Article / 30 June 2016 at 13:30 GMT

Why there's more to the Russia-Turkey deal than meets the eye

Russia oil and gas expert
United Kingdom
  • Moscow, Ankara restore diplomatic, economic relationships
  • Deal likely to have far-reaching geopolitical ramifications
  • Russian markets, currency largely unmoved by Turkish deal

The Russian Navy frigate Admiral Grigorovich sails through the Bosphorus, past Istanbul. Russia and Turkey have recently mended their relationship, but to what end? Photo: iStock

By Nadia Kazakova 

If not for the Brexit trainwreck, the news that Russia and Turkey have pretty much restored their diplomatic relationships and are on the way to mending their economic ones may have enjoyed more prominence in the headlines. 

The overhaul seems to be happening on Russia's terms, with what might be some clever diplomatic manoeuvring by Israel. 

It seems to be too much of a coincidence that Moscow and Ankara's reconciliation, which involved an apology and a compensation by the latter, was preceded by a restoration of the Israeli-Turkish diplomatic relationship, which also involved an apology and compensation by Israel

Both the Russian and Turkish heads of state managed to end their diplomatic standoff without losing face. For Israel, it is both a regional and geopolitical gain. In broader terms, it is probably a step towards a partition-type settlement in Syria and, through a web of complex tradeoff-type deals, a political fix in eastern Ukraine. 

For Russia, the end game must be the lifting of sectoral sanctions. The European Union sanctions are set to extend for the next six months as of July 31 (until the end of January, 2017). Post-Brexit, German chancellor Angela Merkel did not see a change in the sanctions regime forthcoming, insisting that there was nothing to stop their extension. 

This came despite the fact that the decision was delayed by Italy and France, which say they require additional discussions on the measure.

Merkel also insisted that there have been no acceptable conditions for the holding of elections in the breakaway eastern Ukrainian regions as the situation “is just unsafe”. In other words, Ukraine could not be expected to cave in to military pressure to hold elections on unacceptable terms. 

The lifting of EU sanctions without a workable solution in Donbass could deal yet another blow to EU unity. However, with the US backing both the Minsk agreement and the sanctions, such an outcome seems unlikely. Moscow is surely aware of this. 

Washington, DC
The EU's sanctions regime cannot be mentioned without 
a fairly significant nod towards Washington. Photo: iStock 

The normalisation of the Turkey-Russia relationship has already led to the lifting of an embargo on the sale of packaged tours to Turkey, which should help Turkish resorts this summer. The ban on imports of Turkish goods might be also lifted soon (but this would be gradual) and the visa regime for Turkish citizens would probably be reset to allow free travel to Russia and fewer restrictions on work (for Turkish construction workers, for instance).

Russian markets have not been particularly moved by the unexpected reconciliation. There has been little direct effect on either equities or the rouble. There are some winners from the deal, however – such as the tourism industry (higher turnover) and the retail trade (cheaper goods from Turkey) – but there will be losers as well. Russian tourist destinations, for instance, could see fewer bookings while local producers would now need to compete with cheaper imports (both in agriculture and the white goods sector). 

The deal is probably a net negative (in the medium term) for Russia's balance of payments as imports from Turkey will go up with no change in exports.

There is also talk about resurrecting the South Stream pipeline gas project, which would supply up to 63 billion cubic metres of gas to Turkey and Europe. For Turkey, it would now be a more attractive deal given the low level of gas prices. 

Gazprom could potentially recoup the tens of billions of dollars it has already invested in the project (via expansion of the Russian gas network to accommodate the volumes, inventory of pipes for the underwater section and the like). 

Overall, the Turkey-Russia deal might not just be a reset of Turkish foreign policy or mark the creation of some sort of broad-based political "bromance". 

It might also not be a huge economic boon for either Moscow or Ankara – not immediately, at least. 

It may, however, have far-reaching global consequences in the coming months.

Ankara, Turkey
One senses that the Moscow-Ankara deal concerns more than pipeline deals. Photo: iStock 

— Edited by Michael McKenna

Nadia Kazakova is an expert on the Russian oil and gas industry
Michael O'Neill Michael O'Neill
Great insight.


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