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Turkey’s economic situation has deteriorated dramatically over the last couple of years, exacerbated by domestic political instability and worsening relations with key trade and investment partners. High levels of foreign debt and the plummeting value of the lira on currency markets threaten to implode the economy. The government is betting on gas and oil transit fees from major pipelines, as well as domestically produced gas, to restore economic prosperity, however this will take years to fully realize and projected revenues may not arrive in time.
The government’s credit-fuelled growth policies and President Recep Tayyip Erdogan’s preference for low interest rates have sent the lira to a new all-time low against the US dollar. Turkey has large external financing needs, and its private sector is heavily indebted in foreign currency, raising risks of financial instability and a possible economic collapse in 2020-21.
The economic crisis has been exacerbated by the political and military leadership’s expansionist and aggressive foreign policy and bitter disputes with major trade partners and traditional and more recent strategic allies alike (in particular the US and European Union, and Russia, respectively), which has isolated Turkey on the global stage, and makes international assistance to stabilize the dire economic situation much less likely (other than from Qatar, which although vastly rich in gas will not be able to solve Turkey’s burgeoning economic problems alone).
While Turkey is conveniently located to capitalize on the gigantic oil and gas infrastructure projects that will connect the resource-rich regions in Russia, the Caspian and the Persian Gulf (and possibly the eastern Mediterranean in the future) with European markets, these will take time to develop, as will the large gas deposits that were discovered in Turkey’s Black Sea economic zone in August.
Overview of Turkey’s Economy
Turkey’s economy is driven by its industry and, increasingly, service sectors, although the agriculture sector still accounts for about 25% of employment. The automotive, petrochemical, and electronics industries have risen in importance and have overtaken the traditional textiles and clothing sectors as Turkey’s main exports.
Although Turkey’s economy enjoyed a period of sustained growth during the first decade of Erdogan’s leadership, the period of political stability and economic dynamism has given way to uncertainty and security concerns due to both domestic and external developments, which are generating doubts on financial markets and casting a long shadow over Turkey’s economic outlook.
The government has relied on policies emphasize spending measures and low interest rates to stimulate the economy, however as debt reaches critical levels this cannot be continued indefinitely.
The government has taken a more active role in some strategic sectors, however it has also used economic institutions and regulatory agencies to target political opponents, undermining private sector confidence. Between July 2016 and March 2017, three credit ratings agencies downgraded Turkey’s sovereign credit ratings, citing concerns about legal certainty and economic stability.
After a severe financial crisis in 2001, Turkey adopted financial and fiscal reforms as part of an IMF program. In the subsequent period the country’s economic fundamentals improved and there was a period of strong growth, averaging more than 6% annually until 2008.
An extensive privatization program was also adopted, reducing the State’s role in basic industry, banking, transport, power generation, and communication. Although this produced a financial surplus in the short term, it also reduced the State’s ability to influence economic development strategies.
Since 2001 when Turkey commenced a wide ranging restructuring of its energy markets in accordance with IMF demands, the country has moved from a state-owned, vertically-integrated model in most related sectors to a fully privatized electricity distribution network, and mostly privatized electricity, oil and natural gas markets. It has also passed new renewable energy and energy efficiency legislation, established new regulatory agencies, and carried out price reforms.
In the subsequent period, Turkey has added about 31,000 MW market-based electricity generation capacity, including an additional 16,000 MW generation capacity based on renewable sources in the 2001-2014 period.
Although the Turkish oil market is now a ‘highly regulated liberal market’, the State-owned enterprise BOTAŞ still controls natural gas supply and trade. Even so, private natural gas trade and distribution companies play an active role in the market, and the private sector participates in gas exploration and production projects.
Overall, agriculture accounts for approximately 7% of GDP (and 18% of employment), industry and manufacturing accounts for 32% of GDP (27% of employment), and services account for 61% of GDP (55% of employment).
Major agricultural production includes tobacco, cotton, grain, olives, sugar beets, hazelnuts, pulses, citrus, and livestock. Major industrial and manufacturing products includes textiles, food processing, automobiles, electronics, mining (coal, chromate, copper, boron), steel, petroleum, construction, timber and paper.
