The aircraft incident, which escalated the tensions between Russia and Turkey, has turned into a regional duello of both diplomatic and economic maneuvers. After violating, the Turkish airspace according to engagement rules Russian aircraft have been shot down by Turkish air forces causing a political headache and significant amount of economic costs for both countries. The economic burden will increase after January 1, 2016, since Russian government widening the sanctions list. The enlarged list includes a number of prohibitions in construction, tourism, hotel business sectors and government bids.
In detail, Turkish firms are banned from the construction of buildings and their architecture or design activities. Adding to that, citizens of the Republic of Turkey cannot work in travel, hotel business, their visa-free entry to Russia has been canceled, and it is prohibited for Russian companies to hire Turkish workers. Furthermore, their right to participate in government biddings is removed and Turkish firms cannot operate in forestry and logging sectors. However, the Russian government announced a list of 53 Turkish firms, which will be excluded from all the sanction regulations. In addition, sanctions prohibit the entrance of Turkish trucks to Russian territory (which has favorable transit fee comparing with other routes) used not only to deliver goods to regions of Russia but also to Central Asian Republics.
In the political sphere, President Vladimir Putin’s harsh and sometimes provocative speeches escalate the tension between Russia and Turkey even higher. In response to Russian sanctions, Turkish Prime Minister Ahmet Davutoglu mentioned that they want to normalize the relations with Russia but at the same time arranging the necessary preparations to reduce the effects of these sanctions to the Turkish economy. For instance, Turkey is actively seeking new markets to re-route its sanctioned goods to alternative markets and preparing to provide financial support to enterprises, which are exporting their products to Russia in order to reduce their losses.
While the Prime Minister Dmitry Medvedev’s speech on calling the Kazakhstan and Kyrgyzstan to sanction the Turkish products turn this bilateral tension to the international one. It has been written in various articles and newspapers that Russia is pressuring these two countries to join its cause against Turkey and it seems these news had roots where Kyrgyzstan’s President Almazbek Atambayev had cracked and delivered a speech saying shooting down Russian aircraft was a wrong decision. A statement, which has been made after almost 3 months, looks like a political statement rather than an expressing his view on the issue.
It is said that a Russian pilot had died and lots of businesses are going to suffer from the consequences of this tension but in terms of political lessons this incident is a good pressure test for both countries to see where their allies and countries which they have close relations with the stand at. At the beginning of this tension, it was a problem between Russia and Turkey but later on, countries started to pick sides according to their geopolitical interests. For instance, in order to show its support NATO member countries had sent the substantial amount of their armed forces to the Mediterranean against Russia’s military buildup in Syria. In addition, Azerbaijan’s President Ilham Aliyev comment on to simplify the transit protocol and reduce the transit fee on its borders. In order to attract Turkish trucks to bypass the Russian sanctions through Azerbaijani route to reach other Central Asian countries was a move to show its support to Turkey and to generate economic benefit from this conflict.
Looking at Kazakhstan’s import and export from Turkey for the last 4 years we can see that there is a stable increase in the import rate between 10%-17%, while its exports to Turkey has shown fluctuated results. For instance, 2010-2012 the export rate has grown 118,7% and then fallen to 16% between 2012-2014. The one of the major reason for these fluctuations is because Kazakhstan’s major export commodity to Turkey is mineral products, which has consisted of 61% of its exports to Turkey in 2014. Meanwhile, Turkish exports to Kazakhstan is increasing gradually but with consistency due to the diversified structure of its exports to Kazakhstan. Turkish exports to Kazakhstan complied with manufactured products where machinery and machinery equipment covers 29%, textile 15%, and the share of plastic materials is around 10%.
Graph 1. Kazakhstan’s import and export from Turkey 2011-2014 (mln US dollar).
Source: Agency of statistics of the Republic of Kazakhstan.
Turkey is climbing up in terms of number of companies and capital amount within the authorized capital of operating enterprises with the foreign capital participation category. For instance, trade amount started to decrease in 2013 meanwhile number of enterprises, which has to operate with Turkish capital participation, has jumped from 673 to 845 between January 1, 2013, and January 1, 2015. Adding to that at the same period their total capital amount is also increased from 77,2 billion Tenge to 95,5 billion Tenge.
