to appease nationalist voters ahead of the April 16 referendum in Turkey.
 
Even though prospects of the peace process do not look as promising as they did earlier this year, a solution might still be possible. Should all parties be successfully brought back to the negotiation table, a solution to the decade long conflict would resolve crucial points of conflict and blockage that could bring a new dynamic to EU Turkey relations, regardless of how accession talks may develop. 
 
3.4   The China factor 

In mid-November, China was open to an application from NATO-member Turkey to join a Russian and Chinese-led security bloc the Shanghai Cooperation Organisation (SCO), formed in 2001 to include China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan to fight threats posed by radical Islam and drug trafficking from Afghanistan. Although Turkey’s membership is still pending in Q1 2017 (it holds “partnership status”), it will become the first non-member to chair the SCO’s Energy Club via unanimous vote. Leaders in China and Russia view Turkey’s involvement with the group as an alternative to the EU and will be the chair for the full 2017 calendar year. 
 

  • Relations between Turkey and the EU are likely to become more transactional in nature.  Despite an increasingly hostile rhetoric between the EU and Turkey, areas of mutual benefit, including security and defense, economic relations, and the fight against IS, will continue to shape relations significantly. The refugee deal, although fragile is necessary for both sides as Turkey is cash strapped and election-holding EU governments need to keep refugee inflows down to tamper political unrest. Even though EU accession can only be a long-term goal, if at all, s potential solution to the Cyprus conflict could bring a new dynamic to EU-Turkey relations, regardless of the development of accession talks.  

 
4.     Turkey-Germany relations 
After the arrest of Welt correspondent Deniz Yücel, which infuriated many German politicians, the already strained relations between the two countries reached a new low after German municipal authorities cancelled pre-referendum rallies with scheduled appearances by high-ranking members of the Turkish government. In Gaggenau, the authorities cancelled the events due to security reasons whilst Cologne officials argued that they had been misled about the purpose of the rallies. In response, Erdoğan accused the German government of “Nazi practices”, which outraged many German politicians and forced chancellor Angela Merkel to reply in an unusually harsh tone.
 
While the German government’s initial reaction to the referendum outcome has been very cautious, voting behavior of Turkish voters living in Germany has sparked debates on the integration of Turkish immigrants as well as dual citizenships. The discussions feed into Erdoğan’s “us versus the world” narrative and risk alienating the Turkish community in Germany.
 
Further adding to the diplomatic tensions is the fact that about 100 German citizens were refused entry to Turkey since the beginning of 2017 and an investigation into Turkish spying on around 300 individuals living in Germany suspected of cooperating with the Gülen movement. On the sidelines of the Munich Security Conference, the Turkish intelligence agency MIT handed over a list with more than 300 names to BND chief Bruno Kahl, supposedly in hope of getting assistance. However, the list was handed over to Germany’s domestic intelligence agency and a number of other agencies, including the federal criminal police office and the attorney general, to weigh legal action.  Currently, 20 suspected spies are under investigation. Although not being the first time that Turkish individuals are under investigation for spying on German soil (see the search of the Ditib facilities in February 2017), this increases the pressure on Merkel to react and appease the cross-party consensus that Erdoğan needs to be opposed more vehemently.  
 
In light of developments in Turkey, Germany has decided to ban defense contractor Rheinmetall from shipping some products to Turkey. After disclosing the export bans to Reuters, Rheinmetall Chief Executive Armin Papperger said Rheinmetall remained in talks with Turkey over a contract to supply a defense system for its Leopard battle tanks, after the country lost 10 such vehicles in its war against the Islamic State.
 

  • Overall, the escalating rhetoric serves as a repeated reminder of how acrimonious relations between Turkey and the EU have become. With elections looming, the pressure on the German chancellor to start taking decisive action against Turkey is increasing. While it is likely that Erdoğan’s rhetoric will become more reconciliatory over time, as good economic relations with the EU are crucial for the country, EU countries struggle to find their position vis-à-vis Erdoğan and Turkey. Despite current tensions, common interests, particularly in the areas of defense/security and economic relations, will remain a priority. Nonetheless, tensions, especially between Germany and Turkey, can have a short-term negative impact on businesses operating in the field.

