ISSUE 4-2015
Victor Zamyatin Victor Chirila Igor Tyshkevich Bogdana Kostyuk
Daniş Emrah Emin
Ярослав Шимов
Petr Vagner
Vera Novikova

Disclaimer: The views and opinions expressed in the articles and/or discussions are those of the respective authors and do not necessarily reflect the official views or positions of the publisher.

By Daniş Emrah Emin | Coordinator of Istanbul Energy Program, Hazar Strategy Institute, Turkey | Issue 4, 2015

While the relations between Russia and Turkey were experiencing their best period of the history after the year 2002, it reached an all-time high by the statement made by Putin during his Ankara visit in December 2014. Russian President declared that the South Stream Project would be canceled and Turkish Stream Project would be carried out, instead.

However, the eruption of the civil war in Syria was bound to create turbulence in the relations of the two countries, it became clearer after the Turkish jet bomber was crashed at the East Mediterranean in 2012. The rising tension could be foreseen in the recent months as two countries were in different positions about Syria. The military support, provided by Russia to Syria, has elevated the diplomatic tension to a point of security dimension after the border breach on November 24 which resulted with the crashing of the Russian jet bomber by Turkey.

Considering this tension’s impacts on Turkish economy as well as on energy supply security; it will not only create serious risks and problems in the short run, but also it is expected that the existing risks will become reversed for Turkey and have an adverse effect on Russian economy and natural gas exports in the long run.

Russia’s export to Turkey is $25 billion

Although the volume of trade between Turkey and Russia is quite high, it is seen that the trade balance is to the detriment of Turkey to a large extent. According to the 2014 data, total foreign trade volume between the two countries was about $31.2 billion. Turkey had a trade deficit of $19.35 billion to Russia. In the period of January-October 2015, the bilateral trade volume regressed to $20.4 billion due to the sanctions imposed to Russia, the economic crisis, and the falling commodity prices. Turkey’s trade deficit to Russia decreased to $14.2 billion. When we consider that the total foreign trade deficit of Turkey in 2014 was $84.5 billion, it is seen that 23 percent of the total deficit was originating from Russia. The amount Turkey paid to Russia for petroleum and natural gas in 2014 was around $12.8 billion.

Following the collapse of the Soviet Union, Russia became an important export market in textile and food sectors for Turkey, and it was also one of the prior countries where                contracting sector undertook infrastructure and construction projects worth a few billions dollars and for Russia, Turkey started to become an important market and a trading partner where commodity export volume increased particularly in petroleum and natural gas from the beginning of 2000.

While Turkey was the second largest market of Russian natural gas, this situation caused Turkey to become highly dependent on this country for natural gas supplies.

Due to Turkey’s rapid economic growth and increasing energy demand, natural gas consumption sharply increased and Turkey became the largest natural gas buyer country in Europe. Turkey’s natural gas consumption of 14.5 billion standard cubic meters in 2000 increased up to 48.7 billion standard cubic meters by the end of 2014.

In the last two decades, Turkey had the second fastest increasing electricity demand after China, and it paid utmost attention to natural gas conversion plants in early 2000s in order to meet this demand as those plants have low investment costs and short construction periods. Together with increased industrial consumption and urban gas consumption, it led to a sharp rise in natural gas demand in Turkey.

Contrary to the countries in the East and South of Turkey, the country is not rich in natural gas resources and had been meeting around 99 percent of its total natural gas consumption through imports by the end of 2014.

Today, Turkey imports natural gas through pipelines from 3 countries and has 2 import LNG terminals. Turkey, imports Russian gas through the 2 different pipelines one is a 14 billion cubic meters/year contract through the West Line in which natural gas supply started in 1987 and the other is a 16 billion cubic meters/year contract through the Blue Stream Pipeline which came into use in 2003. The contracted volume of gas is 10 billion cubic meters/year with Iran, and 6.6 billion cubic meters/year with Azerbaijan. The total amount of LNG to be received from Algeria and Nigeria is 5.7 billion cubic meters/year. Turkey also imports LNG within the spot market.