There is a number of factors that could explain this increase such as new government incentives to attract foreign investors, the establishment of Eurasian Economic space in 2013, which allows free flow of goods. There have been a number of changes and additions to “Law on Investment” in 2012, and 2014 with the aim of improving the investment climate in Kazakhstan. For instance, changes in 2014 include exemptions from land tax, income tax, property tax and customs duties for 10 years adding to that as a subsidy government is compensating up to 30% of the capital expenses declared in the pre-project phase after the production starts. Investor visa which allows foreign investors to enter and stay in Kazakhstan without obtaining a visa up to 90 days in a single entry and up to 3 years in multiple entries. Moreover, right to hire foreign employees without needing to obtain a work permit for their investment period and ability to extend that period one year after the production phase. Furthermore, the introduction of several new initiatives by a government within the incentives package namely, a principle of stability, one-contract principle and investment ombudsman. These initiatives will support the foreign investors by simplifying the procedures and provide assistance to protect investors’ rights and legal interests. To sum up, these incentives encourage foreign investors to invest in Kazakh economy and attracting more Turkish investors each year to do business in Kazakhstan.
In order to cover its losses from trade turnover due to the sanctions, Turkey takes necessary steps to increase its trade amount by searching alternative markets to its sanctioned products. Adding to that Turkey is running negotiations with Japan, Mexico, Peru and Ukraine, etc. to sign Free Trade Agreement for some time and planning to realize preferential trade agreement with Kazakhstan and Azerbaijan starting from January 1, 2017. The preferential trade agreement will allow lowering custom tariffs for Turkish and Kazakh products, which is expected to increase the trade amount between two countries.
The following legal bases resolve the concerns regarding lower import tariffs within Eurasian Economic Union and re-export opportunities of the Turkish goods to Russia. Eurasian Economic Union (EEU), regulations indicate that Article 42.6 signed treaty in the May 2014 allows members to use lower duty rates; however the re-export of these products to a third member country is prohibited without equalizing the price difference. These questions were the main problems in accession process of Kyrgyzstan to EEU. Since Kyrgyzstan as a member of World Trade Organization agreed to tariff regulations of WTO which is different from the EEU. Therefore, this regulation has accepted in order to be compatible with World Trade Organization’s tariffs and provide a solution to these disputes.
In the end, the tension between Russia and Turkey making it difficult for Turkish products to reach Kazakhstani market due to the prohibition of the Turkish trucks to enter Russia. However, starting from next year with the realization of the preferential trade agreement and possible improvement in the transportation of goods using Azerbaijani route trade relations could be more stabilized and profitable for each country.
References
Alpaslan, I.B., Markovic, B., Tabak, P., Zildzovic, E. (2015). Economic implications of Russia’s sanctions against Turkey. European Bank for Reconstruction and Development. http://www.ebrd.com/news/2015/economic-implications-of-russias-sanctions-against-turkey.html
Contact.az, (2015). The Russian-Turkish crisis will increase the transit through Azerbaijan by 3-4 times, expert. Contact.az.
http://www.contact.az/docs/2015/Interview/120200138636en.htm#.VoTQrfl96Uk
TRT World, (2015). Turkey to take necessary measures against Russian sanctions. trtworld.com
http://www.trtworld.com/turkey/turkey-to-take-necessary-measures-against-russian-sanctions-12019
Satke, R. (2015). Should Kyrgyz Republic take sides in the Turkey-Russia row? The Journal of Turkish Weekly. http://www.turkishweekly.net/2015/12/29/op-ed/should-kyrgyz-republic-take-sides-in-the-turkey-russia-row/
Agency of statistics of Kazakhstan, (2015). Foreign Trade of the Republic of Kazakhstan for the 2011-2015 years. Ministry of National Economy of the Republic of Kazakhstan Committee on Statistics
KazData.kz, (2015). Trade relations between Kazakhstan and Turkey: Import and Export, after the Russian sanctions in 2015. Kazdata.kz. http://kazdata.kz/04/2015-12-export-import-kazakhstan-turkey-russia.html
Daly, C.K.J. (2015). Russian, NATO Maritime Deployments Intensify off Syria. Jamestown.org. http://www.jamestown.org/single/?tx_ttnews%5Btt_news%5D=44874&tx_ttnews%5BbackPid%5D=7&cHash=06065d8ee989d2c0f6f10732e1a1d389#.VoTruPl96Uk
Note: The views expressed in this blog are the author’s own and do not necessarily reflect the Institute’s editorial policy.