 
5     Turkey-Russia relations 
Parallel to the worsening ties with the EU, Turkey is pushing for relations with Russia to normalize. Most prominently, the Russian Turkish Cooperation Council meetings were resumed on March 10. This is the first time that this high-level meeting of both country leaders took place since Turkey shot down a Russian warplane in November 2015. State-owned media in both countries were quick to declare the meeting a success, and Erdoğan announced, “we can dispense with the phrase ‘normalization of relations’”. Nonetheless, the list of issues where Moscow and Ankara’s interests align in the medium and long term remains limited. 
 
5.1   Energy Cooperation 

  1. Oil products

On the sidelines of the high-level negotiations in Moscow, the Russian Rosneft signed a number of documents with Turkey’s leading energy companies. Most notably, Rosneft and Demiroren Group signed a contract for the supply of a 4.6 mmt of petroleum products (3.6 mmt are ultra-low-sulfur diesel and 1.0 mmt is liquefied petroleum gas) for the 2018-20 timeframe. Should the agreement enter into force, Rosneft will be able to supply an additional 11.3% of diesel imports (amounting to an additional 6% of all diesel fuel consumed in Turkey). Also, Rosneft will provide more than half of Demiroren’s annual demand for petroleum products.   
 
In addition, the Russian company announced “Rosneft and BA Gas Enerji Sanayi ve Ticaret A.S. entered into a cooperation agreement with the scope of organizing supplies of up to 6 million tonnes of oil products per year (including Rosneft production) to end-users in Turkey,”
 
Last, Turkish President Erdoğan has invited Putin to attend the World Petroleum Congress, which will be held in Istanbul on July 9-13, 2017.
 
2.  Turkish Stream
At the Cooperation Council meeting, President Putin also restated the plan of Gazprom to start the construction of the first 15.75 bcm pipeline by mid-2017. In October 2016, both parties signed an intergovernmental agreement for the construction of two underwater legs of the Turkish Stream gas pipeline in the Black Sea. 
 
On December 8, 2016, South Stream Transport B.V. (wholly owned by Gazprom) inked a contract with Swiss Allseas Group on constructing the first line. In late February 2017, a similar agreement for the pipe laying of the second leg followed. Whilst the first leg, expected to be operable in late 2019, is envisioned to satisfy Turkish domestic demand, the second leg is geared towards transit to Europe and is thus dependent on EU cooperation. 
 
3.  Nuclear Power Plant in Akkuyu 
Following the meeting, Putin said on March 10th “Rosatom is beginning to work on building in Turkey the nuclear power plant Akkuyu with four power units. The Turkish ambassador said on March 13 that “ground will be broken in 2018 to build the first reactor unit and, hopefully, the nuclear power plant will be commissioned by 2023”. This is likely to be too optimistic and it can reasonably be expected that the plant will not be operable before 2025 due to the lengthy licensing process and the temporary freeze of the project after the diplomatic crisis in late 2015. 
 
After the agreement signed in 2010 stipulated that Russia’s Rosatom State Corporation will build, own and operate (B-O-O) a 4.8GW nuclear power plant in the Southern Mersin region. A total of 70% of the generated energy will be sold to the Turkish state wholesaler TETAS at a fixed baseload price of Turkish lira (TL) 451.91/MWh ($123.50/MWh) and a fixed peak price of $150.00/MWh. Most likely, this agreement will have to revised depending on the market conditions in Turkey upon completion of the project.  
 
After the design parameters for the site have been approved by the Turkish Atomic Energy Authority (TAEK) in late February 2017, the “negotiations with Turkish investors are in the most active phase. We are discussing exact participation configuration and corresponding mutual financial obligations”. Whilst Rosatom aims to retain a minimum of 51% in the plant, it plans to sell 49% to external investors. This process needs to be closely monitored in order to assess the future evolution of $25 billion project. 
 

  • The key factor in the Turkish energy and geopolitics equation is its dependency on Russian gas supplies (55.3% of 2015 gas imports), followed by the more expensive Iranian gas (16.2%). Iranian gas remains key to Turkey’s energy security and, surprisingly, ahead of gas imported from Azerbaijan (12.7%). Turkey’s energy and geopolitical priorities overlap in its drive to achieve three objectives almost simultaneously: To diversify sources of imports, diversify pipelines, and to become a gas hub in the process, linking sources in the east with customers in the west.  

