Destabilizing speculation

Turkey welcomes money from Russian oligarchs – but it’s risky for its economy

Eclipse, the private luxury yacht of Russian billionaire Roman Abramovich, drops anchor at the Marmaris district cruise port in Mugla, Turkey on March 23, 2022.

Anadolu Agency | Anadolu Agency | Getty Images

The Russian oligarch’s wealth is in search of a new home, and Turkey is quickly establishing itself as a welcome guest.

Turkish Foreign Minister Mevlut Cavusoglu told CNBC on Saturday that he would welcome sanctioned Russian oligarchs to the country as tourists and investors, as long as their business dealings abide by international law.

It came a day after President Recep Tayyip Erdogan said ‘certain capital groups’ might ‘park their facilities with us’, in what was seen as a direct reference to the recent arrival of several assets Russian-owned luxury hotels in Turkey, including two luxury hotels. yachts and a private jet owned by billionaire Roman Abramovich.

The comments sparked speculation that Turkey – a non-EU country but a NATO member – could actively encourage investment from blacklisted billionaires as it seeks to shore up its struggling economy. Already, wealthy Russians are actively seeking investments there, according to Reuters reports.

But any potential gain could be short-sighted for a country orchestrating a delicate balancing act between Russia and the West.

“Attracting Russian money could hurt Turkey in the long run,” Defne Arslan, senior director of the Atlantic Council in Turkey and former economist at the US embassy in Ankara, told CNBC.

Find the right balance

Turkey is seeking to draw a fine line in the ongoing war in Ukraine.

While strongly criticizing the unprovoked invasion of Moscow, he refrained from applying sanctions like those imposed by the US, EU, UK and others, saying he oppose it on principle.

Instead, he adopted the role of a neutral mediator, facilitating peace talks between Russia and Ukraine. Negotiations in Istanbul on Tuesday appeared to raise hopes of a breakthrough after Moscow agreed to scale back its military assault on kyiv and Chernihiv, while Ukrainian negotiators offered to adopt neutral status in exchange for security guarantees .

If they park their yacht, it does not matter. But Ankara will be very aware that Turkey will become a reason for non-compliance with sanctions.

Emre Peker

director and specialist in Turkey at Eurasia Group

Turkey’s position of nominal neutrality is widely understood given its close economic and diplomatic ties with Russia, including in energy, defence, trade and tourism. As such, Western allies have not pressured Turkey to adhere to the sanctions, and they are unlikely to punish it for not doing so.

This makes it a legitimate outpost for assets belonging to sanctioned Russians. Indeed, an influx of foreign investment and luxury assets could be a boon for Turkey’s beleaguered economy, which slipped into crisis mode last September as unorthodox interest rate cuts pushed rising already spiraling inflation.

However, Western tolerance is likely to decline if Turkey begins to actively solicit sanctioned wealth, according to Emre Peker, director and Turkey specialist at political risk consultancy Eurasia Group.

“If they park their yacht, it’s fine,” Peker said. “But Ankara will be very aware that Turkey will become a motive for non-compliance with sanctions and will ensure that this is prevented.”

The Turkish Embassy in London did not respond to CNBC’s request for comment.

A sluggish economy

Turkey can ill afford to be hit with secondary sanctions given the pressure that the war and the resulting Russian sanctions have already put on its economy.

Last month, inflation hit a 20-year high of 54.4% amid a falling pound and soaring commodity prices. Data that fully reflects the impact of the war has yet to be released.

“Russia’s attack on Ukraine makes Turkey’s economic situation more precarious,” Peker said.

“The ramifications are clear,” he continued. “Inflationary pressures are higher, destabilizing the Turkish economy. The fallout from the sanctions will reduce or stop tourism from Russia and Ukraine, which accounted for about a third of inbound tourism. And this will affect Turkish investment in Ukraine and in Russia.”

In the meantime, Erdogan is keen to maintain Turkey’s reputation as an independent mediator in the ongoing conflict, seeking to curry favor both at home and abroad ahead of the 2023 elections.

“Erdogan is desperate to qualify for elections next year,” Timothy Ash, senior sovereign emerging markets strategist at BlueBay Asset Management, told CNBC.

An advertisement for Starbucks seen on the highway near Istanbul on Tuesday October 17, 2017.

Nurphoto | Getty Images

Still, there are opportunities for Turkey to shore up its economy and benefit from the flow of wealth from Russia without incurring political and economic anger.

This includes attracting investment from some of the 450 Western brands that have so far pulled out of Russia, according to Atlantic Council’s Arslan.

“If it plays well, I think it can be a huge opportunity for Turkey, not only staying in line with Western allies, but potentially attracting investment from foreign companies,” she said, pointing out similarities between Russian and Turkish geography and production lines among other factors.

Indeed, Erdogan said last week that “Turkey’s door is open” to companies looking to relocate their operations outside of Russia.

“Not only American companies, but also many brands and groups from all over the world are leaving Russia. Of course, our door is open to those who come to our country,” he said.