TURKISH - RUSSIAN ECONOMIC RELATIONS: TODAY'S ISSUES AND PERSPECTIVES

Cihangir Gürkan ŞEN
Research Coordination Assistant
Foreign Economic Relations Committee

1. Introduction

Turkey's relations with her neighbor in the north, despite changes in its degree and quality at several times, has always been one of the top items in the recent agenda. Russia of either the era of Tsarist Russia, USSR or the Russian Federation, the name and political regime of which was altered throughout history, has often been recognized as one of the countries "threatening" Turkey's territorial integrity, and this very same "threatening" country has been drawn to the center of balance policies arising at times of troublesome relations with the West. As a matter of fact, this tradition dates back to the event in which the Ottoman Emperor asked Russia's help to solve his problems with his own Governor. (1)

The traces of this balance policy in the political field are likely to be observed in the economic field as well. Indeed, it is undoubtedly acknowledged that Soviet's economic aids and the first industrial facilities established under USSR's support played a major role in the onset of Turkey's industrialization in 1930s with an attempt to gain economic independence after the political independence based on the proclamation of the Turkish Republic. In this regard, this bilateral cooperation has laid the foundations of modern textile, metallurgy, glass industry and chemical industry in the Turkish Republic.

In addition, the neighbor in the north has also been the center of an alternative cooperation against the West at several times, even in the Cold War era, when problems arose regarding political relations with the US and the Western world. After 1960, in a period in which relationship with the Western world turned out to be a crisis, particularly in relation to the Cyprus issue, some technical and technological facilities required by Turkish economy and not provided by the Western world were obtained from the Soviet Union. With this respect, large industrial complexes, metallurgy, chemistry and oil refineries established by the Soviet Union by 1970s in the years of heavy industrialization have been important milestones of Turkey's economic and social life.

However, the course of mutual economic cooperation too was affected by the political relations that became tense in line with the political events of the Cold War era. In fact, it is quite unnatural to tell that Turkey had a stable foreign policy sustained on the basis of certain strategies not only in the political field but also in the economic field against Russia. Russia was mostly been recognized as an element of balance at times when political or economic relations with the West were troublesome or approached a crisis, and was brought back to its familiar condition in the Turkish foreign policy after the crisis was settled down and the relationship with the West took its course.

It may well be claimed that the economic relationship between Turkey and Russia is generally due to political affairs and parallels the political events regarding both countries. This, however, has gradually changed since 1990. Once the Cold War ended, the Soviet Union disintegrated, and the Russian Federation took over the heritage of USSR, both Turkish and Russian political and economic affairs gained mutual weight and political relations now and then have been determined or directed by economic relations.

2. The Emergence of Cooperation Based on Energy

Indeed, after 1990, the foundations of an increasing economic cooperation between Turkey and Russia were laid in late USSR era. The contract, signed on September 18, 1984, concerning the delivery of natural gas to Turkey by USSR who possessed the world's greatest natural gas resources is highly significant in this regard. (For natural gas procurement contracts signed by Turkey so far see Annex 1)

Since the accomplishment of this contract, economic and trade relations between both countries have progressed at a rapid rate. This was partly facilitated by the search for alternative energy resources in Turkey as seen in any other country after the oil crisis in 1970s. Thanks to this search, an alternative energy resource was found and it was aimed to increase the share of natural gas in economy and energy sector and solve the growing problem of pollution in urban areas.

The "Russian-Turkish Natural Gas Pipeline" construction initiated on October 26, 1986 within the framework of the contract dated 1984 got as far as Ankara in August, 1988. In order to enable industrial establishments to consume natural gas, distribution lines were built for several industrial zones on the route of "Russian-Turkish Natural Gas Pipeline" and newer lines were extended on demand. (2)

Beyond an ordinary natural gas procurement agreement, this contract encompasses a more comprehensive meaning with respect to bilateral economic and trade relations. While Turkey has for the first time begun procuring natural gas from the Russian Federation depending no this contract, it was determined that 70% of the natural gas was compensated by Turkish offsets. In this wise, by the implementation of such compensation, it was aimed to find new possibilities to increase the exportation of Turkish industrial goods rather than the traditional Turkish export goods. In addition, it was arranged in the 9th term Mixed Economic Commission (MEC) Protocol signed in 1986 by both countries that part of the payment for natural gas was utilized to finance the projects which Turkish contracting firms executed in Russia. Moreover, the period in which this agreement was put into practice coincided with the period in which the Turkish private sector had to withdraw from the Middle East, its customary import market. Thus an alternative market has emerged for Turkish goods and contracting services.

