Turkey-Russia Stand-off: Energy and a Difficult Neighbourhood

Exactly a year ago Russia and Turkey hailed the launch of a joint project – TurkStream – a pipeline that was expected to carry 63 billion cubic metres of natural gas across the Black Sea into Turkey and further to Europe.

A year on, Moscow threatens Ankara with economic sanctions and even military escalation after Turkey downed a Russian fighter jet for allegedly breaching the Turkish airspace.

Since the incident at the end of November, journalists and academics have been poring over latest statements hoping to guess well in advance whether Russia would leave Turkey out in the cold this winter by cutting vital gas supplies, or order its army of sun-soaking tourists back home.  

Some even wonder how things could have taken such a dramatic turn only from a year ago. But are events truly that surprising?

Turkey’s relation with Russia since the end of the Cold War has been neither one of committed friendship nor one of open hostility, even if the memory of the Bolsheviks’ or Stalin’s expansionist plans in eastern Anatolia or desired control over the Turkish Straits remains stamped in the Turkish psyche.

With the fall of communism and the Soviet Union a 500-year history of arch-rivalry came to an apparent end as the two countries identified common economic goals and geopolitical interests.

Aktürk shows how in the early 1990s, Turkish officials including the prime minister and later president Süleyman Demirel visited Moscow on numerous occasions, signing 15 agreements and protocols spanning a multitude of areas – science, technology, culture, education, economic cooperation and the exchange of armed forces (Aktürk, 2006).

The rapprochement culminated in the signing of the “Treaty on the Principles of Relations between the Republic of Turkey and the Russian Federation” in 1992, which, Aktürk notes, resembled the 1925 “Treaty of Friendship” between Turkey and the then Soviet Union.

However, just as the 1925 treaty failed to materialise into a strategic alliance as Turkey and the Soviet Union became Cold War enemies, the displays of friendship and mutual affection of the early 1990s faded once Ankara and Moscow re-emerged as rivals in Russia’s Turkic hinterland of Central Asia and the Caucasus.

This led Suat Bilge, an ambassador and academic, to claim that Turkey and Russia were locked in a “difficult neighbourhood” but one, nonetheless, where inherent challenges could be smoothed out by upholding a balance of capabilities complemented by growing trade links.

Conversely, Aktürk argued, any imbalances in capabilities could lead to a re-emergence of the Russian threat.

Bilge shows that although from a geographic, demographic and resource point of view, the balance has always tilted in Russia’s favour, the Turkish economy may have had an edge over Russia’s, which remained “an underdeveloped superpower”.

Russia, Bilge argued, was the sort of power that would send satellites in space and build nuclear weapons, but was incapable of harvesting its potato crops. Since the end of the Cold War the Turkish economy had proved comparatively more resilient. Aktürk notes that the Turkish GDP doubled in relative terms vis-à-vis the Russian GDP in the latter half of the 1990s.

This meant that both Turkey and Russia found themselves in a relationship of equilibrium that allowed the two to rein in historical rivalries. The development of economic relations starting with the so-called suitcase trading of the early 1990s when Russian and Turkish tourists began to visit each other’s country, engaging in cross-border commerce, and ending with complex investment project such as Russia’s planned Akkuyu nuclear power plant in Turkey contributed to the softening of those rivalries.

However, even as the two countries appeared to cultivate a congenial relation based on shared economic interests, mutual suspicions remained a permanent feature of that relationship.

Two-faced Russia

In examining Turkey’s political relations with Russia, Bilge says, it is important to make a careful distinction between official and covert Russian policies.