Tourism is one of the most important of the services sectors, and has contributed between 11% and 12% of GDP over the last 10 years up until early this year. Tourism had however already been hit hard by Turkey’s geopolitical disputes with Europe, Russia and the US, as well as the deteriorating security situation following Turkey’s intervention in northern Syria and intensification of the ongoing military campaign against Kurdish armed insurgent groups, before the outbreak of the Coronavirus reduced the flow of tourists almost completely.
Most exports (as of 2017) were to Germany 9.6%, UK 6.1%, UAE 5.9%, Iraq 5.8%, US 5.5%, Italy 5.4%, France 4.2%, and Spain 4%. Major export products include apparel, foodstuffs, textiles, metal manufactures, and transport equipment.
Most imports as of 2017 were from China 10%, Germany 9.1%, Russia 8.4%, US 5.1%, Italy 4.8%. Major import products include machinery, chemicals, semi-finished goods, fuels, and transport equipment.
Turkey has been running a constant trade deficit for many years, averaging around $40-50 billion per year. The trade deficit blew out to over $6 billion in August 2020 up from around $2.3 billion in August 2019 due to both a fall in exports and an increase in imports.
The overall trend of Turkish GDP since 2016 has revealed persistent underlying imbalances in the Turkish economy. Growth has stalled, and Turkey’s large current account deficit means it must rely on external investment inflows to finance economic activity, leaving the economy vulnerable to an adverse shift in investor confidence.
The last few years have also seen rising unemployment and inflation, compounded by the Turkish lira’s continuing depreciation against the dollar. Approximately 20% of the population lives below the poverty line. Although government debt remains relatively low at about 30% of GDP, bank and corporate borrowing has almost tripled as a proportion of GDP during the past decade, prompting investor concerns about its long-term sustainability.
The country has also had to face US unilateral sanctions since August 2018, due to the detention of a US citizen suspected of involvement in the 2016 coup attempt. US sanctions were extended in 2019 following Turkey’s invasion of northern Syria into areas occupied by armed groups supported by the US, and other punitive economic measures were imposed including a tariff increase on steel from Turkey and the cancellation of negotiations over a possible trade deal.
These concerns have deepened substantially as the economy has been hit by the dramatic global economic downturn this year caused by the Coronavirus outbreak. Although as in almost all other countries this latest ‘external shock’ is without precedent in modern times and could push the economic situation into free-fall, economists preaching the fiscal austerity dogma – as well as Turkey’s ‘adversaries’ and doomsayers – have been warning of an impending economic implosion for some time. For example, last year an analysis in The New York Times commented disparagingly:
Turkey has avoided the meltdown that seemed possible last summer when the lira plunged precipitously, but safety is remote. The palpable threat of imminent collapse has given way to a sense of muddling through as the government unleashes credit to defer an inevitable reckoning…
Turkey’s currency remains battered, while its foreign debts remain vast. Inflation and joblessness are alarmingly high. Economic growth is minimal, and anxiety considerable amid the sense that more trouble lies ahead…
For Mr. Erdogan, all available choices entail peril.
Most economists maintain that he must accept interest rates above the now-stultifying level of 24 percent to dissuade investors from abandoning Turkey. That should prevent the lira from falling further, limiting inflation. But it would also deprive businesses of capital, yielding bankruptcy and joblessness, while constraining economic growth…
All signs now point to Mr. Erdogan’s forcing interest rates lower, while pumping credit to Turkish businesses and households. That should spur spending and economic growth, but at the cost of remaining faith in the currency, yielding more inflation and bank losses that risk eventually exploding into a full-blown crisis…LINK
While Turkey’s consumption and growth-led strategy has defied the predictions of its many critics up until now, the risk that it will surpass all limits is greater than ever in the current global economic conditions.
Nonetheless, most of those that would be likely to celebrate such a development are also deeply mired in their own economic problems, and the fallout from a generalized economic collapse in Turkey would have major ramifications throughout Europe, the Middle East and West Asia.