Owing to this agreement, a variety of Turkish goods from drugs to busses, cleansing agents to telephone exchange which was so far restricted to a few items such as tobacco, tea, citrus fruits, hazelnut and raw materials have entered the Russian market. Besides, these agreements also have made influential contributions to enable Turkish contractors who today execute a great many successful projects in the Russian Federation to rank among Russian construction firms. As a matter of fact, a natural gas importation amounting 1.9 billion dollars was carried out between 1987 and 1994 in which the first natural gas procurement started. The import registered in the entries within this period amounted to dollars 271 million, and the aggregate contracting services amounted to dollars 609 million. (3)

On the other hand, the natural gas account implementation was unable to proceed after 1994 due to Russia's attitude. The main reason to interrupt this mechanism, which made valuable contributions to the improvement of trade relations between two countries was declared by Russia to be the change in Gazprom's, the natural gas exporter company, institutional and financial structure due to privatization efforts after the foundation of the Russian Federation. However, 38% of the shares of Gazprom are under state control and the state still pulls the wires. Although a mutual agreement was later settled between both governments, the mechanism in question was not likely to be put into action.

Following the recent negotiations between two countries, Russia suggested that the Natural Gas contract be altered, and that only a part of natural gas was compensated by Turkish offset, but a concrete progress was not made. The last Mixed Economic Commission Meeting held in October 2001 in Ankara and the following negotiations between authorities of both countries could not reach a conclusion concerning the implementation of the natural gas account.

Furthermore, the 25-year-valid natural gas contract subscribed in 1984 concerning the procurement of 6 billion m3 natural gas per year from the Russian Federation as well as the contract dated December 10, 1996 which envisaged a further 8 billion m3/year natural gas procurement did not refer to any expression of offset. Additional natural gas procurement was initiated in March 1998 within the framework of this agreement.

On the other hand, such a clause was not introduced in the Blue Stream Agreement signed in 1997 either. However, Gazprom delegates have demanded in the recent negotiations between Turkey and Russia that Russian investments are allowed for the improvement of natural gas infrastructure, storage and distribution in Turkey instead compensating part of the natural gas particularly delivered within the Blue Stream by Turkish offset. Russia, hence, aims, on one hand, to enhance its economic effectiveness in Turkey, and on the other hand, by improving the natural gas infrastructure, to expand the use of natural gas in Turkey and thus, to mitigate public reactions due to over-procurement of natural gas from Russia. However, this will not cure the gap in foreign trade balance that recently widens against Turkey. By means of the full capacity initiation of natural gas procurement from Russia in accordance with the Blue Stream project, Turkey, after Germany, ranks the second biggest natural gas market of Russian Federation. Turkey ranks the third after Germany and Italy with regard to present procurements.

Source : BOTAŞ

If natural gas agreements signed between the Russian Federation and Turkey so far are taken into consideration, almost 43% of the natural gas imported by Turkey will be met by Russia once these projects are fully implemented. However, Russia's share in present procurements is over this percentage. In 2002, Turkey effected a total 17.6 billion m³ natural gas importation. The amount of natural gas imported from Russia is approximately worth 11.6 billion dollars. In 2002, Turkey met almost 62% of its total natural gas importation from the Russian Federation. In 2003, 61.68% of the total natural gas supply of Turkey, which is an estimate 25.9 billion m³ is expected to be met by importation from Russia.

3. Main Fields of Economic Cooperation between Turkey and Russia

Despite an occasional troublesome economic relationship between Turkey and Russia, it may well be concluded that a progressive movement marks the last decade and economic relations surpass political affairs. Recently, economic and trade relations between Turkey and the Russian Federation have experienced a significant transformation. Today, the economic relationship encouraged by the increasing cooperation in the energy sector after 1990 offers a wide variety of fields from business to tourism, contracting services to investments. The main fields of economic cooperation between two countries are as follows:

3.1. Trade

Trade relations between Turkey and Russia, the foundations of which are laid in 1980s, were subject to a considerable progress within 1990s. Indeed, the trade volume between both countries, which was an approximate 1.5 billion dollars in 1992 first exceeded 5 billion dollars in 2002.

Particularly in 1993-1997, Turkey's exportation to Russia accelerated and the trade balance against Turkey made a significant improvement. Nevertheless, this improvement sloped downward due to the Russian financial crisis in August 1998. Since 1998, the year of financial crisis, Turkey's exportation to Russia has reverted to its earlier state, whereas importation from Russia has risen. In a period when importation increased, after 1998 following the great regression in exportation, the gap between both countries' trade relations widened considerably against Turkey.

