Trade and Economic Relations of the Russian Federation and the Turkish Republic

In 2004, the most critical events happened in development of bilateral relations between the Russian Federation and the Turkish Republic  – an official visit of Russian President Vladimir Putin to Turkey in December and Sixth Meeting of the Mixed Inter-Governmental Russo/Turkish Commission on Trade and Economic Cooperation,  which was held on the eve of the visit. As part of the economic part of the visit and the meeting of the IGC, the entire range of cooperation issues was considered,  ways of addressing the principal problems were outlined, and transition to multi-dimensional cooperation and partnership was emphasized.  However, there was a significant gap between positive declarations of the Turkish government and specific practical steps.  Within IGC,  it was displayed in  departure of the Turkish side from  specificity and in unwillingness to  include any agreements on individual projects in the minutes of the meeting  (except for the one of them, which is extremely advantageous for the Turkish side, namely, construction  of a pipeline bypassing the Black Sea straits). At the same time,  the Turkish side continued to persistently promote resolution of a series of issues of unilateral interest to it, such as  elimination of the imbalance in official trade and  getting back to partial payment for Russian gas deliveries with Turkish goods and services, conclusion of a free-trade agreement,  further supplies of goods without pre-shipment inspection and virtually uncontrollable import to Russia of  goods  under shuttle trade and also active lobbying in this connection of creation of free-trade areas, customs warehouses and terminals.

In total trade turnover of Russia, Turkey ranks No. 14, having  outstripped such nations as Japan, India and the Republic of Korea.  It accounts for more than  3% of our trade turnover, and, taking into account so-called “shuttle” import of the Russian Federation, approx.  5%.

According to statistical data, Russia’s trade turnover with Turkey is described by the following data  ($ mn):

 In 2004, trade turnover between Russia and Turkey reached  the record year for all years of cooperation, almost $11 bn, having increased by 60.1% on 2003,  export rose by  66.2%, and import, by 35.8%. Russia’s debit balance in official trade amounted to $7.1 bn. The share of Russia in Turkish import is 9.3% (2^nd place after FRG), and in export,  2.9% (8^th place).

The main Russian export component, just as in previous years, were fuel and energy products (62%), metallic products (28,1%), chemical products (4%), timber and pulp products (2.4%), agricultural products (1.6%).

The main item of Russian export  was natural gas (some $ 2 bn). Total growth in supplies amounted to 14.4 bcm, including 11.1 bcm by the western gas pipeline, and 3.3 bcn, through the trans-Black Sea gas pipeline. The latter was steadily functioning during the entire 2004 year.  Crude oil, oil product and metal product supplies   boosted by $ 1.7 bn, $1.1 bn, and $2.5 bn, respectively. Supplies of machinery and equipment amounted to $35 mn.

In 2005, there are certain options for scaling up export of machinery and equipment. These are contracts for supplies of energy equipment for Torul hydro plant (Silyvye Mashiny, $9.7 mn),  Sobol, Gazel, Lada/Niva and ZIL cars ($25-30 mn), individual  machine-tools and cable products.

Machinery, equipment and vehicles ($498 mn, 26.9 %), textile and clothes ($420 mn, 22.7%), agricultural products and food ($322 mn, 17.4%), chemical products  ($207 mn, 11.2%), metallic products  ($111 mn, 6%) prevail in our official import from Turkey. The bulk of “shuttle” export ($3.0 bn) is accounted for by ready-made clothes and leather goods.

Active cooperation continues in construction of a series of facilities in Turkey and Russia. Taking into account that, with commissioning of the Blue Stream gas pipeline, the fuel and energy component of our export will increase even more, the issue of its structure improvement becomes even more topical.

With possibilities of Russian companies to significantly increase supplies of machinery and equipment to Turkey being limited, the main dimension of work is looking for ways of  facilities construction in Turkey both by participation in tenders and by direct investments. The top-priority cooperation dimensions are the power industry, the oil and gas industry, and transport construction.