Oil and Gas Sectors
Turkey remains highly dependent on imported oil and gas, importing 92% of its crude oil and almost all of its natural gas. To address this it is pursuing several parallel strategies including developing energy relationships with a broader set of international partners and increasing use of domestic energy sources including renewables, nuclear, and coal.
Turkey is also hoping to rectify the chronic trade and current account deficits with oil and gas revenues, both from transit fees from pipelines as well as by greatly increasing domestic production.
Turkey’s aggressive exploration program in the eastern Mediterranean has caused a dramatic increase in geopolitical tension in the region and threatened to provoke a military clash with Greece in particular (backed by most members of the European Union) as maritime boundaries remain unresolved.
Turkey’s exploration efforts in the Black Sea have however been much more successful, and without the controversy and associated security risks, as all exploration activities have taken place within Turkey’s universally recognized maritime zone.
Turkey has increased LNG purchases from Qatar and the US this year, taking advantage of lower spot prices, and also looking to reduce gas imports from Russia and Iran. The LNG imports have also been facilitated by the expansion of Turkey’s LNG infrastructure capacity in recent years.
Although Turkey and Qatar have been keen to develop economic relations and infrastructure projects between the two countries, nothing has eventuated yet and they will require the cooperation of other countries for any major project to be successful. LINK
Major Gas Find in the Black Sea
In August President Recep Tayyip Erdogan announced that Turkey has discovered a field in the Black Sea holding an estimated 320 billion cubic metres of gas.
But he also said that the discovery – which he hopes will be providing energy to the national power grid by the time Turkey celebrates its centennial in 2023 – will not slow the push to explore for reserves in the eastern Mediterranean.
The Black Sea find “is a sizable discovery, but we still need more gas,” a government official said.
“Our demand will still be 70% imported,” when the Black Sea gas goes online. LINK
The State-owned Turkish Petroleum Corporation (TPAO) decided to conduct exploration activities directly, and purchased three drilling ships with this objective — Fatih, Yavuz, and Kanuni, all named after Ottoman sultans — between 2017 and 2020, deploying them in both the eastern Mediterranean and the Black Sea. Fatih was instrumental in making the August discovery in the Black Sea.
Turkish authorities considered a potential collaboration with Russian and Iranian companies, but it seems less likely given current relations with both countries. Turkey has increasingly diverging interests with Tehran and Moscow in Syria and is also trying to reduce dependence on Russian and Iranian gas supplies.
Therefore, Turkey will likely be reluctant to add another dimension to this complex web of relations by inviting a Russian or Iranian company to the project. Turkish companies are more likely to partner with companies from friendly states with experience developing such complex and costly projects.
TPAO has already partnered with the State Oil Company of the Azerbaijan Republic (SOCAR) in upstream projects in the Caspian Sea. Given the fraternal relations between the two countries, which have only solidified in light of the recent fighting between Armenia and Azerbaijan over the disputed Nagorno-Karabakh region, SOCAR’s engagement in the project is not excluded. Ankara’s unequivocal support for Baku in the conflict with Armenia and Azerbaijan’s increasingly growing share in natural gas supplies to Turkey could be easily translated into cooperation in the oil and gas sector as well. LINK1, LINK2
Exploration in the eastern Mediterranean
Turkey intensified its search for oil and gas in the offshore eastern Mediterranean in 2018, but has so far failed to discover any oil or gas in the region. The increased exploratory activity has however reignited unresolved maritime boundary disputes with its neighbours, particularly Greece and Cyprus, and led to an ongoing crisis in the region. Over the last couple of months its main survey vessel has had a military escort, which has been confronted at sea on numerous occasions by Greek navy ships.
Turkey also concluded a maritime boundary agreement with the Tripoli-based Government of National Accord in Libya in November last year in an attempt to consolidate its claims in the eastern Mediterranean.
The agreement has added additional fuel to the already extremely high tensions in the region, with Egypt and Greece signing an agreement several months ago which overlaps with the earlier agreement, and Turkey will not be able to continue exploratory activities in disputed areas in the eastern Mediterranean without provoking a major crisis, the imposition of sanctions by the European Union, and a real possibility of armed clashes with at least one of its neighbours.