Turkey imported 49.26 billion standard cubic meters of natural gas from Russia in 2014, which corresponds to 54.7 percent of its total natural gas imports. Turkey does not have difficulty in maintaining the total natural gas supply and demand balance, but it is hard to meet the peak demand during the winter months. The underground gas storage capacity of 2.6 billion cubic meters falls behind under the peak demand conditions during the winter months. It is also not effective in ensuring supply security. Moreover, LNG plants are insufficient and there are certain deficiencies in the natural gas transmission substructure, and thus there can be limited input.

The TANAP project, the most important link of the Southern Gas Corridor, being realized by Turkey and Azerbaijan, starts from Azerbaijan and reaches to Italy through Turkey. It will supply an extra natural gas input of 6 billion cubic meters to Turkey from 2019. In the upcoming years, Turkey will have the opportunity to take 15 billion cubic meters of extra natural gas.

At the same time, it is scheduled to export 10 billion cubic meters/year of natural gas to Turkey as of 2019 due to the agreement made with the Kurdish Regional Government of Iraq. Turkish and Iraqi sides are still negotiating the terms and conditions about the project.

On the other hand, rich natural gas reserves in the East Mediterranean region will feed the Turkish market and also the European markets via Turkey. If the relations between Turkey and Israel are normalized, offshore fields of Israel are developed and a pipeline is constructed; Israeli gas can be included in Turkey’s imported gas list within 3 or 4 years, approximately by the end of 2019. It is evaluated that 5 billion cubic meters/year of natural gas can be available after that date.

Together with the natural gas resources which will be delivered to Turkey in early 2019, and Turkey’s diversification of its natural gas sources in the long term will ensure energy supply security, and at the same time decrease related costs of natural gas imports in the future.

The agreement with Russia for 8 billion cubic meters of gas will come to an end in 2021 and Russia schedules to cut out the West Line by this date. These facts become more significant after Russia’s statement, declaring that the Turkish Stream will be transfixed.

While Turkey will play a significant role in the access to natural gas resources far above its demand and in the commercialization of those resources by delivering them to European markets after 2021, it can diversify its portfolio instead of high-cost suppliers and an absolute dependency on single supplier country. In this case, the Blue Stream will stay as Russia’s only export line into the Turkish market and Russia may be confronted to lose its dominant position in the Turkish market and lose its market share. The same situation may be experienced with Iran from where Turkey purchases gas at the highest price.

The crisis between Turkey and Russia will certainly have reflections on the energy sector as energy constitutes one of the main titles in the relations between the two countries. However, Turkey may face a bigger risk in terms of energy supply security in the next 3 to 4 years until it initiates new projects and other alternatives. Those new alternatives which will be carried out in the medium and long term will ensure Turkey’s supply security by bringing resource/country diversity in the long term and help develop renewable energy sources at a faster pace.

Russia will face billions of dollar economic loss by failing to keep more than 50 percent of its share in Turkey, the second largest gas export market with the highest increase in demand in Europe. Keeping in mind that Gazprom’s gas export revenues of 61.8 billion dollars in 2013 declined to 50.6 billion dollars in 2014 due to the continuation of decreasing demand in the natural gas consumption of Europe and the rapid regression in the gas prices in the past year along with the rapid development in the renewable energy sector. The calculations show a regression in Gazprom’s revenues by 36-37 billion dollars in 2015 and 32 billion dollars in 2016, which tells that Turkey will not be the losing side in the medium and long term.

Russia crisis will be a milestone in Turkey’s energy policy

In case the crisis continues and Russia does not change its approach, the results may also lead to the abrogation of the Akkuyu Nuclear Power Plant agreement in addition to the regression of Russia’s market share in Turkey particularly in natural gas and petroleum exports in the medium and long term. The dimension of economic losses which Russia might face in the trade between the two countries might be much higher.

For Turkey, the crisis with Russia will be an important milestone as it will lead to speeding up and giving priority to other sources and alternative projects in its energy policies for ensuring the security of energy supply.

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