 
5.2   Other Bilateral Trade
The lifting of sanctions remains top priority for the Turkish government. According to estimates, the ban of certain Turkish exports after the downing of the Russian jet in November 2015 has cost the Turkish economy around $550 million. As a sign of good will before the meeting, the Russian government lifted some bans on imports of carnations and some types of vegetables according to an order signed March 9. 
 
However, the import ban on tomatoes, one of Turkey’s strongest exports, remained in place. Furthermore, there are still legal limitations for Turks to work in Russia, even when the employing company is in Turkish hands. In response to a question from a Turkish journalist on this issue, Putin emphasized that the ban would be lifted in the near future, calling it a “a purely technical matter” after the Cooperation Council meeting.

1. Rostec deal for Russian S-400 Triumph air defense systems
 
After Turkish efforts to buy Chinese air defense systems had collapsed last year, the Turkish Ministry of Defense confirmed its interest in acquiring one of Russia’s most advanced missile system currently deployed in Syria to protect Russian bases at Khemeimim and Tartus: Roste’s S-400 systems. 
 
But since these missiles would possibly limit Assad’s and by extension Russia’s operations in Syria, the deal might have difficulty to take shape. Another reason why big arms deals with Moscow have not materialized yet, is that NATO membership restricts Ankara’s acquisition of weaponry from Russia.  
 
5.3 Foreign and Security Policy
1. 
Diverting interests in Syria
This is a thornier issue since Turkey’s and Russia’s interests diverge on both – Assad and the Syrian Kurds. While Moscow supports Assad and has extended a level of support to the Syrian Kurds, Turkey opposes a solution to the Syrian conflict that would include Assad in any way (even though this position has soften a bit over time) and rejects any potential Kurdish autonomy in Northern Syria. To Ankara’s displeasure Russia, alongside the US, considers giving democratic representation to or even full autonomy to the Kurds under a new Syrian constitution. Turkey’s decision to end its 8-month military operation in Syria is the culmination of its frustration with Russian intervention west of the Euphrates and land swaps between the YPG and the Assad regime, backed by Moscow.   

 BGA Analysis 

  • Turkey seeks to exercise influence based on its geopolitical position between an energy-consuming Europe and energy-producing regions to the south and east. Nonetheless, Turkey’s internal power struggles make it a volatile partner and despite some progress and overlapping interest outlined above, it would be far-fetched to speak of a stable, comprehensive partnership between Moscow and Ankara. Turkey’s declared foreign policy goal of becoming a major regional energy hub hinges on a delicate balance of interest with Russia, the Levant and the Caucasus since gas supplies via Turkey form Kazakhstan, Azerbaijan or Turkmenistan would require Russian approval. 

 

  • Turkey aims to diversify its gas supplies in terms of both – sources and pipelines, away from Russia (which also includes diversifying away from the Ukraine route). This is driven by the fragility of the relationship between Turkey and Russia despite appearances as well as Turkey’s goal of strengthening its international position and influence by becoming an energy hub. Although the Trans Anatolian Pipeline (TANAP) is expected to be completed by 2018 Azeri gas will not be sufficient to replace Russian supplies.

 
6.  Turkey’s regional relations  
One of Turkey’s primary goals remains the prevention of Kurdish autonomy in Northern Syria. Turkey’s newly minted, yet fragile alliance with Russia and Iran over a potential diplomatic solution in Syria is a sign that Turkey is asserting itself more prominently in the outcome of the civil war and taking a more aggressive stance militarily beyond its borders. However, a remaining area of friction between the three countries is the future of Syrian President Bahir Al-Assad. Russia and Iran remain steadfast that he stays in power in any cease-fire settlement agreed upon, while Turkey, Saudi Arabia, and Qatar are pressing for regime change. 
 
Despite Turkey’s decision to end Operation Euphrates Shield in Syria after 8 months, Turkey’s military remains a force in northern Syria, but limited beyond the region as their plans to move west of the Euphrates were halted by both Russian and US interests.     
 
