The currency crisis in Turkey has revealed a key weakness in its economy: an almost complete dependence on imported energy for heating households and for the operation of factories and industry in general.
Turkey is surrounded by some of the world’s richest deposits of fossil fuels, in the Middle East and Central Asia, but autonomously produces little oil, gas and coal of its own. The state imports 93% of the oil and 99% of the gas it consumes.
This situation is making Turkey particularly vulnerable as energy prices rise in dollars while the Turkish lira is losing ground – two events that have been happening in parallel in recent times.
The Turks are having a hard time keeping up with price increases
Both factors have hurt Turkey’s economy, the G20 and NATO. Brent oil prices have risen 42% in dollar terms this year. In the price of crude oil since the coronavirus’ omicron strain was discovered, the pound has lost more than a third of its value since Turkey’s central bank began cutting interest rates in the face of accelerating inflation since September.
The rise in energy prices further stretches the economic capabilities of the Turks and they are already having a hard time keeping up with the rising prices of food, medicine and transportation. The government raised the price of fuel by more than a whole pound per liter last week, causing long queues at gas stations the day before the midnight price rise.
The gas supply agreements will expire next month
Turkey’s energy situation is unstable because supply contracts supplying 8 billion cubic meters of natural gas a year – almost 15% of annual demand – are expected to expire next month, just as Europe is facing the biggest gas price crisis in a generation. Cold weather raised gas prices in Europe and the UK by 8% on Monday.
The long-term agreements relate to gas sent by the Russian Gazprom company to a government-controlled corporation in Ankara Botaş Petroleum Pipeline and a group of private companies. Contract renewal talks are underway these days.
“This situation is very disturbing,” said Golmira Razaeva, a senior research fellow at the Oxford Institute for Energy Studies. Turkey may even reach a point where it will have power outages during the winter, she added.
Russian Gazprom – one of the biggest gainers
Gazprom is one of the largest beneficiaries of the global shortage of natural gas, and has been producing record profits from it in recent months. Sales to Turkey also helped: Gas began flowing through the TurkStream pipeline passing through the Black Sea in early 2020 and Gazprom says supplies to Turkey more than doubled in the first 10 months of 2021. Ankara, however, tried to reduce its dependence on Russian energy by importing gas from the US as well. By producing more renewable energy.
Turkish President Recep Tayyip Erdogan will want to avoid a shortage of winter gas. Russia could push Turkey away from oil-related prices, towards prices that reflect spot trade in international gas centers like the Netherlands, which are currently higher.
Energy prices are a major factor in Turkey’s inflation problem. Consumer prices rose by almost 20% in October compared to a year earlier. According to the Turkish Statistics Institute. Transportation and commodity categories including electricity, gas and other fuels account for 6.5% of this increase.
“Households will not be able to spend a lot of money on other things,” said Victor Sabo, fund manager at asset management company abrdn, which sold all of its assets in Turkish lira from investment portfolios dealing with debt of emerging markets.
Demand for gas is expected to peak this year
Natural gas is responsible for more than a quarter of the energy consumed in Turkey and demand is expected to reach a peak of 60 million cubic meters this year. Russia is the biggest supplier despite a relationship that has sometimes not been smooth with its rivals in the region. Gazprom has cut the amount of gas it sent to private Turkish importers who owe the Russian company hundreds of millions of dollars earlier this year.
The Turkish government corporation Botaş, which buys and transfers Russian gas, is under pressure due to the decline in the value of the local pound. The company sells gas at government-set prices, which due to currency differences are currently lower than the price of gas it imports from foreign countries.
Ali Arif Acturk, an energy consultant who previously worked at Botaş and is on the board of directors of two gas distribution companies, estimates that Botaş will lose between $ 4 billion and $ 5 billion this year. A Botaş spokesman did not respond to a request for comment.
According to Acturk, the contracts will eventually be part of discussions between Erdogan and Russian President Vladimir Putin, which include other issues such as Syria and Ukraine.
Cool relations with European countries
Russia’s relations with Turkey are less chilly than its ties with the EU, and that should help Ankara get the gas it needs, says Christoph Roll, a research fellow at Columbia University’s Global Energy Policy Center and a former BP chief economist. In recent months, however, the Kremlin has complained about the use by Ukrainian government forces fighting separatists supported by Russia of Turkish-made drones.
In one sense, Turkey is in a better position to deal with rising energy prices compared to the period when it faced a currency crisis in 2018. The country’s current account – the amount of deals it has made with the rest of the world – is in a rare state of balance due in part to the revival of tourism before the coronavirus omicron strain was discovered.
At the same time, the rise in global energy markets is drawing dollars from the economy which is a warm home for companies laden with foreign currency debt. Turkey has spent $ 3.67 billion more on energy imports than it imported from exports in September, according to central bank data, which is its largest expenditure in the field since 2014.