Monday saw Russian President Vladimir Putin recognise the independence of two separatist entities in eastern Ukraine, Donetsk and Luhansk. Following the recognition, Russian troops were dispatched to the area to ‘maintain peace’, a move that may escalate the situation into all-out war.
Putin said Ukraine was an ‘ancient Russian land’ that was ‘managed by foreign powers’, and was a U.S. colony with a puppet regime.
On Tuesday, Ukrainian President Volodymyr Zelensky said the country was waiting for ‘clear and effective steps of support from its international partners’. The UK, the European Union and the United States are planning to implement further sanctions on Russia.
Separatist groups have been vying for independence in Dnetsk and Luhansk since 2014.
Mahfi Eğilmez, prominent Turkish economist and former undersecretary of Turkey’s Treasury, wrote on the possible escalation and its economic consequences for Turkey and other actors involved in the crisis.
The following article was translated from its original on Eğilmez’s personal website.
Economics of War
Russia has recognised Donetsk and Luhansk’s declaration of independence from Ukraine, pushing tensions up higher with NATO, and the possibility of the tensions escalating into a war is now top of the global agenda. As with all things, this matter also includes many smaller issues, one of the main ones being the future of economies.
There are three types of war: (1) Two or more states taking on armed conflict with their armies over economic, political or religious disagreements (An international war). (2) Various groups within a country taking up arms to take over the government (A civil war). (3) Two or more states engaging in political tensions without breaking out in armed conflict, in a situation that could escalate at any moment (A cold war).
In the global system, states are affected by wars even if they are not directly part of any of the three types. Today, the case at hand is the third type for now, a cold war. As of today, none among the United States or NATO or Ukraine have given a military reaction to Russia recognising Donetsk and Luhansk as independent states and sending troops to support them. There is talk of a light embargo from the United States and Europe, and a possibility that the embargo would get more severe if Russia attempts to invade the rest of Ukraine. The United States is another story, but it cannot be said that Europe has that strong of a hand when it comes to embargoes. Russia is the most important natural gas supplier for Europe, and as such, it could cut the gas off in a counter-embargo. Russia would inevitably lose significant amounts of income if that happens, as it would lose an important market. The current picture shows us that there is a complicated equation at hand, and that the matter could drag on for a long time.
Turkey has announced that Russia’s recognition of the Republics of Donetsk and Luhansk was unacceptable.
The most defined outcome of this development appears to be bilateral embargoes and an acceleration of the arms race between NATO member states and Russia. Europe gets half of its natural gas from Russia, and the other half from various countries starting with Norway and Algeria. The countries least dependent on Russian natural gas are Spain (1 percent), Romania (8 percent), and Belgium (14 percent). Whereas, Germany gets 51 percent of its gas from Russia.
These developments have reflected on the rest of the world in the form of rising prices for gold, silver and other precious metals, crude oil, and other commodities. The effect on Turkey was the dollar-lira exchange rate rising to 13.75 after cruising along 13.50 for a while, on top of these price hikes.
Turkey’s economic relationship with Russia is quite extensive. Some 33 percent of Turkey’s natural gas comes from Russia, 21 percent from Azerbaijan, 17 percent from Iran, 13 percent from Algeria, 4 percent from Nigeria, and the rest from various countries. It is an advantage for Turkey to have diverse sources for its natural gas, but Russia has significant weight.
Russians also make up the largest of tourist groups to holiday in Turkey. Before the COVID-19 pandemic, some seven million Russians would visit Turkey every year – 13 percent of all incoming tourists. These tourists generated some $3.3 billion – 10 percent of all tourism revenue. In 2021, Turkey increased its exports to Russia to $5.8 billion – 2.6 percent of all exports. Russia stands in 12th place among the list of countries Turkey exports to, but is first in line in terms of the volume of imports. Turkey imports up to $29 billion’s worth of commodities from Russia – 10.7 percent of all imports. On top of these, Russia is also constructing a nuclear power plant in Akkuyu in southern Turkey. Russians will also take on the running the plant once construction is completed.
Russia is one of the most important countries for Turkey in terms of bilateral economic and commercial ties, and as such, a cold war with light embargoes turning into one with more severe embargoes could create troublesome outcomes. Undoubtedly Russia’s prosperity also depends on its natural gas sales for the most part. When NATO countries place an embargo on Russia, if Russia cuts off natural gas in a counter-embargo, everybody will lose.
If the matter escalates beyond a cold war, it could lead to a complete disaster, as both sides are in possession of nuclear power. At this point, looking at who would lose more, we can say that the west, the richer side, has more to lose. Because of that, I think this matter will continue as a long-term cold war with light embargoes.
If the relations between Russia, Ukraine and NATO continue on the current path, markets will eventually digest this development and the principle of market indifference will take over to calm the situation. We saw this play out in many incidents in the past. However, if relations take a turn for the worse and war breaks out, this indifference may not be enough to get over it.