Only the facilities included into bilateral inter-governmental agreements and protocols, including protocols of the Inter-Governmental Commission, may be received on a bilateral basis, bypassing international tenders where competition on the part of Western and local firms is rather high.   Deriner hydro plant and Torul hydro plant are now constructed under this pattern. In addition, as a result of efforts of the consortium members (Tekhnostroyexport, Erg Inshaat, and WEMB, FRG),  work involving design of Bairam hydro plant (69 MW) and Baglyk hydro plant (58 MW) were included into the 2005 state investment program. Contracts for their construction were ratified as early as in 2002  and inclusion of design work in the 2005 investment program lets us get down to negotiations on signing and implementation of the key contracts .

Erection of a dam and Deriner hydro plant on the Chorukh River with capacity of 670 MW is carried out by a consortium of firms comprising Erg Inshaat (the leader),  Tekhnostroyexport VO OJSC and two Swiss firms. The scope of TSE’s liabilities amounts to some $50 mn (construction of the machinery hall and tunnels in the ledge rock).  From 15 to 120 Russian and Ukrainian specialists worked at the facility in different periods.  At present, the biggest share of staff is now accounted for by Turkish workers employed on site. The scope of TSE’s performed obligations amounts to some 85%.

In the consortium with the Turkish Baytour and Western firms, Silovye Mashiny VO participates in construction of Torul hydro plant on the Kharshit River with capacity of 100 MW.  Construction was performed by Baytour and are nearing completion. The scope of liabilities of Sylovye Mashiny that envisages supplies and technical supervision over energy equipment installation amounts to $9.7 mn. However, due to a financial squeeze in the country, no assignments were allocated to the customer (the Turkish Water Facilities Administration) in 2004. As a result of taken steps, it is only in January 2005 that, after repeated inclusion of the facility into the investment program, that the L/C for the said sum of money was issued. In this connection, the idea is that the bulk of supplies will take place in 2005.

In 2004, practical steps were taken aimed at receiving by Russian entities of new contracts for construction of energy facilities in Turkey, on a bilateral basis, bypassing the international trade system.  For instance, in furtherance of the Russian side’s proposals recorded in minutes of the 4^th and 5^th meetings of IGC,  possibilities of bilateral cooperation on Gektash dams and hydro plant on the Zamanty River (270 MW) and Boyabat hydro plant on the Kyzylyrmak River (513 MW), for construction of the 2^nd energy unit at Orkhaneli thermal plant were elaborated with Turkish institutions and organizations.

To expand economic cooperation, information and materials on international tenders for erection of high-voltage power lines as well as Uzunchayir and Obruk hydro plants was transmitted to a series of interested Russian entities (Tekhnopromexport, Tekhnostroyexport,  Zagranenergostroymontazh). However, probably, taking into account the negative experience of previous years, none of the Russian companies, except for Sylovye Mashyny VO, participated in tenders, explaining its position by difficulties with funding and high prices of manufacturing plants.  At the same time, participation of Sylovye Mashyny  in the said tenders confirmed the ability of Russian companies to equally compete with Western firms both in terms of equipment and in prices. In addition, Sylovye Mashyny A/O  elaborated issues and prepared proposals both for participation in tenders  (Din hydro plant, 36 MW;  Orkhaneli 1 thermal plant, 210 MW generator reconstruction or replacement;  Elbistan A thermal plant, comprehensive reconstruction), and on a bilateral basis, with the private sector  (energy units for sugar plants in Kaiseri and Kiutakiya,  16.4MW and 4MW; for the paper factory Chaidzhuma, 15 MW; for Iskenderun industrial area, 150 MW).

Another essential line of cooperation is the oil and gas market of the country. In 2004, Stroytransgaz  participated in the tender for laying down the Turkey/Greece 200-km trunk gas pipeline.  Krasnodargazstroy participated in three tenders – for gas pipelines Tarsus/Mersin (35 km), Adana/Iskenderun (170 km), and Malatya/Marash/Gaziantep (250 km), but based on their results it failed to join even the top three companies.

