Downing of the Russian jet and economic consequences

I mean a world where all countries possess exhaustive information about their rivals’ capabilities, vulnerabilities and strengths. In this world, if an issue emerged between two nations, a resolution would be found before any battle. Whether you are the triumphant side or the losing one, a peaceful solution is always better than one garnered through war. Wars are destructive in every sense, for the losers as well as the winners. In my utopia, if a weaker party had a dispute with a more powerful one, they would immediately reach an agreement with conditions that would have otherwise been agreed upon following conflict. Compromise could be achieved free from the destruction of war.

Only because parties misjudge their rivals’ capabilities, vulnerabilities and resoluteness do they start wars with each other. I guess we can use this framework to understand the recent crisis between Turkey and Russia. Even though nobody expects an actual war, the tensions are having a significant impact on economic, social and political relations. I will focus on the economic consequences of the escalating tension.

The bilateral trade between Russia and Turkey is substantial. Turkey sells Russia a significant amount of fresh fruit and vegetables, poultry and semi-finished industrial goods. In addition to this official trade, there is la great deal of so-called “suitcase trade” between the two nations. Small-scale Russian enterprises are allowed to import certain types of Turkish products without undergoing the usual customs procedures. These are estimated to be in the order of several billion dollars. Moreover, Turkey, especially the coastal city of Antalya, is the preferred destination for more than 4 million Russian tourists every year. Finally, Turkish construction companies undertook several billion dollars’ worth of projects in Russia in the last year and similar levels in previous years.

Turkey in return mainly imports metals and minerals from Russia. By far the most valuable Russian import to Turkey is natural gas. Russian natural gas accounts for approximately 60 percent of Turkey’s natural gas market. Natural gas is not only used in residences and industrial complexes, but also in the generation of electricity. More than 35 percent of electricity is generated using natural gas. In addition, close to 30 percent of electricity is generated by using coal, a substantial portion of which is also imported from Russia.

Moreover, a Russian firm has undertaken the construction and operation of the first nuclear power generator in Turkey. The value of the Russian stake (public and private) in the Turkish energy market significantly surpasses the value of Turkish companies’ stake in the Russian market.

Russian officials announced that virtually all Turkish exports to Russia (goods and services including tourism and construction) will be significantly reduced if not eliminated altogether. So far Turkey has not responded. Naturally we can assume that Turkey would retaliate by ceasing its import of energy-related products and services. However, the problem with this move is that it would hurt Turkey more than Russia due to a lack of alternative suppliers. It is true that every voluntary transaction benefits both suppliers and consumers, and similarly the elimination of these transactions hurts both parties. However, those gains and losses can be asymmetric, at least in the short term.

As we all know, energy is an inevitable input in virtually all production and consumption processes. Moreover, electricity cannot be stored, so the continuous generation of electricity is very important. In order to ensure uninterrupted power, most countries generate an excess of power and use alternative energy sources. Unfortunately, Turkey does not have these safety nets. If Russia really wants to hurt Turkey’s economy by cutting natural gas, it can do so. The alternative sources of natural gas would not be enough to cover any termination, especially in the short term.

Nobody in Turkey (or as far as I can tell in Russia) is seriously discussing such a possibility yet. However, the severity of Russia’s response to the downed jet pushes me to consider it. I guess this situation was not foreseen by Turkish officials, either. Let me return to my assertion that in a perfect world there would not be any wars (economic or military). However, we should also remember that this ambiguity works both ways. Russian officials cannot predict what might happen if they decide to cut natural gas. One instance from the recent past might provide an insight. Following the terrorist attacks of Sept. 11, 2001, Americans tired of their dependence on Arab oil. Partly as a result of that, technological developments in the acquisition of shale gas and oil revolutionized international energy markets. Energy prices are at almost historic lows. Frequent use of energy resources as a weapon of political campaigns might increase the speed of development and uptake of alternative energy sources in European countries. This would definitely hurt Russian interests in the long run. We do not live in a perfect world, but fortunately we are equipped with the cognitive ability to check and balance our emotions.