Here is what the diplomat wrote in the 1990s:

“Russia’s official policy is expressed by its government, and more often by its Ministry of Foreign Affairs. Russia’s covert policy was formerly administered by the Communist Party and the KGB. Now FSK (Federal Counterintelligence Service, the successor of KGB, nowadays FSB) has replaced these. Official and covert policies can sometimes be the same and sometimes very different. Therefore while the government preached friendship, and particularly the friendship founded by Lenin and Atatürk, the Communist Party could have been engaged in destructive activities. We witnessed various instances of this dual policy during our War of Independence and World War II. A coup d'état against Atatürk was staged at the outset of the War of Independence. Recently, when the Turkish prime minister, Tansu Çiller, visited Moscow, Russian authorities talked about friendship and said she resembled Atatürk. Soon afterwards, the FSK stepped up its covert activities against the security of Turkey in Georgia and Azerbaijan. Russia makes official shows of friendship towards Turkey for the sake of propaganda. In reality, it continues to pursue the covert policy of trying to turn Turkey into a satellite, keep it under control or at least to influence it.”

Since the Soviet Union’s repeated attempts to wield political power over Ankara failed, whether those attempts related to the spread of Bolshevism in Turkey, an intention to block it from becoming a NATO member, or threatening it with war after Turkey was the only country to deploy troops on the Syrian-Turkish border amid suspicions of a communist takeover in Damascus in August 1957, Moscow sought to influence Turkey with pledges of economic exchanges. This strategy is also seen nowadays.

In 2013, the Russian Federal Customs Service estimated Turkish-Russian trade relations at $32.7bn and the two countries had argued that the figure may triple to $100bn within a decade.

The energy weakness

In this context, Turkey’s energy dependence on Russia appears as the riskiest factor in the Turkish-Russian relation, not only because Turkey’s energy security relies principally on Russian gas imports, but also because energy straddles both the economic and the political spheres, creating a double vulnerability for Turkey.

Since Turkey has proved to be a skilled actor, staving off Russian attempts to control or at least influence it politically, Moscow’s option is to play the economic card, and in particular its energy card.

Russia is currently supplying 55% of Turkey’s natural gas imports, it is expected to build a 4.8GW nuclear power plant, it has expressed an interest in buying the Istanbul gas distribution system – the largest in the country – and wants to build gas storage.

Its offer to build the 63bcm TurkStream pipeline and help turn Turkey into a gas hub, an ambition that the country has been pursuing, was arguably driven not only by commercial interest, but may also be consistent with a desire to control Turkey economically, if politically it has not been possible, as argued by Bilge.

But it would be a mistake to think that Russia’s control over Turkey, its second largest gas market after Germany, would translate into turning off the gas taps. Such a measure may be too crude and could backfire, jeopardising Russia’s interests at a time when it is losing market share in Europe and has been hit by falling revenues because of plunging oil prices.

At the same time Russia is fully aware of Turkey’s vulnerability to Russian gas supplies, since alternative pipeline imports from Iran and Azerbaijan cannot be pumped westwards because of constraints in the transmission system, while LNG supplies received at its only two terminals –Aliaga and Marmara – in the west of the country are insufficient to cover demand.  This means that the northwestern region, which has the highest industrialisation level and demand concentration in the country is nearly entirely dependent on Russian gas.

Ironically, Russia would stand to gain much more by simply exploiting Turkey’s failure to reform its natural gas sector.

Turkey’s shortcomings

Turkey has been unable to build interconnection capacity with neighbouring Greece and Bulgaria and establish reverse gas flows that could plug supply shortages. Such interconnections would help Turkey and its southeast European countries, but not Russia, which needs to keep a grip on each and ensure that they do not have freedom of action.

Turkey has failed to build additional LNG receiving terminals, locking itself out of an emerging global market that promises not only security of supply, but also cheaper prices as vast volumes of liquefied natural gas are set to reach customers within the next five years. It is also upholding a punishing cross-subsidies system that had made it impossible for private companies to source LNG as the price of the former had been significantly more expensive than the regulated tariffs they could have sold volumes at domestically.

Turkey has pledged under its Natural Gas Market Law 4646 of 2001 to reduce the share of the natural gas incumbent BOTAS to 20% by transferring its volumes of natural gas to the private sector, but it has so far failed to do so. Despite two contract releases amounting to 10bcm on BOTAS’ 30bcm Russian contracts, BOTAS has been unable to transfer further volumes.

