By Symela Touchtidou-@stouchtidou

For neighbors being so close, Greece and Turkey are not close economic partners. Bilateral trade is subdued, cross-border investments and tourism are restrained. And they have been further shrinking in 2020.

Is it the result of the pandemic crisis that hit the global economy? Or is it the product of rising tensions between the two countries that brought them on the brink of a conflict in the summer of 2020?

“Mostly it is due to the deterioration of bilateral relations between the countries, less due to the pandemic. But if we try to distinguish what is what, it is very hard to do so”, says to GREEK BUSINESS FILE Panagiotis Koutsikos, president of the Greek-Turkish Chamber of Commerce.

Does this come at a cost?

“In 2019 Greek exports to Turkey dropped to €1.97 billion. In the first seven months of 2020 they dropped to €790 million. Compared to 2019, we have lost exports worth approximately €750 million. Compared to 2016, losses reached €1.5 billion. This is money that will be deprived from the Greek market,” P. Koutsikos says.

So, economic ties between Greece and Turkey are a victim of geopolitics? It is not clear.

Let’s break down the numbers.

Bilateral trade between Greece and Turkey amounted to about €4 billion in 2019, dropping by less than 1% compared to 2018. Throughout the years, bilateral trade has been dominated by fuels (they amount to 50–70% of total Greek exports). Greek refineries had been exporting oil to the Turkish market that is highly reliant on imports to meet its energy needs. Energy imports account for about 75% of the total energy consumption in Turkey.

But Turkey has been working intensively to reduce its energy dependence. As the Asian Development Bank Institute notes in its paper Energy Insecurity In Turkey: Opportunities For Renewable Energy (No. 1058 December 2019), “Turkey, which is a country with strong dependence on oil and gas imports, is following a developmental strategy including increased nuclear and coal facilities and a renewable energy agenda.”

To this end it has built the STAR Refinery in Izmir. Similar projects are under way in other parts of Turkey. The Economic and Commercial Office of the Greek Embassy in Ankara predicts that once these refineries operate fully, Greek fuel exports will be reduced to zero.

So, if you take out fuels what is left? A big trade deficit for Greece. It exceeds €700 million.

Bilateral trade is conducted in the context of Turkey’s Customs Union Agreement with the European Union, which entered into force in 1996. Before the geopolitical tensions and the pandemic, Greek products had been making some progress in the Turkish market.

Ethanol for the food and beverage industry, cotton, cereals, tobacco and machinery were among the most dynamic products. Turkey is a huge market of 83 million consumers. Its middle class has been growing and more women enter the job market. Demand for sophisticated products of nutrition (i.e. healthy food products, quality wines, personal care (i.e. natural cosmetics) and tech gadgets is rising.

Normally the Turkish market would present an attractive exports destination for Greek products. But for most products, especially the ones of the food industry, penetrating the Turkish market is quite hard.

There are three reasons for this:

❱ The fall of the Turkish lira makes all imported goods more expensive. The Turkish currency has lost more than 30% of its value against the dollar and the euro in 2020.

❱ The Turkish state imposes a number of tariffs that drive consumer prices up.

❱ Turkish authorities follow “practices that make imports harder” as the Economic / Commercial Office of the Greek Embassy in Ankara notes (for example, they demand a special certificate issued by Turkish authorities for all pharmaceuticals imports in Turkey)

More specifically, there are:

❱ a special tariff to finance the “public housing fund” of Turkey.

❱ tariffs on all agricultural products. Tariffs are particularly high for food and drinks that constitute competition to Turkish producers.

❱ a Special Consumption Tax (for some alcohol products).

Greek investments in Turkey have been following the general European trend. After a spike in the ’00s (especially in the banking sector when the National Bank of Greece acquired Finansbank in 2006), they have been receding lately. The National Bank of Greece sold Finansbank in 2016.

Cross-border tourism on the other hand has been growing steadily in the past decade. In 2014, 2015 and 2017, large numbers of Turkish tourists visited Greece. Greece has been named as one of the top holiday destinations for Turkish tourists in 2017. Greek islands of East Aegean depend heavily on tourists from Turkey, especially the ones that visit the islands by boat. But the fall of the Turkish lira makes it expensive to cross the border and the trend has reversed.

On the other hand, Greeks have been visiting Turkey in growing numbers after the end of the Greek financial crisis. This trend is expected to be reversed after the conversion of Hagia Sophia into a mosque. An important institution of bilateral economic cooperation is the Supreme Council of Greek-Turkish Cooperation.

The last (4th) took place in March 2016 in Izmir. There the two parties agreed, among other things, on a ferry connection from Thessaloniki to Izmir and the construction of a new high-speed railway connection between Istanbul and Thessaloniki. Neither of these projects has shown any progress.

An economy in dire straits

Greece has only recently exited a decade-long financial crisis that slashed its GDP and household income and forced the country into harsh austerity. The Greek economy has been recovering the past three years and was expected to achieve dynamic growth in 2020, before the pandemic struck.

On the contrary, for Turkey, the pandemic might be the final blow. Its economy has been struggling with rising debt (public and private), currency depreciation and sluggish growth. In the wake of the global financial crisis, growth in Turkey became increasingly dependent on externally funded credit and demand stimulus, and, as a result, “Turkey’s economy began running above potential with a large current account deficit and high inflation,” notes the IMF in its 2019 Article IV after Consultation with Turkey (December 27, 2019).

The long-term picture of the Turkish economy, source: IMF

On October 7, 2020, the President of Turkey, Recep Tayyip Erdoğan fired the country’s central bank governor, Murat Uysal and replaced him with the former Finance Minister Naci Agbal. Hours later, Erdoğan’s son-in-law, Berat Albayrak Turkey’s Finance Minister was ousted too.
“The Turkish lira has been suffering from depreciation for a while,” explains to GBF Uğur Gürses, financial editor and ex member of the Turkish Central Bank.

“Apart from the Covid-19 pandemic, structural problems and bad management of the Turkish economy are the reasons behind this. Chronic current account deficit, easy monetary policy, and big credit expansions have been putting pressure on the Turkish currency. Big pressure is also coming from politics. Turkey has been losing the rule of law and democratic values day by day for a decade. This is another reason for the loss of confidence in the national currency. Lira depreciation is a major concern for all; corporates owe large sums of foreign currency in their balance sheet. As long as Lira depreciation continues, their balance sheets are hit by FX losses. Another problem is raising inflation.”

So how can the Turkish state afford its growing interventions in the East Mediterranean (in Syria, Libya, the drilling expeditions)? – we asked. “All expenses are financed through the state budget. The budget deficit has been increasing rapidly in the past 2 years,” notes U. Gürses. “So far, the East Mediterranean crisis did not affect the Turkish economy. But lately the sword of Damocles is hanging over it, meaning the potential sanctions imposed by the EU. That would taper off credit lines to Turkey by EU banks and financial institutions.”

The article is included  in the the Greek Business File November-December 2020 issue.