Following President Erdogan’s apologies for the downing of a Russian aircraft, the relationship between Russia and Turkey has improved. As a result, Russia withdrew its sanctions against Turkey that were targeting tourism, construction firms and food exports. Charter flights will resume shortly. June was also marked by a rapprochement with Israel. Indeed, both countries agreed to restore diplomatic ties which were broken in 2010 after a dispute related to a Turkish vessel that tried to break Israel’s blockade of the Gaza Strip.
Impact on country risk
Following the rapprochement with Israel and Russia, Turkey’s foreign policy seems to be more pragmatic. In particular, Russia’s decision to ease sanctions on tourism is welcome. Indeed, the tourism industry – which accounted for more than 10% of current account receipts and 3.5% of GDP – is hit hard by rising insecurity and Russian sanctions. Following the lifting of Russian sanctions, Russian tourists are allowed to return to Turkey. However this positive news is unlikely to offset the sharp drop in tourism receipts as insecurity remains high which is likely to continue to deter tourists. Given the importance of tourism and as growth in the Eurozone – an important trade partner – is likely to slow down following the Brexit, the current account deficit is likely to widen compared to last year. This is of particular concern as Turkey finances its current account deficit by short-term capital flows and is thus vulnerable to foreign investor sentiment (which could also worsen following the Brexit).
Analyst: Pascaline della Faille, email@example.com