Potential Impact of Russian Embargo on Turkey

Russian embargo expected to impact on both Turkey and Russia

Geopolitical tensions between Russia and Turkey have risen this week after a Russian warplane was shot down by a Turkish fighter jet on Tuesday 24th of November. Russian Prime Minister Medvedev appeared on Thursday 26th of November to toughen his position against Turkey with the government to prepare measures which could include restrictions on food imports. Turkey being Russia’s second trading partner after Germany, Euromonitor International estimates that a cut in economic ties could be as detrimental for both countries on the short-to-medium term.

Trade relations between Turkey and Russia have always been strong and restrictions between the two countries would impact first on the food industry.  Russia’s Agriculture Minister explicitly requested Russian’s Food Agency to reinforcing control over supplies of agricultural produce and food from Turkey, after cases of Turkish produce not ‘meeting Russian standards’. The Russian consumer protection agency said it had removed Turkish products, including meat and fruit, from shop shelves following health safety checks. Re-directing wheat exports from Russia to Turkey to other countries in the Middle East is among the sanctions options. Turkey is today one the largest buyers of Russian wheat, impact on the country can therefore be immediate. In 2014, exports to Russia reached almost US$6 bn while imports from Russia were worth US$25 bn. Further area where Turkey could opt for getting products from another source is vegetables. Turkish vegetables until today accounted for about 20% of vegetable imports to Russia, Turkey could therefore suffer from the situation.

In addition to being major trading partners, Russia is also a main energy provider for Turkey and Turkey has always been a widely popular tourist destination for Russian holidaymakers. According to Turkey’s Government economic goals announced in September 2015, bilateral trade volume was expected to increase to US$100 bn by 2023. If trade and food sanction could happen, we do not foresee however a strong deterioration of the economic relationship between the two countries on the long term, in particular when it comes to energy ties.

European markets still impacted by renewed Russian Embargo

There is no doubt that the European commodity market was and is still until now deeply affected by the Russian ban of import of certain foods and drinks coming from the EU. Actions such as the renewed aid deal by the EU Commission for Agriculture and Rural Development – helping support the EU with farmers most impacted by the ban – played a key role in mitigating the effect of the restrictions. The renewed support to the European fruit, vegetable and dairy sector was announced in In June 2015. Financial aid to dairy producers is in place until February 2016.

Europe’s fruit and vegetable sector has been and is still strongly hit by the Russian embargo. Previously, 12% of exports not less than 10% of European dairy exports were going to Russia. After the USA, Russia was the second most important market for EU agri-food exports, with a value of  €11.8 bn in 2013. The agri-food products covered by the Russian ban represent €5 bn in 2013 exports, which is 43% of EU agri-food exports to Russia. As a result, Turkey’s importance as a trading partner grew last year. While Imports from Turkey dropped 38.5% year-on-year in January through September imports from the EU dropped by 43%.

In terms of export revenue, Germany is the major European economy likely to be the most affected in the forecast period with a possible loss of 1.6% over the next few years. Italy, Spain, France and the UK are likely to lose less than 1%. Smaller countries such Estonia are expected to be the most impacted. The country is projected to register about 16% decrease in revenue from exports.

Turkey likely to focus on new export market 

It is likely that the Turkish Government will somehow subsidies its producers, however the main emphasis will be put on finding new commodities markets, at least on the short term. Further development of economic ties with key markets such as Germany, UK, Italy and France – representing respectively 9.6%, 6.3%, 4.5% and 4.1% of total Turkey’s exports – will be pursued in order to compensate the loss expected from the Russian ban. Russia also seems ready to concentrate further on markets which already become traditional suppliers of food to the Russian market, in particular in terms of fruits and vegetables. Those are, among others, Azerbaijan, Uzbekistan, Iran, Morocco, South Africa and Argentina. However the economic cut between the two countries is not expected to be deep or long enough to completely tarnish their relationship, especially considering the strong energy tie.