Source : State Statistics Institute (DİE)

However, a re-advancement has been observed in Turkey's exportation to Russia since 2000. Particularly in 2001, the devaluation of Turkish Lira created an environment of competition in favor of Turkish companies, while importation from Russia regressed a lot. But in general, Turkey's importation from the Russian Federation is proportionally less affected by the crises due to its contents, chiefly energy products and raw materials. In other words, the outlines of Turkey's import goods from the Russian Federation involve products with low price flexibility.

DISTRIBUTION OF TRADE ITEMS BETWEEN TURKEY AND RUSSIAN FEDERATION BY PRODUCT GROUPS (%)

EXPORT

IMPORT

Source: DİE

As a matter of fact, over 2/3 of Turkey's all importation from the Russian Federation in 2002 was composed of mineral fuels. Therefore, Turkey's importation and exportation with Russia moved forward although 2002 was at the same time the year Turkey was to face the largest foreign trade deficit in bilateral trade relations with nearly 2.7 billion dollars.

TURKEY-THE RUSSIAN FEDERATION FOREIGN TRADE BY YEARS
YEARS	EXPORT (X)	IMPORT(M)	X/M	BALANCE	VOLUME
1992	441.9	1,040.8	0.42	-598.5	1,482.7
1993	504.7	1,542.3	0.33	-1,037.6	2,047.0
1994	820.2	1,046.0	0.78	-225.8	1,866.2
1995	1,238.1	2,082.4	0.60	-844.3	3,320.5
1996	1,482.0	1,846.0	0.80	-364.0	3,328.0
1997	2,049.3	2,048.4	1.00	0.9	4,097.7
1998	1,347.5	2,154.9	0.63	-807.5	3,502.4
1999	586.6	2,371.9	0.25	-1,785.3	2,958.5
2000	643.9	3,886.0	0.16	3,242.1	4,529.9
2001	924.1	3,435.6	0.26	-2,511.5	4,359.7
2002	1,163.0	3,855,0	0.30	-2,692.0	5,018.0

Source : State Statistics Institute (DİE)

In general, main factors, which encourage the occurrence of deficit against Turkey in foreign trade relations between Turkey and Russian Federation, are as follows:

As a result of high international oil and natural gas prices, the purchasing power of Russia, a leading exporter of these products, gradually gets better. Moreover, the rise in Turkey's importation from the Russian Federation particularly stems from the rise in worldwide energy prices. On the other hand, once an additional natural gas is supplied by Russia within the framework of the Blue Stream agreement by this year, the aforementioned gap, doubtlessly, will rapidly widen in the following years. Actually, the amount Turkey will pay in 2005 for only the natural gas importation from Russia is expected to be 3 billion dollars.

Furthermore, quota and customs tariffs against Turkish exporters are expected to be amended along with the acceleration of Russian Federation's membership to WTO. Moreover, parallel to the recent rise in the expendable income of Russian people, demand for more quality import products increases. This also creates opportunities for Turkish firms offering high quality goods and services.

Besides foreign trade under normal circumstances, luggage trade has also fulfilled major functions in shaping the trade relations between two countries. However, despite a distinct type of business "urged by necessity" due to lack of production and excess demand in Russia in early 1990s, luggage trade is inclined to regress by 1995. Main reasons to cause regression in luggage trade are as follows:

• Particularly after the financial crisis in 1998, Russian buyers preferred alternative markets like China, Poland and Greece instead of Turkey and this created a competitive environment for the relatively low price goods of these countries.
  
  
• The Russian Government applied restrictions to unregistered economy and luggage trade in compliance with negotiations with IMF, WTO and other international organizations.
  
  
• Local manufacturer in Russia grew stronger and campaigns against luggage trade were hastened after powerful Western companies entered the market (Local manufacturers who especially made progress in the fields of domestic leather, textile products, ready-made clothing and construction materials applied intense lobbying on the government).
  
  
• Many items of luggage trade started to be manufactured within the country in accordance with import substitution policies being implemented by the Russian Government.
  Doubts rose against the quality of products within luggage trade.
  
  
• Demands relatively lessened due to stores a number of Turkish enterprises opened in Moscow.
  
  
• Fluctuations in the exchange rate.

Therefore, the Russian Federation aims to modify the course of business by passengers, which is also called as luggage trade step-by-step by a series of local precautions. However, it is observed that the modification seems unlikely to occur by now and the course of business by passengers will endure for a few years. On the other hand, due to WTO membership negotiations, it is highly expected that Russia will terminate luggage trade after a transition period.

