Doctor of Economics, Professor at St. Petersburg State University
The modern perception of conflict between rival countries differs considerably from what it used to be as far back as a quarter of a century ago during the Cold war. At that time the arms race, ‘proxy wars’ as well as bans on delivering innovative and dual-purpose technologies were the dominant forms of conflict. Today the manipulation of exchange rates, consumer goods, food supply as well as visa bans are getting more and more frequently used as instruments of interstate conflict.
The effectiveness of foreign policy in the modern era of “Facebook diplomacy” is measured in terms of its image in the traditional and social media. The sanctions target ordinary citizens, with their ultimate purpose being reducing the population’s income. Consequently, sanctions are designed to alter electoral preferences in the rival state.
For the past 25 years, the US and other Western countries have acquired considerable experience in imposing these sanctions. Compared to the Western sanctions imposed on Iran and Iraq, Russian sanctions against Turkey seem quite moderate. These measures are taken as a signal of discontent with the actions of the Turkish military force against the Russian forces in Syria. They are also aimed at demonstrating that Turkey is responsible for the death of Russian soldiers and the downing of a Su-24 bomber.
Of course, there are some other means to express discontent. However, Russia’s ‘Diplomacy 2.0.’ prefers measures that would provoke public resonance and the reaction in the media, but at the same time won’t lead to an uncontrolled escalation of the conflict risking to slide into military confrontation. Therefore, from the diplomatic viewpoint, sanctions imposed on December 1, 2015, would trouble Turkey and its citizens but won’t provoke the escalation of the ongoing conflict.
The Russian economic sanctions against Turkey imposed by Presidential Executive Order №583 of 28 November, 2015, and the following Government Decree №1296 of 30 November 2015 target Turkey’s industries that are most vulnerable and dependable on the Russian market. The sanctions fall into three groups:
- Measures against goods produced in Turkey including chilled and frozen meat of cattle, poultry and products of the poultry industry, savory meat, dried meat, milk and dairy products, seafood, nuts, fruits, vegetables, berries and edible greens. For the past nine months the estimated volume of supplies from Turkey has accounted for $750 million. This sum is significant enough to influence the Turkish agriculture, but not substantial enough for the Turkish authorities to consider the decrease in export of these goods to Russia as a threat to economic security.
- The limitation of visiting Turkey. Sanctions against the travel industry are the most painful for the Turkish economy, since for the past 15 years this sector has been developing predominantly due to the millions of Russian tourists. In the absence of Russian tourists the infrastructure of the Turkish Mediterranean coast will be in low demand. Consequently, millions of Turkish citizens who work to serve this infrastructure would eventually suffer. The decision to scrap the visa-free regime and to introduce a ban on charter flights between Russia and Turkey would create additional challenges to Turkish citizens; however, they are not likely to damage business ties between Turkish and Russian companies. Suspending the visa-free regime for Russian tourists is not on the table in Turkey at the moment. Restrictions against Turkish construction companies in Russia would inevitably create challenges both for Turkish businesses and their Russian clients. It is unclear whether these measures will be implemented but their effect on bilateral ties is unlikely to be significant.
- The dialogue between the Russian and the Turkish governments has stalled as the activity of the Russian-Turkish Mixed Intergovernmental Commission on trade and economic cooperation has been suspended. This will create additional transactional costs for interstate dialogue on important questions of mutual interests, but will not have a negative effect on the relations between the countries immediately. Turkey has invested more than $10 billion in the Russian economy therefore it is interested in permanent communication with Russian authorities. Yet so far nothing threatens Turkey’s investment in Russia.
The ban on food imports from Turkey will inevitably have a negative effect on Russian consumers. Turkey accounts for 4% of Russia’s food imports, while for some products (vegetables, for example) the figure reaches 17%. Abrupt disappearance of Turkish vegetables from Russian food stores has already sparked a hike in prices on tomatoes and cucumbers. From November 25 to November 30 tomato producers from southern Russia more than doubled purchasing prices. Simultaneously prices on tomatoes and cucumbers increased by over 100% in supermarkets in largest industrial cities. Prices will eventually stabilize, however they are not likely to achieve the ‘pre-sanctions’ level until summer 2016.
This in turn will accelerate inflation in Russia. Sanctions against Turkey are likely to contribute to a 0,2-0,4% price increase at the end of 2015. This increase is not crucial, but due to the fact that the Finance Ministry and the Central Bank are making efforts to reduce the inflation rate as a key aspect of the stabilization of the Russian economy during the period of recovery, this effect of the sanctions is extremely unfavorable. The import ban on Turkish agricultural products as well as suspending flights and limiting activities of Turkish companies in Russia may result in multi-billion costs for Russia and income deficiency since parties will fail to fulfill contracts.
In the coming twelve months the Turkish economy in turn is expected lose about $3 billion. Taking into account the very fact that sanctions against Turkey target predominantly small and medium-sized enterprises in different sectors of economy, Russia is likely to reach resonance in the media, since the Turkish business community partly tends to blame the authorities for the clumsy policy towards Russia. However at the time being it is impossible to imagine that this discontent will result in radical changes in the Turkish policy, be it resignation of the President or the government.
During the first nine months of 2015 Turkey exported 662 thousand tons of fruits and vegetables to Russia. Turkish agricultural products could be substituted with those from neighboring nations, primarily from Azerbaijan, Iran, Egypt and Israel. However, the problem is that producers from these countries did not consider the sharp growth in demand from the Russia and therefore will not be able to satisfy the growing needs in the short term. The negative outcomes of the import ban on Turkish fruits and vegetables could be overcome by mid-summer 2016. Till then Russian consumers will have to overpay for, or even sometimes face a lack of, certain products, including grapes, lemons, mandarins, peaches, cucumbers, but first of all tomatoes and marrow.
Turkish automotive suppliers control a significant market share in Russia. They cannot be replaced in the short term and therefore negative outcomes for the Russian car industry should also be taken into account. The textile industry is the only sector where the absence of Turkish goods can be as inconspicuous as possible since Turkey does not hold a significant market share while the possibilities to replace it are infinite.
Representatives of Russian business, who suffered from the country’s accession to WTO and the liberalization of the trade regime, support the sanctions against Turkey since they gain considerable benefits. Russia’s agricultural industry will be the one who benefits more than other industries due to massive investments in 2014-2015 and the growth of share of their products in the market. The so-called import substitution is gaining momentum in agriculture and first positive outcomes have become apparent in the production of chicken meat, eggs and pork.
Taking into account the length of the investment business cycle in agriculture, the effect of import substitution in agriculture will become most visible by 2017-2020, while in the production of beef even later. This means that the objective of achieving full import substitution in agriculture by 2022 that Vladimir Putin set during his recent Address to the Federal Assembly on December 3, 2015, is attainable.
But even today we can notice first positive results of import substitution and sanctions against major foreign suppliers even accelerate the growth of the Russian agricultural industry. Therefore contrary to ordinary consumers, Russian agrarians will advocate for enhancing sanctions against Turkey because they will be the ones to benefit from them.