Turkey’s other main hope for increasing revenues from the oil and gas sectors involves the generation of transit fees from major pipelines between production areas in the Middle East and Western Asia and markets in Europe.
Baku-Tbilisi-Ceyhan crude oil pipeline
The Baku–Tbilisi–Ceyhan (BTC) pipeline is 1,768 kilometres long and stretches from from the Azeri–Chirag–Gunashli oil field in Azerbaijan’s maritime zone in the Caspian Sea to the Mediterranean Sea. The crude oil pipeline commenced operation in 2006, and has a capacity of up to 1 million barrels per day.
The pipeline cost US$3.9 billion to build, and employs around 1,000 people. 70% of the construction cost was funded by third parties, including the International Finance Corporation (a subsidiary of the World Bank), the European Bank for Reconstruction and Development, the export credit agencies of seven countries, as well as a syndicate of 15 commercial banks.
The pipeline is owned and operated by BTC Co, in which 11 companies are shareholders (of which BP is the largest and has responsibility for operational management of the pipeline). The shareholders are BP (UK) 30.1%, State Oil Company of Azerbaijan (SOCAR) (Azerbaijan) 25%, Chevron (US) 8.9%, Statoil (Norway) 8.71%, Türkiye Petrolleri Anonim Ortaklığı (TPAO) (Turkey) 6.53%, Eni (Italy) 5%, Total (France) 5%, Itochu (Japan) 3.4%, Inpex (Japan) 2.5%, ExxonMobil (US) 2.5%, and ONGC Videsh (India) 2.36%.
Baku-Tbilisi-Erzurium gas pipeline
The Baku–Tbilisi–Erzurum Pipeline (also known as the BTE pipeline, Shah Deniz Pipeline, or South Caucasus Pipeline) is a natural gas pipeline from the Shah Deniz gas field in the Caspian Sea to Turkey. The pipeline runs parallel to the Baku–Tbilisi–Ceyhan crude oil pipeline, and commenced operations in 2007.
The 42-inch diameter gas pipeline has been laid alongside the Baku–Tbilisi–Ceyhan pipeline until Erzurum, where the latter turns south towards the Mediterranean. It is 692 kilometres long, of which 442 kilometres is in Azerbaijan and 248 kilometres in Georgia. The initial capacity of the pipeline was 8.8 billion cubic metres (310 billion cubic feet) of gas per year, and has since been expanded to up to 20 bcm per year.
The pipeline is owned and operated by the South Caucasus Pipeline Company, whose shareholders are BP (UK) 28.83%, TPAO (Turkey) 19%, SOCAR (Azerbaijan) 16.67%, Petronas (Malaysia) 15.5%, Lukoil (Russia) 10%, and Naftiran Intertrade (Iran) 10%.
Southern Gas Corridor
The construction of the Southern Gas Corridor, a chain of pipelines linking Azerbaijan to Italy, has cost $40 billion and the project is almost completed.
The Southern Gas Corridor’s main source of gas is the Shah Deniz field, located in the economic zone of Azerbaijan in the Caspian Sea. The project comprises three pipelines and has a total length of almost 4,000 km: The South Caucasus Pipeline (SCP) linking Azerbaijan with Georgia, the Trans-Anatolian Pipeline (TANAP) across Turkey, and the Trans-Adriatic pipeline (TAP) linking Greece, Albania and Italy.
Onshore work on the pipeline has been completed in Azerbaijan, Georgia, and Turkey.
Sixteen wells have been drilled in the Shah Deniz gas field and are ready for operations. Eight of the wells are producing and gas is already flowing to Azerbaijan, Georgia and Turkey.
The rest will be gradually put on-stream once the final stretch in Italy is completed. Work on the TAP section of the gas corridor is over 90% completed and is estimated to be finished around the end of this year.
Turkey has been receiving gas in the pipeline since July 2018. It received approximately 2bcm in 2018, 4bcm in 2019, and in 2020 the supplies are expected to be about 6 bcm. Also, 2 bcm have been reserved for Greece and Bulgaria, which will be delivered once TAP enters operation.
