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Peripheral Country Spread Effects of the Political Crisis

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The effects of the political crisis on the surrounding countries… It is seen that the tension between Russia and Ukraine has reached greater dimensions. However, the end of military tension does not mean the end of international tension. The possible embargoes of the US and EU against Russia indicate that the tension between the countries may continue and these may have economic and financial repercussions. In such a case, both the regional economy and the financial markets will be affected by the developments.

 

Energy profile… On the other hand, natural gas prices in Europe increased due to sanctions and expectations of supply cuts. The price of Brent oil rose to $103 per barrel. Turning the sanctions into a showdown may cause much higher levels to be seen in commodity prices. Russia, which has a share of 19% in the world’s natural gas reserves, also has a share of nearly half (41%) in the natural gas imported by Europe. In addition, Russia holds 13% of the world’s oil production and ranks third in the world’s aluminum production, in wheat production from agricultural products.

 

Russia’s main trading partners… Source: Bloomberg

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Economic effects for Turkey… In the statement made by the Ministry of Foreign Affairs, Turkey emphasized its determination to protect Ukraine’s political unity and territorial integrity. For this reason, the increase in tension may affect trade relations with Russia in the coming period. While Turkey has a trade volume of 22.9 billion dollars with Russia and 5 billion dollars with Ukraine, Turkey supplies 39.4% of its refined oil imports and 56.2% of its crude oil imports from Russia. In addition, according to January data, Turkey obtained 10.5% of its tourism revenues from Russia and 2.9% from Ukraine. These shares were 17.5% and 5.5%, respectively, at the beginning of 2021. In other words, it can be mentioned that there is an effect of approximately 20% on tourism revenues. In addition to these direct effects, increases in oil and natural gas prices in case of military conflict, if permanent, include the possibility of deterioration of Turkey’s macroeconomic balances through foreign trade, current account balance, exchange rate and inflation.

 

When we look at the effects of the Ukraine crisis in 2014; Between 2014-15, the number of Russian visitors decreased by 18.5%. However, the real decline occurred between 2015-16, when the plane crisis with Russia and relations became strained. While there was a 76% decrease in 2016 compared to the previous year, the share of Russia in total tourism revenues decreased to 3%. With the normalization of relations, it became old again in 2017 with a serious base effect. The decline in 2020 already marks the period when there are serious travel restrictions related to the pandemic. There is no significant break in Ukraine over the years. In 2016, there was a significant proportional increase of 47%.

 

We can summarize the layered effects as follows;

 

·        Loss in exports

·        Decrease in tourism revenues

·        Increase in energy bill

 

Number of visitors from Russia and Ukraine by years… Source: Ministry of Culture and Tourism

 

Conclusion? In the current geopolitical risk axis, Turkey’s inflationary balances and, accordingly, its borrowing profile may be adversely affected. The most compelling factor will of course be the rise in oil prices. Of course, strategic balances are also important. The fact that Russia is an important economic partner for Turkey in terms of energy flow and tourism directly concerns the situation of the country. On the inflation front, although the movement in exchange rates has slowed down with FX-protected deposits, we think that additional effects from energy prices may pose risks and adversely affect the current account balance. The negative impact of tourism revenues may further strain Turkey’s foreign exchange needs. With the rising geopolitical risk, the expected money inflow from the tourism sector may fall below expectations and the negative pressure on the lira may increase in the short term. The increase in demand for commodities in global markets indicates that cost inflation expectations will increase rapidly in the short-medium term. The Central Bank will need to revise its assumptions and forecasts regarding the short-medium-term pricing behavior upwards. We consider that the inflation equilibrium point may be higher than the previous assumptions.

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