By the Blouin News Business staff

Russia, terrorism drag down Turkey’s economy

by in Middle East.

Source: AaronP65/flickr

Source: AaronP65/flickr

Turkey is paying a hefty price for incurring Russia’s wrath. After Turkish jets shot down a Russian jet in disputed airspace in November, Moscow responded with biting sanctions that have caused bilateral trade and tourism to plummet. Now, Russia’s latest move is to start looking for ways to transfer the manufacturing of spare auto parts for its major car producers from Turkey to Serbia, Deputy P.M. Dmitry Rogozin said on Monday. Turkish producers exported some $800 million worth of spare automotive parts to Russia in 2014, making them key suppliers for Russian automakers, and Moscow wants to end that reliance.

Yet, apart from this troubling development, the Turkish auto industry is at an all-time high. Riding a wave of FDI, auto production and exports broke national records in 2015. According to Automotive Industrialists’ Association head Kudret Onen, Turkish automakers manufactured 1.4 million vehicles in 2015, an increase of 16% from 2014. Their exports increased by 12% last year to 992,000 vehicles (or 73% of total production), with a total value of $21.3 billion. And the industry’s capacity will increase to 1.9 million units when current investments are completed.

Now if one were to believe the Turkish government, the entire economy is doing quite well. Indeed, last month Ankara raised its 2015 GDP growth estimate to 4% (compared to its October prediction of 3%). It also raised its growth targets for this year from 4% to 4.5%, and expects 5% growth in 2017 and 2018. And officials have assured that high inflation (8.8% in 2015, the fifth consecutive year it surpassed the government’s 5% target) will be tamed.

But there is trouble in paradise. 2015 had been a fairly good year up until a major terrorist attack in Ankara killed 102 people and wounded hundreds more outside of the capital’s main train station in October. Then came the souring of relations with Russia over the downed jet, which sparked Moscow to cancel charter flights to Turkey and end visa-free traveling between the two countries. Now the Turkish tourism ministry reportedly expects to lose 4.5 million tourists from Russia this year.

And just last month a suicide bomber in Istanbul killed 10 German tourists, dealing a major setback to Turkey’s already-reeling tourist industry. Tourism accounts for about 11% of the country’s GDP, and revenues from the industry fell 8.3% in 2015, with more pain to come. Germans were the largest nationality of tourists to visit Turkey in 2015, followed by Russians and Brits. But with Russians staying away (and Germans likely to have second thoughts about visiting), it’s not surprising that as of Sunday as many as 1,318 Turkish hotels on the Aegean and Mediterranean coasts were up for sale.

And while auto exports surged last year, they only accounted for 15% of the country’s total exports, which declined by 9.8%. And the trend seems to be worsening, as exports in January fell 14.4%. For example, while Turkey’s exports to Russia reached $313 million in January 2015, last month they contracted to around $110 million.

Ankara is hoping that post-sanctions Iran will buy more Turkish exports, and that more Iranian tourists will visit this year. Turkey aims to more than double bilateral trade with Iran and with Latin America by 2023. And it’s trying to attract many more Qataris to visit, since they tend to stay longer and spend more on luxuries.

But in the face of terrorism and Russian hostility, it’s going to be a tough road ahead.