Putin and Erdogan Are Feuding and There’s Big Money at Stake

(Bloomberg) --

A fresh standoff between Vladimir Putin and Recep Tayyip Erdogan is testing the fragile alliance that has allowed Russia and Turkey to work together in the Middle East. But there's another major reason why things may not get too far out of hand: the countries have deeply entrenched economic ties.

The potential for economic upheaval was tested in 2016 when Moscow imposed sweeping restrictions on trade following the downing of a Russian warplane in Syria by Turkish fighter jets. The food feud led to job losses and a widening trade deficit in Turkey, while pushing up inflation in Russia. The last of the curbs were dropped by Putin in 2018 as relations improved.

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This time around, the stakes could be even higher because the recent alliance has deepened economic ties. Russia has resumed its status as Turkey's second-biggest trading partner, with total turnover of about $26 billion, as business has recovered since the last spat.

As the two leaders meet for talks this week to try to smooth out the recent tensions, here are five charts that show what's at stake if relations worsen.

Turkey ranks only seventh among Russia's largest trading partners, but Moscow is building a $20 billion nuclear plant for its southern neighbor and opened a second gas pipeline under the Black Sea in January. Turkey also bought a $2.5 billion-dollar air-defense system from Russia last year and has expressed interest in buying more.

Its tourism industry, a major source of much-needed foreign exchange revenue, relies on Russia for about 16% of foreign visitors a year and a flight ban in 2016 was a major blow. Erdogan was forced to make rapprochement efforts to get Putin's tourism penalties lifted after a slump in revenues from the industry.

Turkish farmers were the biggest losers of the last trade spat as Putin used a ban on fruit and vegetables to help domestic businesses investing in food production. Russian state TV broadcast a ceremonial bulldozing of Turkish tomatoes at the height of the standoff. The ban on the fruit was the last to go in May 2018. Sales have since recovered, but not returned to pre-2016 levels.

Turkey is Russia's biggest wheat market and exports have surged to a record high in the past two years, potentially making Moscow more vulnerable to a standoff this time round. In 2016, Erdogan hit back at Putin's food curbs by effectively barring purchases of wheat from Russia, but that strategy was fraught with risks for Turkey, the world's biggest flour exporter and one of the biggest per capita consumers of bread.

Another area where Russia has invested significantly in trade ties with Turkey is the gas market. Gas giant Gazprom PJSC opened the TurkStream natural gas pipeline under the Black Sea in January to increase its market share in Turkey and reduce Russia's dependence on Ukraine as a transit route.

Turkey's high trade deficit and growing unemployment rate put it in a weaker position than Russia to cope with a trade standoff. More than 13% of Turks are unemployed now, compared with just over 10% before the last spat. By contrast, Putin has spent the last few years building up some of the biggest foreign-currency reserves in the world and cutting back spending to make Russia more resilient to outside threats.

--With assistance from Cagan Koc, Olga Tanas, Anatoly Medetsky and Onur Ant.

To contact the reporter on this story: Natasha Doff in Moscow at ndoff@bloomberg.net

To contact the editors responsible for this story: Gregory L. White at gwhite64@bloomberg.net, Tony Halpin

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