Luggage trade, as a practice of the transition period, served as a very important instrument for the trade relations between two countries particularly at early times. But it is quite unlikely to long-run maintain these trade relations in this wise. Therefore, legal arrangements and incentives are required to direct sectors dealing with luggage trade in Turkey to official business.

3.2. Contracting Services

As mentioned above, embarking of Turkish construction firms on the Russian market falls in with the last years of the Soviet Union. The Natural Gas Contract put into effect by 1987 between Turkey and the Russian Federation has been an essential driving force for trade relations as well as for Turkish construction firms to enter the Russian market. In this regard, Turkish construction firms have been undertaking, to an increasing degree, major projects in the Russian market since 1987.

This process gained impetus within 1990s. It reached the climax for military housing projects financed by German credits particularly in between 1993 and 1995. The housing projects financed by Germany for Russian military personnel returning from East Germany in 1991 were a turning point for Turkish contractors. In this respect, total amount of the project undertaken by Turkish contractors was almost 2.5 billion DM.

The Russian crisis in August 1998 greatly affected both economic and trade relations and the construction activities of Turkish firms in Russia. Financial resources of units such as municipalities, banks and large-scale companies which supply financing became restricted after devaluation, and hence construction expenses needed to be confined. Banks and large companies also wholly froze their earlier construction activities since they chose the process of reducing.

In the post-crisis period, decline in the real income of Russian people caused the sale of houses to fall; the need for an office has faded because foreign companies left the country and regular business life came to a stand. This was due to a number of factors such as the economic crisis, the state caused by elections, disputes between the Central Government and local governments and difficulty to supply financing. The annual total of Turkish firms' construction activities in Russia descended to 100 million dollars.

145 Turkish contracting firms undertook 712 projects equal to an approximate 12.8 billion dollars in the Russian Federation so far. (4) The Russian Federation is the country which Turkish contracting firms attempted projects at most. Considering the total project amount, almost one fourth of projects undertaken by Turkish contracting firms abroad involve the Russian Federation. Depending on the number of projects, this proportion reaches an estimate 35%.

Today, restrictions on financial resources of the Russian Government and local governments, support of project-financing large-scale Russian establishments towards Russian construction firms and an increasing tendency to employ Russian workers create difficulties for Turkish companies to attempt new tasks. The Government of Russian Federation utilizes its financing resources to support Russian contracting firms, which grow stronger and obtain technical skills. On the other hand, Western companies with their own financing in this sector enjoy more advantages in the Russian Federation.

As a result, Turkish construction companies need to provide their own financing resources in order to be permanent in the Russian market. In this regard, building partnership with municipalities and some Russian firms can militate in favor of Turkish firms to compete with Western companies.

Although contracting services undertaken by Turkish contracting firms in Russian Federation descended in terms of number and project amounts after the crisis in August 1998, a certain increase is expected in the forthcoming period depending on the evident revival in Russian economy particularly as a result of the rise in worldwide energy prices. In addition, the Russian Government made a resolution to begin inviting tenders for public services again by 2000. This situation is believed to give Turkish firms new opportunities.

On the other hand, Turkish contracting services in Russian Federation have a big share in bilateral economic relations while the volume of Russian contracting services in Turkey is very limited. Therefore, Russia consistently demands that the imbalance is eliminated and Russian contractors are granted more shares in the Turkish contracting market.

Russian contracting firms which cannot perform effectively at projects of infrastructure in Turkey due to lack of technology and financing try to be assigned to tasks such as subway construction, railroad construction and electrification, thermal and hydro-electric power plants, construction of natural gas pipelines and gas storage facilities, construction and soil investigation of earthquake resistant housing, and fossil fuel and coal exploration. On the other hand, the modernization of a number of industrial facilities established under support by Soviet Union in Turkey is among other demands of Russian contracting firms.