A 25-year supply contract has been signed with Italy, and the first Azeri gas is expected to start flowing there before the end of 2020, with supplies estimated to be at 8+bcm per year.
The Azerbaijani government (Ministry of Economy of the Republic of Azerbaijan) owns 51% of the Southern Gas Corridor; the other 49% is owned by State Oil Company of Azerbaijan Republic (SOCAR).
The project has also been strongly promoted by the European Union, and even the US, as an important diversification of its energy sources:
SGC is a multinational natural gas pipeline supported by the European Commission and financed by the World Bank, European Bank for Reconstruction and Development, and Asian Infrastructure Investment Bank. Despite the US has not invested and will not get any commercial benefit from the project, Washington supports TANAP due to its promotion of diversification of energy supplies…
Energy resources in the Caspian Basin are important for the EU, and the geographical location of Azerbaijan makes it ideal and more optimal point for the transportation of these resources;
SGC is not long-distance route as Nabucco, therefore, it is affordable in terms of costs;
SGC will create competitive prices in the energy market, especially for Southern Europe at the first stage, and later for CEE countries;
SGC will strengthen Turkey’s position as a transit country, and enhance the EU-Azerbaijan relations. LINK
The planned Nabucco pipeline was eventually abandoned by the project’s proponents in 2013.
Turkey and Azerbaijan having been steadily deepening their ties, a trend that has been boosted by the troubled relations of both with Armenia. Several other major infrastructure projects apart from the Southern Gas Corridor also reflect the strength of their developing relationship:
Since the dissolution of USSR, the Azerbaijan-Turkey axis has brought positive trends both in the political and economic fields. For instance, despite several issues and obstacles at the end of XX century, Azerbaijan and Turkey managed to implement the Baku-Tbilisi-Ceyhan (oil pipeline), Baku-Tbilisi-Erzurum (gas pipeline), and Baku-Tbilisi-Kars (railway) projects and strengthen their geopolitical benefits in the world arena. Following this, TANAP project Turkey will gain a strategic momentum against Russia in the context of ensuring energy flow, especially to Europe in the near future.
Turkstream Gas Pipeline
TurkStream connects the gas transmission systems of Russia and Turkey. The gas pipeline has two strings with a combined throughput capacity of 31.5 billion cubic metres, and is 930 kilometres long.
The first string delivers gas to Turkey, while the second string is intended for gas transit to southern and south-eastern Europe through Turkish territory.
The Russian end of the TurkStream pipeline is the Russkaya compressor station, which is part of Russia’s Unified Gas Supply System and is located near Anapa. The compressor station has a capacity of 224 MW, sufficient to supply the pressure required for transmitting gas along the pipeline’s two strings up to the Turkish coast where the gas enters the receiving terminal.
The pipelaying for TurkStream took 15 months and was completed ahead of schedule in November 2018. The construction of the receiving terminal near Kiyikoy in Turkey was finished in 2019, and the project was officially inaugurated in January of this year. LINK
Although Turkey’s strategic location means it is well placed to capitalize on the major oil and gas projects between the Caspian Sea, southern Russia, the Middle East and Europe, its expansionist foreign policy coupled with an aggressive negotiating approach has made it an undesirable project partner for many countries which will only reluctantly be engaged when there is no alternative.
While Turkey’s invasion of northern Syria did not concern the European Union greatly, its stand-off with Greece in the eastern Mediterranean is another matter and risks exposing it to sanctions from its major trading partner. After the latest outbreak in hostilities between Armenia and Azerbaijan, Turkey seems to have realized that the confrontation with Greece is a step to far, apart from being unnecessary at the moment. This would explain the decision to stop exploration activities in disputed parts of the eastern Mediterranean for the moment.
The decision to simultaneously confront Russia, Europe and the US is a dangerous policy, particularly when Turkey is also pursuing expansionist and provocative policies with many of its immediate neighbours. Unless Turkey’s political and military leadership begins to take a more conciliatory approach, it could find it has played its allies and adversaries off against each other one time too many.
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