In spite of its relatively new engagement with Iran, Turkey is still wary of growing Iranian influence in the region. In addition to Syria, Iran has mobilized militias and military grade equipment in Iraq, Lebanon, and in Yemen, where it is undertaking a proxy war with Saudi Arabia. To the Gulf Cooperation Council countries (GCC), Turkey is a feasible, but unpredictable counterweight to Iran. 
 
6.1   Qatar
In its expansion in relations with GCC countries, Turkey has grown closer with Qatar. Some of it stems from the warm personal relationship between Erdoğan and Qatari Emir Tamim bin Hamad Al Thani. The bilateral relationship is also based on mutually beneficial means of resources, technological and defense nature. 
 
When Turkey’s relationship with Russia was damaged in late 2015, Qatar supplied Turkey with liquefied natural gas in the interim. Qatar, for its part, is looking to enhancing its defense and security capabilities. Both nations have engaged in joint military exercises and training. Due to the hit to its economy, Turkey is also looking to Qatar for much needed financial support. 
 
They also share mutual regional security concerns, including Iran’s ballistic missile capacity and its nuclear program, despite its fragile E3+3 deal in place, as well as threats posed by Islamist networks in the region. On the economic front, Turkish businesses have generated nearly $15billion in revenue across the defense, retail, construction, and finance sectors.  
 
6.2   UAE (Abu Dhabi)
Turkey’s most contentious relationship in the GCC has been with the UAE. Areas of dispute have been related to their differing positions on the Muslim Brotherhood following the removal of Egyptian President Mohammad Morsi – a move that was strongly opposed by Turkey and supported by the UAE. The dispute led to the UAE recalling its ambassador to Turkey. 
 
Nonetheless, trade volume between the two reached $8 billion in 2015. Last year, ties were more formally re-normalized when Turkish Foreign Minister Mevlut Cavusoglu visited Abu Dhabi, becoming the first Turkish official to do so since 2013. By June 2016, the UAE appointed a new ambassador to Turkey and in October, UAE Foreign Minister Sheikh Abdullah bin Zayed visited Ankara. Delega
tions, larger than usual, attended the Turkey-UAE Joint Economic Committee meeting in February and several military equipment deals have been completed between the UAE and Turkish companies in March.   
 
At the Joint Economic Committee meeting, the two sides agreed to strengthen cooperation in 13 vital sectors, namely investment, finance and banking, trade, small and medium-sized enterprises, innovation, civil aviation, renewable energy, telecommunications and information technology, transportation, agriculture, livestock, food, health, education, and tourism. Turkey is the sixth largest importer from the UAE. Their total volume of bilateral non-oil trade exceeded USD 9.1 billion in 2016.

 BGA Analysis 

  • One key geopolitical problem standing in the way of Turkey’s ability to diversify gas imports is that it has driven itself into regional isolation. For example, its support for the Muslim Brotherhood regime in Egypt alienated it from the Gulf Cooperation Council states except for Qatar (who also supported the Brotherhood regime in Egypt). The latter being only able to export LNG for which there is limited capacity in Turkey.

 

  • Turkey will still likely look to regional partners as the main sources of diversification for gas imports, including the Kurdish Regional Government (KRG) in Iraq and Israel, which was a key driver of the two countries’ rapprochement after a period of severely damaged relations. This may become yet more likely as Israel seeks expert markets other than Egypt following ENI’s discovery of gas in Egypt.  

Author
Todd Williamson, Consultant 

Todd is a Senior Consultant at BGA. Immediately prior to joining BGA, Todd was a Robert Bosch Fellow at the Global Public Policy Institute (GPPi). At GPPi, he focused on global governance, emerging markets, and US & EU foreign policy. From 2011-2015 he was a member of the international government relations and federal government relations teams at JPMorgan Chase & Co. His government experience includes congressional relations in the Obama administration and as a financial services legislative assistant on Capitol Hill.

BGA Expert
Bashir Bernard Siman, OBE, Partner, London
Bashir Bernard Siman, O.B.E. is a Partner at BGA. He has spent his career as an investment and banking professional with
a focus on strategic risk analysis and geopolitical advice. Based in London and Tokyo, he advises investors and insurance operators from the Middle East, Japan and Europe on their global investment and business strategies, and leads on originating and structuring specific investments. Bashir has worked at Flemings, UBS and Nomura in several leadership positions.
 

 

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