Tehnopromeksport, Tehnostroyeksport and Energomaşeksport are the main Russian construction firms acting in Turkey. The aggregate amount of Russian contracting firms' contracts in Turkey is almost 360 million dollars. The major ones are as follows:

PRIMARY PROJECTS RUSSIAN CONTRACTING FIRMS IN TURKEY ACCOMPLISHED
Project Title	Project Rate (Million $)
Electrification of Çerkezköy - Kapıkule Railway	14
Three Bridge Constructions on the Ankara Beltway	60
Construction of Deriner Dam and Hydro-electric Power Plant	40
Modernization of İskenderun Met. and Seydişehir Alum Facilities	3
İmralı - Kayseri Natural Gas Pipeline Construction	40
Samsun - Ankara Natural Gas Pipeline Construction	150
Engineering Services for Gas Storage Facility Constructions	4.5
Aqueduct Construction Under İstanbul Melen Project	50

3.3. Investments

Import substitution policies initiated after the devaluation caused by the crisis in 1988 in Russia and the following rise in tariff walls complicated exportation to the Russian Federation, and subsequently, investing and establishing one's own distribution network in Russia gradually gained more importance than selling goods to Russian Federation from abroad.

The most important progress recently occupying a position of prominence in terms of direct investments in the Russian Federation involves a rise in direct investments not in central but local areas. Lately, foreign investors' interest has moved from large cities of Russia, Moscow above all, to local areas. All charges, mainly wages, raw material prices and rents, are very dissimilar between Moscow and the country. Reasons to raise interest in the country include the fact that bureaucracy and tax administrations and other auditing agencies apply heavy restrictions on foreign companies performing in large cities. Another reason is that enterprising and liberal governors of a few local areas provide a better business environment, enact private laws concerning incentives and warranty and follow several policies pertaining to foreign capital protection.

In line with this development, a rise is recently seen in Turkish investments in the Russian Federation. By early 2003, Turkish investments in Russia have exceeded 1 billion dollars. Turkish investments in the Russian Federation mostly involve sectors like business and shopping centers, food and drink, textile products, banking and telecommunication.

Major investments done by Turkish firms in the Russian Federation are as follows:

FIRM / ESTABLISHMENT	INVESTMENT AREA	INVESTMENT AMOUNT (million $)
ENKA Holding	Business Centers	600
RamEnka (Koç Holding-Enka Holding)	Retail Trade	250
Anadolu Endüstri Holding (Efes)	Bear Production	125
Finansbank, Garantibank, Denizbank, Yapı Kredi Bankası, Ziraat Bankası	Banking	87
Netaş (Rontelekom)	Telecommunication	44.7
TOBB - TİM*	Trade Center	40
Zorlu Holding (Vestel)*	Television Production	40
Türkiye Şişe ve Cam Fabrikaları (Ruscam)	Bottle and Glass Production	12
BinMeksan	Gas Pump Production	5.5

Source : Cihangir Gürkan Şen, Turkish - Russian Federation Economic and Trade Relations Report, Confederation of Russian- Turkish Businessmen Publications, No. 8, May 2003.

(*) Investments to be fulfilled within 2003.

3.2.1. ENKA Construction Investments

ENKA, a business which possesses the greatest trade volume among other Turkish construction firms practicing in the Russian Federation, is at the same time the first foreign company to invest in immovables in Russia. ENKA Holding constructed buildings on lands it hired for 49 years from the Municipality of Moscow and now markets them as offices, stores and houses. The number of A-class business buildings owned by ENKA and other companies to which ENKA is a shareholder is 18 and the aggregate construction area reaches 275,000 sq. m. This figure equals to 25% of the whole Moscow A-class office market and carried ENKA to a leading position in the market. The approximate market value of these investments is about 600 million dollars.

3.2.2. Ramstore Chain Stores

RamEnka which is a co-investment by Koç and ENKA Groups practicing in this country since 1997 is the greatest chain store in the Russian Federation today, called Ramstore. Koç and ENKA Groups' investments in Russia approached 250 million dollars with respect to RamEnka, a 100% Turkish investment. The first of Ramstore chain stores was actualized by Turkish Eximbank credit. Along with the rise in their income, Russian people moved from open markets to supermarkets, which in turn enables RamEnka to raise its investments in Russia for the following 5 years up to 1 billion dollars by opening new stores and shopping malls in Moscow and other regions.

More than half of Ramstores' turnover includes Russian goods and about 5% Turkish goods; the remaining 40% involves European goods. In addition, Ramstore labeled 75 products are also offered for sale.

3.2.3. Anadolu Endüstri Holding Investments

Anadolu Group is the Turkish firm that invests most in the manufacture sector in Russia. The aggregate amount of investments in Russia including beer factories in Moscow and Rostov and malt facilities in Moscow equals to an estimate 125 million dollars.

The Moscow Efes Brewery in Moscow is one of the biggest beer factories in Russia in terms of capacity. Starıy Melnik labeled beers produced by Anadolu Group are among the most favorite beers in Russia. Today, according to data received from United Financial Group (UFG), the share of Efes in the Russian beer market is about 3.5% and Efes is the 7th biggest producer of Russia. Besides Efes and Starıy Melnik, the German beer Wasteiner with the largest sales volume has also been manufactured in factories of Anadolu-Efes in Moscow.

