UKRAINE-Türkiye WAR AND TURKISH ECONOMY…

Halil İbrahim PİŞKİN
UGM Board Member

With the relative success of the collective immunity approach during the COVID-19 pandemic, optimism about the future was increasing in the global economy. However, the war that started with Russia's invasion of Ukraine began to profoundly affect both the regional economies and the global economy. In the international system, even if a state is not involved in the war, it still suffers from the adverse conditions created by the state of war.

HIGH INFLATION RATES NOT SEEN FOR YEARS…

As a result of supply-side developments on a global scale, high inflation rates that have not been seen for many years have occurred in all countries, especially in the USA and the EU. Ongoing increases in energy and commodity prices further fuel global inflation. FED and ECB plan to reduce inflation to acceptable rates by managing the risk of recession and stagflation with the tightening steps in monetary policy they have recently initiated. This situation led to the appreciation of the US dollar as a haven, increased demand for developed country bonds, and increased short-term interest rates. These developments create depreciation pressure on the currencies of developing countries such as Türkiye.

THERE MAY BE LONG-LASTING GRAIN SUPPLY TROUBLE

Another significant effect of the war was the food crisis it created. Russia and Ukraine, which can be described as the "breadbasket of the world," so to speak, supply approximately 30 percent of global wheat and 80 percent of corn. Egypt, Lebanon, Pakistan, Iran, and many underdeveloped and developing countries that cannot produce enough grain to meet their needs are under the threat of a food crisis. Considering that 20 to 30 percent of the fields in Ukraine will not be planted in the 2022/23 season due to war conditions, it is evident that the world will experience a long-lasting grain supply shortage.

FUNDING THE FINANCIAL DEFICIT IS AT RISK…

This war negatively impacts Turkey, which enters 2022 with the risk of high inflation and current account deficit, not only politically but also economically. The currently implemented monetary policy leads to high inflation, and the current account deficit continues to increase. Coercive measures that can be described as limited capital control are implemented to prevent the depreciation of the lira. A country risk premium exceeding 840 points puts the predictable funding of the financing deficit at serious risk. The sustainability of borrowing in the 10.50 - 11.50 percent interest band is not rational and can rapidly drag the country into a severe crisis environment.

INDISPENSABLE RELATIONS WITH BOTH SIDES OF THE WAR…

We have a significant trade volume with the warring parties, and it is not possible for us to give up this volume. Currently, we import approximately one-third of our natural gas from Russia. On the food side, according to the Ministry of Commerce data, 65.50 percent of sunflower imports are from Russia, 64.50 percent of wheat imports are from Russia, and 13.50 percent are from Ukraine.

THE CONTRIBUTION OF TOURISM TO THE CURRENT DEFICIT WILL REMAIN LIMITED THIS TIME

The situation on the tourism side is as follows: 23 percent of the tourists coming to our country are from these two countries. Although the number of tourists has increased significantly after falling under pandemic conditions, it is still far from meeting expectations. Tourism revenues contribute considerably to the current account deficit on a seasonal basis. However, the contribution is anticipated to be limited this time due to increasing import costs.

THERE IS NO GLASS FULL ON THE SIDE...

Amidst all this negativity, some developments can be seen as the glass half full. Sea transportation between Novorossiysk-Samsun and Novorossiysk-Istanbul is possible via secure lines. Since ships cannot sail in the Black Sea due to security problems and other restrictions, deliveries to Russia have become possible through Turkish ports and Turkish logistics companies.

Last word: In the coming period, the rulers' priority should be to "establish a permanent and fair peace between Ukraine and Russia as soon as possible," first for humanitarian and then for economic reasons.