Russia had been reluctant to deal with companies other than BOTAS, and firms that had taken part in the two tenders organized since 2005 pointed out that it was difficult to bid given that the terms of the contracts were confidential and very few had access to such information. (World Bank, 2004).

Any further contract releases would require bidders to have intimate knowledge of contractual terms, which may be gained by giving Russia further stakes in the Turkish private gas sector.

Finally, Turkey had endured arduous negotiations for its gas prices, which left it paying some of the highest gas bills in Europe, even at a time when other European countries had managed to clinch discounts from Russia. Turkey has recently taken Russia to arbitration over its failure to grant a discount on BOTAS’s import prices. However, it is uncertain what the outcome will be and whether it would set a precedent that Turkey could use in its further negotiations with Russia or indeed other gas suppliers such as Iran.

Turkey’s inability to secure cheaper gas imports and to break the indexation of gas prices to oil prices as it has happened in Western Europe has left it short of levers in its negotiations with Russia.  The fact that Turkey is also geographically remote from any liquid gas hubs that would permit greater flexibility in price negotiations is also a drawback.

Turkey’s BOTAS loses millions of dollars every year by supporting a wasteful subsidies system that creates widespread inefficiencies in the energy sector and the economy as a whole.

Unlike other gas incumbents such as France’s GDF, nowadays Engie, BOTAS is not only unable to compete on the international scene and to position itself as the worthy representative of a regional power, but it is also seen as the junior partner in its relations with Russia’s Gazprom.

Awkwardly for Turkey at a time when its economy is slowing down, the inefficiencies in the gas sector have also started to contaminate the electricity sector where gas-fired generators are teetering on the verge of bankruptcies.

Estimates by Turkish banks show that the equity to debt ratio for gas-fired generation is as low as 20 to 80% or in some cases even 10 to 90%. Average equity to debt ratios for European power plants (including thermal and renewables) is 40 to 60%.

Of course, Turkey is not a unique example. Gas-fired generation has been badly hit all over Europe. However, in Turkey the problems are also linked to the fact that gas had been purchased at prices that were often higher than the regulated tariffs and have been set politically, rather than by the market.

According to Turkey’s Banking Regulation and Supervision Agency (BRSA) the level of debt that cannot be serviced in the Turkish energy and water sectors has increased 400 times to just over TL10 billion between September 2005 and 2015, being one of the highest in the economy.

A sharp depreciation of the Turkish lira between September 2013 and September 2015 has no doubt contributed to the problems confronting the sector now.

As a new government takes over following the snap elections of November 2015, it will have to reconsider its options, particularly as far as reform in its natural gas sector is concerned.

The previous administration had taken a tough interventionist approach, denying the private sector the chance to take a more active part and contribute to strengthening an important area of the economy.  It mistakenly viewed its energy interests as a political lever that could not only close up its vulnerabilities, but also help to expand Turkish influence in the region.

Aktürk and Bilge successfully show that Turkey will be able to balance against a resurgent Russian threat by offering a reliable economic counterweight.

In this context, a solid energy sector that reflects market realities and not political interests and which sits at the heart of Turkey’s economic prosperity is key to the regional balance of capabilities.

This is the message that the new Turkish energy minister, Berat Albayrak, needs to take to his father-in-law, president Recep Tayyip Erdogan.

Aura Sabadus

Aura Sabadus is a journalist specialising in Turkey’s energy sector

Bibliography

Aktürk, Ş, (2006) “Turkish-Russian relations after the Cold War (1992-2002), Turkish Studies, 7:3, 337 - 364

Bilge, S., “An analysis of Turkish-Russian relations” http://sam.gov.tr/wp-content/uploads/2012/02/A.SuatBilge.pdf

World Bank, “Turkey Gas Sector Strategy Note” September 2004