3.2.4. TOBB-TİM Turkish Trade Center

The project to build a trade center in Moscow where Turkish export goods will be exhibited and marketed is accomplished by the Union of Chambers of Commerce, Industry, Maritime Trade and Commodity Exchanges of Turkey (TOBB) and Turkish Assembly of Exporters (TİM). The construction of the center, which will cost 55 million dollars, will be finished in December 2003.

3.2.5. Şişecam Gorohovets Factory

The Glass Container Factory established by Anadolu Glass Industry INC., a Şişecam corporation, in the state of Vladimir, Gorohovets town, 330 km northeast to Moscow aims to meet Russian Federation's quality glass container needs in alcoholic and non-alcoholic beverage and food sectors. The first oven of the factory with 43 thousand sq. m. enclosed area on 17 ha of land was constructed by an investment of 26 million dollars and initiated on September 6, 2002. The second oven, the foundation of which was laid the same day and which will double the capacity of the former, is also complete and set to operate on May 13, 2003. Together with 22 million dollars spent for the second oven, the total sum of investment has reached 48 million dollars. 50% of the investment made use of equities whereas another 50% includes credits. The credit financing was available through IFC. Including the third oven planned to operate in 2004, the total investment will amount to 75 million dollars. The aim is to be the No 1 glass container manufacturer in Russian Federation within 3 years.

3.2.6. Vestel Television Factory

Vestel, practicing within Zorlu Holding, has decided to co-invest with Standard, a corporate Russian television manufacturer, to produce televisions in Russia in 2002. Vestel and its Russian partner's factory in Alesandrov, state of Vladimir with an approximate 40 million dollars investment is planned to operate in August this year.

Besides large-scale investments, there are also medium or small size Turkish investments the amount of investment of which differs from 1 to 5 million dollars in sectors such as machinery, textile, ready-made clothing and food. These include Binmeksan gas pumps factory, "Colin's Jeans" Combed Texture Factory, "Muya" Sandals Factory, "M" Döner House, "Etalon aluminum facade".

Russian companies' investments in Turkey are very limited when compare to the volume and diversity of Turkish investments in Russian Federation. By the end of 2002, direct Russian investments in Turkey have been below 100 million dollars. Russian companies are mostly in the business of transportation, trade and tourism. Moreover, they are eager to be more effective in case petroleum processing, petrochemistry and gas distribution enterprises in Turkey are privatized. Indeed, Russian companies like Gazprom, Lukoil and Tatneft are very engaged in the privatization of Tüpraş.

3.4. Tourism

Tourism is today the largest economic sector that made a remarkable development with regard to Turkish-Russian relations. Since early 1990s, Turkey has been one of the most favorite countries of Russian tourists. This is partly due to Turkish tourism agencies practicing in Moscow. Today, Turkish tourism dealers hold one fourth of the Russian tourism market. Turkey's tourism income from Russian Federation is about 700 million dollars. Attracting nearly 300 thousand Russian tourists, Spain stands second after Turkey. Number of tourists coming from the Russian Federation to Turkey is shown by years on the table below.

NUMBER OF RUSSIAN TOURISTS
Years	No of Russian Tourists (persons)	Share Within the Total (%)	Annual Rise Rate (%)
1999	438.719	5,86	-
2000	676.958	6,49	54,30
2001	757.446	6,52	11,89
2002	945.000	7,14	24.85

Source: Turkish Republic, Ministry of Tourism

Due to the negative impact on the purchasing power of Russian people created by the financial crisis in Russia in August 1998 and the following devaluation, the number of Russian tourists coming to Turkey decreased. However, as effects of the crisis have lately been cleared away and purchasing power and consumption demands of people particularly from Russian middle class have increased, the number of tourists from Russia again trend to ascend. Moreover, the relative fall in vacation costs in Turkey after the devaluation that occurred in 2001 made Turkey a more appealing country of holidays for the Russian tourists.

