Turkey and Ukraine have a lot in common. Both straddle the fault line between East and West. Both are trade transit routes and both have similar geopolitical outlooks.
But Ukraine is far behind its southern counterpart in terms of development and global trade.
As part of the March 29 Kyiv Post Capturing New Markets conference at the Hilton Kyiv Hotel, the Kyiv Post will be looking at what Ukraine can learn from Turkey.
The conference comes at a timely moment in bilateral relations. Ukrainian President Petro Poroshenko is set to travel to Istanbul this month in hopes of sealing a pivotal free-trade agreement with Turkish President Recep Tayyip Erdogan. It also comes as bilateral trade has dropped to $4.3 billion last year, according to Turkish Ambassador to Ukraine Yonet Tezel, a speaker at the conference.
Despite worries at the time, many observers now consider the 1995 Turkey-European Union customs agreement a watershed moment in Turkey’s economic development. Today, Ukrainian producers have almost identical fears about Ukraine’s new Association Agreement with the EU as those Turkey had 21 years ago, Burak Pehlivan, the vice president of the International Turkish-Ukraine Business Association, told the Kyiv Post.
“They were very afraid – they thought that Turkish production capacities were insufficient,” said Pehlivan. “They thought that the Turkish markets would be flooded with EU goods. However, that wasn’t the reality, and time showed that Turkish companies could learn from competition. Over time, Turkey attracted a lot of investment from these countries, opened a lot of factories – it developed better quality products, but with lower costs.”
Turkey’s total trade turnover went from $57 to $403 billion from 1992 to 2013, and it now has the 17th largest economy in the world, according to the latest World Bank figures. The EU is Turkey’s number one import and export partner, while Turkey ranks 6th in the EU’s imports and 5th in exports.
Investors benefited because exporting from Turkey to the EU is tax-free: “Instead of goods flooding the EU market, EU companies came to Turkey to set up companies, because it’s cheaper and closer to other markets. Exports to Europe from Turkey also increased very quickly too. In the end, exports on both sides increased four to five times,” Pehlivan said.
The agreement was a first between the EU and a non-member state, and according to a 2014 World Bank evaluation it forced improvements in several areas that “lie at the heart of Turkey’s strong export performance over the past decade.”
And, according to a 2015 report by the Wilson Center, Turkish economic legislation is now in line with over 55 percent of the EU’s provisions, “which effectively means that Turkey is a part of the EU economy,” and, moreover, has made Turkish exports more attractive to countries outside the region.
For instance, the EU and the Turkish government have co-financed projects to harmonize their quality controls, such as accreditation, standardization, conformity assessment, metrology and market controls.
Customs procedures were also improved.
As in Ukraine now, Turkey’s customs procedures were mostly paper-based and involved traders making declarations in person, as well as consignments being physically inspected. Now all of Turkey’s customs offices have been automated and 99 percent of customs transactions are carried out electronically, slashing processing time to just over a day.
Turkey is not rich in natural resources. Its trade growth, albeit waning in recent years, is largely attributed to the government’s foreign policy being shaped by its economic interests.
In contrast with the Ukrainian authorities, the Turkish government consistently funds the country’s business associations around the globe, along with exhibitions to promote trade.
At present only one Ukrainian business, Terrasoft, operates in Turkey, while there are more than 500 Turkish businesses in Ukraine. The dearth of Ukrainian businesses in Turkey is in part due to higher Turkish labor costs, but Ukrainian businesses lack almost any state support to help them break into foreign markets.
That’s not to say Turkey’s doing everything right, however.
Kemal Kirisci, a professor with the Brookings Institute who coined the term “trading state” to describe Turkey’s foreign policy, told the Foreign Policy Forum at Bogazici University in 2015 that Turkey’s status is diminishing because of a strategic overextension of its ambitions and a contraction of trade routes due to conflicts in neighboring countries.
The country needs to reinforce its allegiances again with the EU, according to Kirisci, which can be done through upgrading Turkey’s Custom Union and through seeking inclusion in the EU-U.S. Transatlantic Trade and Investment Partnership. As with Ukraine’s Association Agreement, Turkey has to sign separate third-party agreements to keep it in line with those that the EU signs.
According to the Turkish Minister for EU Affairs, Volkan Bozkir, if Turkey is excluded from the EU-U.S. trade agreement it will lose a huge share of the EU market, and Turkish gross domestic product will fall by 3 to 4 percent, amounting to billions of dollars – though that figure was reckoned only to be in the millions in the 2014 World Bank assessment.
Ukraine should also seek to maximize its trading potential and realize its special relationship not just with the EU, but with Turkey as well, according to Pehlivan: “Ukraine is not taking enough advantage of its strategic partnership with Turkey,” he said.
Murat Yulek, a professor of economics at Istanbul Commerce University, told the Kyiv Post that now is the time for Ukraine to build solid trade relations with Turkey.
“Ukraine should take advantage of the current situation with Russia,” Yulek said.
Russia used to be the single largest exporter to Turkey, but then Moscow imposed a trade ban after Turkish jets shot down a Russian warplane in Syria on Nov. 24 after it strayed, the Turks say, into Turkish airspace.
Energy accounted for around 75 percent of Russia’s exports to Turkey, and Ankara is now trying to replace them with imports from China and central Asia. According to Yulek, Ukraine could snap up most of the remaining 25 percent, which includes wheat and grain.
“Both countries are quite complimentary in terms of trading needs. I can see quite a strong possibility that Turkey’s imports from Ukraine, which would replace those from Russia, could increase quite rapidly,” said Yulek. “However, Turkey may not have enough impetus for the time being as its foreign policy is so concentrated on the situation in Syria. So Ukraine must be more aggressive in its marketing efforts to show it’s a more reliable partner than Russia.”
Another driver for increasing bilateral trade would be a Ukrainian-Turkish customs agreement, which would allow for tax-free trade. Negotiations on the agreement, which began in 2007, have been bogged down over the issue of agriculture. However, the geopolitical situation has more than ever brought the two countries closer together. Earlier in 2015, Turkish President Recep Tayyip Erdogan told the press on a visit to Kyiv that work on the agreement was now at its “final stages.”
Nevertheless, Pehlivan said Turkish farmers would find it hard to compete with their Ukrainian counterparts if full liberalization took place, due to Ukraine’s cheap production costs. Still, he said stalling the agreement had been short sighted. Ukraine’s head of the Chamber of Commerce and Industry, Gennady Chizhikov, agreed, saying that he believes that the future agreement will benefit both sides.
Aside from exports, Ukraine could attract more investment from Turkey – and vice versa. The Turkish-Ukraine Business Association says at least 100 Turkish companies want to move factories from Turkey to Ukraine. If that happened, Ukraine would gain capital and experience, particularly in light industry and textiles, according to Pehlivan. But he said these companies will also want to export back to Turkey, and are therefore waiting for the agreement to be signed before they invest.
Ukraine-Turkish trade relations
As a consumer of Ukrainian export goods, Turkey ranks second among all our trade partners. For the year 2014, bilateral trade in goods amounted to $4.9 billion kraine’s exports to Turkey amounted to $3.6 billion. Turkey’s imports to Ukraine amounted to $1.3 billion, according to the Ukrainian Embassy in Turkey.
Turkish Ambassador to Ukraine Yonet Tezel said trade further dropped in 2015 to $4.3 billion. Two-thirds of the trade are Ukrainian exports to Turkey, while one-third of the trade is Turkish exports to Ukraine.
According to official statistics, the volume of the Turkish investments to Ukraine as of Dec. 31, 2014, was nearly $200 million with more than 500 Turkish companies working in Ukraine.