In 2004, Transstroy corporation in consortium with Khazinedarogly and Junivar,  has virtually finalized construction of three sections of the high-speed tramway lines, under the contract with Istanbul Cityhall,  Sultanchiftlii/Edirnekapy, Edirnekapy/Veznedzhiler, and Eminoniu/Kabatash with total length of 18.6 km and a tramway depot  worth of $47 mn.  Finalization of work, testing and commissioning are scheduled for April/May 2005.

During recent years, participation of the Turkish companies in construction of different facilities in Russia became more active. The total scope of concluded contracts reached $13.2 bn by the end of 2004; of which work and services were provided for over $7 bn. In 2004, the scope of new signed contracts exceeded $1 bn. Ratification by the Russian State Duma of double-taxation and investment-promotion treaties in 2001  started to bear fruit. However, lack of funds from federal and local sources, higher competitive standing of Russian construction companies, inconsistency of tax, tender and investment law of Russia and regions as well as imperfection of the system of  commercial and other risk insurance were restraints in development of this cooperation dimension.

Approx. 150 Turkish construction firms are now operating in Russia. Most of them have facilities in Moscow and the Moscow Region as well as St. Petersburg, Tatarstan, Bashkortostan, the Sverdlovsk, Vladimir,  Rostov regions, and the Krasnodar Area.  The total of some 800 facilities have been built by Turkish firms in Russia since the late 1980s.  The biggest of implemented investment projects at this stage are the following:  several supermarkets of the Ramstor network in different cities of Russia;  Vestel TV set assembly works in Alexandrov (2^nd stage),  expansion of the brewery in Biriuliovo, Moscow; a business center at Paveletskaya Embankment in Moscow (ENKA, expansion),  household electric equipment works in Kapotnya, Moscow (Konti),  Moscow City project implementation (Summa), and Tomsk-based cancer center (Mertep). In addition, Archelik, Turkey’s biggest company engaged in production of household electro-technical products, in 2004 started implementation of two projects, refrigerator and washing machine works. As a rule, Turkish companies come to Russia with modern technologies and management.

Implementation of the $350-mn investment loan provided by Turkey’s Eximbank continues. Out of 7 signed loan agreements worth of $341 mn,   operations of the Central Clinical Hospital  ($80.0 mn, 100% was used; $11 mn, a new loan; implementation is nearing completion) and the Children’s Dental Hospital in Moscow (a new loan of $15 mn; implementation continues)  were funded.

In November 2004, negotiations on payment of Russian debt to Turkey’s Eximbank in the amount of $350 mn resumed (between the Russian Finance Ministry and Vnesheconombank, on the one hand, and the Turkish Treasury and Eximbank, on the other hand).  The Russian side proposed several debt repayment options, including commodity supplies. The Turkish side put forward a series of counter-options. The parties agreed to study them and to continue negotiations in the near future.

To develop and coordinate bilateral trade and economic cooperation, in accordance with Agreement dated May 14, 1992, the Mixed Inter-Governmental Russo-Turkish Commission for Trade and Economic Cooperation (IGC) was established.  The Chairman on the Turkish part is the State Minister K. Tiuzmen (since January 2003); the Chairman on the Russian part (from July 2004) is Russian Industry and Energy Minister Victor B. Khristenko.  The last 6th meeting of the Commission was held in Moscow on November 29-30, 2004.

The IGC meeting reviewed the most topical issues of bilateral trade and economic cooperation, in particular, cooperation in the fuel and energy sector, gas industry,  in the power industry, industry and technologies, including by participation of Russian entities in implementation of the Turkish privatization program, the Turkish privatization program, program for gasification of Turkish cities, construction of underground gas storages, gas and oil pipelines.  Issues of trade as well as cooperation in third countries, including Russian gas supplies across the Turkish territory were dealt with at the Commission’s meeting.

To establish direct business links with Russia’s regions, the Russo/Turkish and the Turko/Russian Business Councils have been established and operate with participation of 36 Russia’s regions and over 150 Turkish companies and firms.  The last joint meeting of Business Council was held in Moscow on January 12, 2005.