THE PLACE OF RUSSIAN TOURISTS IN THE RANKING OF TOP COUNTRIES
	2001		2002
Country	No of Tourists	% Share	No of Tourists	% Share
Germany	2.884.051	24.82	3.480.051	26,28
UK	845.536	7.28	1 040 228	7,85
Russian Federation	757.446	6.52	945 678	7,14
Hollanda	632.975	5.45	871 560	6,58
Bulgaria	540.452	4,65	833 848	6,29

Source: Turkish Republic, Ministry of Tourism

As a result, the Russian Federation was the third country to send the most tourists to Turkey in 2002 after Germany and UK. On the other hand, according to data received from Banko Information Agency, Turkey was the first out of hundred among summer vacation preferences of Russian citizens in 2002. Turkey stood the first with its 49.1% market share in all year 2002 while Egypt came after with a percentage of 49.0%. Third in the ranking, Thailand's share was about 40%.

According to World Tourism Organization, the number of Turkish citizens to enter Russia is about 100 thousand. It is declared that the number of Turkish citizens to visit Moscow in 2001 was almost 40 thousand. The year in which the most Turkish citizens entered Russia is 1996 with an approximate 160 thousand.

While Russian tourists particularly in the first half of 1990s visited Turkey mainly for the purpose of shopping, they have been coming to vacation to an increasing degree since then. Why Russian tourists prefer Turkey to vacation includes low costs, geographical proximity, quality service and easy visa acquisition. On the other hand, a number of studies have shown that the rise in the income level of Russian people moved primarily to tourism and especially consumer goods and services. As a matter of fact, Russian tourists pass their vacation in Turkey's quality facilities at a lower cost compared to those in Europe. Easy visa acquisition is also another important factor, which encourages Russian tourists to choose Turkey.

2 to 3-day tours of shopping abroad have recently become widespread particularly among high-level income groups in Russia. This is primarily due to high costs of quality and fancy import goods in Russia. Therefore, Istanbul and Milan are the leading shopping centers, which Russians favor most. Russian tourists who visit Istanbul via shopping tours buy many European products, most of which are produced in Turkey, cheaper than their prices in Russia.

Moreover, Turkey has lately been a favorite country of winter tourism for Russian tourists to an increasing degree. This is likely due to transfer-flights from Istanbul to Uludağ and through flights to Erzurum Palandöken.

Low cost is the main reason why Russian tourists prefer Turkey, which is highly influenced by the extreme competition among Turkish tourism agencies practicing in Moscow. In a sector where extreme competition is faced, it is inevitable that a Turkish tourism agency's price dumping affects another Turkish agency which wants to carry more Russian tourists to Turkey. On the other hand, the economically aware Russian consumers first do some market research and naturally try do benefit from this competition between tourism agencies.

Almost 90% of Russian tourists enter Turkey in either Antalya or Istanbul. This describes that Russian tourists visit Turkey for maritime tourism and business purposes (luggage trade).

4. Conclusion

Although Turkey and Russia are two great economic powers in the Eurasian region and progress is made in mutual economic relations, the level which economic relations reached is far behind the accessible potential. The situation is rather apparent if foreign trade volumes of both countries are placed one upon the other. The trade volume between two countries is far from reaching 5% of all their worldwide trade volume which is totally 250 billion dollars.

Another aspect to take into consideration is that both countries have economic structures that complement each other. Today Russia can supply a large number of raw and semi-finished inputs primarily energy products and minerals which the Turkish economy is in need at lower shipping costs. Moreover, the production of many consumer goods from food to textile which the Russian community demands is carried out in Turkey at worldwide competitive prices and quality.

Minimum balance is required in order to attain a sound and steady progress in trade and economic relations of two countries. The most important difficulty in this respect is experienced in the field of business. Therefore, the adoption of a rational percentage to recompense the natural gas amount by Turkish offsets as implemented under the Contract dated 1984 is highly important with regard to the course of mutual trade balance. Similarly, such mechanisms may also be applicable for counterbalancing oil, coal and other materials that occupy a significant place in importations from Russia. Furthermore, it is highly beneficial to create mechanisms to encourage Russian firms' activities in Turkey. Developing projects that cover several third countries located between Turkey and Russia can contribute mutually to eliminate perceptions based on regional competition and power struggles particularly observed in both nations and governments. Mutual common interests to be created in the economic field can help sound improvement of political relations. As recently been discussed in terms of Blue Stream project, relations must be evaluated comprehensively; problems that arise occasionally shall not be allowed to affect the general outline of relations.

Turkey's main policy is certainly to integrate into the European Union. Sound relations to be developed between Russia and Turkey will serve as a component rather than an alternative for the European Union process. Strong relations that Turkey will develop with many neighboring countries, primarily Russia, can support Turkey's economic and political state against the Western world.

