Why Russia's Trade with Turkey Is Declining

According to statistics published on July 31 by the Turkish statistical agency TurkStat, exports of goods from Turkey to Russia in the first half of 2024 fell by 28.3% compared to the same period in 2023, to $4.16 billion (versus $5.8 billion in the first half of last year).

In June 2024, Turkey sent goods worth $670 million to Russia (a month earlier - $784 million), which is almost 30% less than in June last year ($956 million).

Last year, Turkey took third place in Russia's trade turnover with other countries - almost 8%. However, the bulk of it came from Turkish imports from Russia, which, in turn, mainly consist of energy resources. In the first half of 2024, Russian supplies to Turkey amounted to $22 billion (10% less than in the same period in 2023 - $24.6 billion). More than 70% of the figure in January-June 2024 ($16 billion) was provided by supplies of Russian mineral fuel (oil , gas, coal).

Indeed, against the backdrop of the high base of 2022-2023, a decrease in trade turnover is observed, the Ministry of Economic Development commented to RBC. However, compared to pre-pandemic indicators, Russian-Turkish trade turnover has more than doubled, the department emphasized. Compared to the first half of 2021, Turkish exports to Russia increased by 1.6 times.

“It is also important that, while cost indicators were reduced, for example for the first quarter of 2024, the physical volume remained at the same level,” the Ministry of Economic Development indicated.

Reduction of re-exports from Europe

In terms of Turkish exports, since 2022, against the backdrop of US and EU sanctions, the country has become an important hub for the supply of goods from unfriendly countries to Russia, recalls Alexander Firanchuk, a senior research fellow at RANEPA. In 2023, the volume of Turkish exports to Russia was approximately twice as high as in 2021. “A significant part of this growth was due to the supply of European goods through Turkish intermediaries, but there are no direct statistics on this,” Firanchuk notes.

According to detailed data from TurkStat ( Russia, for its part, has closed country-by-country statistics on mutual trade), Turkish exports of equipment and mechanical devices (group 84 of the HS: boilers, generators, turbines, internal combustion engines, pumps, lifting mechanisms, etc.) to Russia amounted to $961 million in the first half of the year, a 27% decrease compared to the first half of 2023 ($1.32 billion). Exports of electrical equipment (group 85) decreased by 48%, to $205 million (for the same period a year earlier - $390 million). Supplies of plastics and plastic products from Turkey to Russia decreased to $249 million (from $347 million, minus 28% year-on-year).

We are talking about data from the so-called general trade system. TurkStat also produces alternative data - from a special trade system. According to these data, exports to Russia for the first half of the year amounted to $3.79 billion, down 22.1% compared to the same period a year earlier, says Andrey Gnidchenko, a leading expert at the Center for Macroeconomic Analysis and Short-Term Forecasting.

The special system does not include exports through free economic zones, customs warehouses, etc., that is, "the most natural ways of re-exporting," says Gnidchenko. According to him, the difference between exports under the general and special trade accounting systems can be used to indirectly track a significant change in the situation with the re-export of goods from EU countries through Turkey to Russia since 2023. "According to our estimates, the share of re-exports from the EU in the supply of goods from Turkey to Russia in the first half of 2022 was less than 4%, in the first half of 2023 - about 8%, and in the first half of 2024 - only a little more than 1%," he told RBC.

The introduction of secondary sanctions and the EU's increased control over the supply of goods "have probably significantly reduced the supply of European goods passing through Turkey," Firanchuk agrees.

The "contribution" of the decline in re-export activity for European goods to the overall decline in Turkey's exports to Russia by 28% in the first half of the year is approximately 6 percentage points (pp), Gnidchenko estimates. This means that if we subtract the estimated volumes of this re-export, the reduction in the remaining exports will be approximately 22%. Approximately 1 pp in the overall reduction may be due to the partial redirection of supplies through the EAEU . Thus, the estimated reduction in supplies of goods produced in Turkey to Russia is 21%, the expert says.

Payment problems

Since the beginning of the year, the media have regularly reported problems with payments from Russia to Turkey due to sanctions risks. At the end of 2023, the United States introduced a mechanism of sanctions against third-country banks for interaction with the Russian military-industrial complex. And in June 2024, the States expanded the definition of the "military-industrial complex" of Russia to include all companies, organizations and all individuals who have been or will be subject to sanctions after April 2021. These include, for example, many Russian banks, including Sber and VTB.

" Work with Turkey as the main logistics hub  remains quite complicated," the press service of the Rusta group of companies, which specializes in international transportation, notes. Payments to Turkey are possible directly only for four types of goods and services from the so-called green list: pharmaceuticals, food products , consumer goods, and tourism services, they remind. For other groups, payments - even in rubles - either do not arrive or are returned. "Turkish banks are reviewing processes and tightening requirements for Russian clients. This is due to direct threats from the United States to Turkish banks to impose secondary sanctions," the group of companies says.

The United States simply needs to disconnect the Turkish bank from correspondent accounts in the United States, and any cross-border transactions of this bank with American legal entities and individuals will become inaccessible, they explain there.

Businesses are also experiencing difficulties with Russian banks when making payments to Turkey, Rusta reports. “Banks are reluctant to open accounts in lira and refuse payment for many transactions,” they claim.

In January 2024, there was some improvement in the situation with payments, when the Turkish bank Emlak Katılım began to carry out money transfers for some groups of goods, says Roman Samoilov, HEAD of projects in the AIC and Consumer Sector practice at the consulting company Strategy Partners. “Despite a partial solution to the problem, many exporters remain pessimistic about the improvement of the situation,” he notes. According to him, the Turkish side is ready to look for opportunities to carry out cross-border payments, “when the current situation in the country requires it,” “in other cases, the country's government is more likely to protect local entrepreneurs.”

Prospects for Turkish imports from Russia

The total volume of exports from Russia to all countries in the first half of the year remained virtually unchanged (minus 1.3%, according to the Bank of Russia), says Firanchuk. And although the decline in Russian supplies to Turkey (minus 10.3%) was stronger than in other directions, this is consistent with the overall decline in Turkish imports (minus 8.4%). “Thus, the sanctions pressure does not determine the overall dynamics of supplies of Russian goods to the Turkish market,” he emphasizes.

According to the expert, Russian exports, which are dominated by raw materials, are much more resistant to various types of sanctions restrictions - "at least in the medium term". "Raw materials are easier to redirect (except for pipeline gas, which is tied to infrastructure), and the risks of sanctions and additional transaction costs for the buyer can be compensated by providing discounts to the world price. Moreover, significant discounts are required only in the months of the most intensive redirection, after which the size of the discounts decreases, as happened with oil supplies to CHINA," he reasons.

The decline in Turkish imports from Russia is “relatively small” and is explained by the fact that its main volume consists of raw materials that were not subject to harsh sanctions pressure, Gnidchenko agrees.

An important factor that will affect the indicators of import of Russian products in the second half of the year is Turkey's decision to suspend wheat imports from June 21 to October 15, 2024, in order to support local producers and prevent a decrease in prices on the domestic market due to significant volumes of its own reserves, Samoilov warns. In this regard, the volume of grain supplies to Turkey will decrease, which will also affect the EXPORT of fertilizers, he says.