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1. The Event of Kavalalı Mehmet Ali Pasha the Egyptian Governor.
2. State Statistics Institute, Eighth Five-Year Development Plan, Transport (Pipeline Transportation) Private Specialization Commission Report, Ankara, 2001.
3. Russian Federation Report, Export Development Research Center (İGEME), Ankara, December 2000.
4. Data from Undersecretary of Foreign Trade, General Directorate of Contracts, Foreign Contracting Services Bureau.

APPENDICES

APPENDIX 1

NATURAL GAS PROCUREMENT CONTRACTS SIGNED BY TURKEY SO FAR
Current Contracts	Amount (Plateau)(billion m³ / year)	Date of Subscription	Period (Year)	Position
Russia (West)	6	14 February 1986	25	In force
Algeria (LNG)	4	14 April 1988	20	In force
Nigeria (LNG)	1.2	9 November 1995	22	In force
Iran	10	8 August 1996	25	In force
Russia (Blue Stream)	16	15 December 1997	25	In force
Russia (West)	8	18 February 1998	23	In force
Turkmenistan	16	21 May 1999	30	2005
Azerbaijan	6.6	12 March 2001	15	2005

APPENDIX 2

TABLE OF NATURAL GAS PROCUREMENT IN ACCORDANCE WITH CONTRACTS SIGNED BY TURKEY (% Distribution by Countries)

Source : BOTAŞ

APPENDIX 3

NATURAL GAS PROCUREMENT BY YEARS AND COUNTRIES
YEARS	RUSSIA	IRAN	TPAO	ALGERIA	NIGERIA	SPOT LNG	TOTAL (Million cm3)
1987	432	-	85	-	-	-	517
1988	1.136	-	42	-	-	-	1.178
1989	2.986	-	114	-	-	-	3.100
1990	3.246	-	109	-	-	-	3.355
1991	4.031	-	65	-	-	-	4.096
1992	4.430	-	31	-	-	-	4.461
1993	4.952	-	23	-	-	-	4.975
1994	4.957	-	2	418	-	-	5.377
1995	5.560	-	-	1.058	-	240	6.858
1996	5.524	-	-	2.436	-	80	8.040
1997	6.574	-	-	3.300	-	-	9.874
1998	6.539	-	150	3.051	-	644	10.384
1999	8.693	-	299	3.589	77	-	12.658
2000	10.079	-	154	3.962	780	-	14.975
2001	10.931	115	-	3.985	1.337	-	16.368
2002	11.603	670	-	4.078	1.271	-	17.622

Source : BOTAŞ

APPENDIX 4

RUSSIA'S SHARE IN THE NATURAL GAS IMPORTATION IN 2002 (% Distribution)

Source : BOTAŞ

APPENDIX 5

RUSSIAN FEDERATION'S SHARE IN TURKEY'S EXPORTATION
YEARS	RUSSIA'S SHARE (%)	RUSSIA'S RANK
1998	4.9	5
1999	2.2	9
2000	2.3	9
2001	3.0	7
2002	3.3	6
RUSSIAN FEDERATION'S SHARE IN TURKEY'S IMPORTATION
YEARS	RUSSIA'S SHARE (%)	RUSSIA'S RANK
1998	4.6	6
1999	5.8	5
2000	7.1	4
2001	8.3	3
2002	7.6	6

Source : DİE

APPENDIX 6

LUGGAGE TRADE INCOME RATE OF TURKEY AND WORLDWIDE IMPORTATION THROUGH LUGGAGE TRADE OF RUSSIAN FEDERATION BY YEARS(Billion $)
Years	Luggage Trade Income Rate of Turkey	Exchange (%)	Worldwide Importation Through Luggage Trade of Russia	Exchange (%)
1997	5.8	-37.5	18.3	13.7
1998	3.6	-36.2	13.3	-27.3
1999	2.2	-41.0	8.5	-36.0
2000	2.9	30.0	11.1	30.5
2001	3.0	3.2	12.1	9.0

Source : Turkish Central Bank
Russian State Statistics Committee

APPENDIX 7

HOLIDAY REGIONS FAVORED MOST IN RUSSIA IN 2002
RANK	COUNTRY / TOWN
1	Turkey
2	St. Petersburg
3	Crimea
4	Sochi
5	Spain
6	Annaba
7	Bulgaria
8	Greek Administration of Cyprus

Source : Nezavisimaya Gazeta

APPENDIX 8

TURKEY'S SHARE IN RUSSIAN TOURISTS' VACATION IN 2002 BY SEASONS
Season	Share Per Cent
Winter	3.7
April	43
May	41
June	54
July	48
August	47
September	42
October	25

Source : Info - City