The sharp rise in energy prices in the European Union may lead to the relocation of business to other countries. A number of companies have already decided to move their production to the US. Closer states, in particular Turkey, are also of interest to European investors.
For several decades, Turkey has been Europe’s exporting country for cheap, low-skilled labor. Western European countries, by attracting labor migrants, have eliminated the deficit in the labor market.
Currently, the European Union is home to a multi-million Turkish diaspora. For example, up to 500,000 immigrants from Turkey have settled in France. But the largest Turkish community is in Germany: according to various estimates, from 2.5 to 4 million people. The German economy, which is the leading one in the European Union, owes its success not only to lucrative contracts with the USSR, and then with Russia for the supply of hydrocarbon raw materials, but to a large extent also to guest workers from Turkey.
What role does Ankara play in world affairs, and is it good at it?
An agreement on the employment of labor migrants – guest workers (gastarbeiter – guest worker, invited worker) was signed by Germany and Turkey on October 30, 1961. In 2011, Turkish Prime Minister Recep Tayyip Erdogan came to Berlin to celebrate the 50th anniversary of the agreement. The dear guest was received by a hospitable hostess – Chancellor Angela Merkel. She paid tribute to the diligence and conscientiousness of Turkish guest workers who work in the automotive industry, petrochemistry, metallurgy, light industry, housing and communal services. In turn, Erdogan noted that over 50 years, about 72 thousand of his countrymen opened their own business in Germany, creating about 350 thousand jobs.
However, it is legitimate to consider Turkey as the beneficiary. Hundreds of thousands of citizens of this country, who had been temporarily employed in Germany or France, returned to their homeland as qualified specialists.
They brought modern professional standards and production culture to the Turkish economy. It is natural that in the 80s of the last century, Turkey made a transition to a new quality, turning from an agrarian country into an industrial one.
The leading positions in the Turkish economy today are occupied by metallurgy and metalworking, mechanical engineering, chemistry and petrochemistry, pharmaceuticals, and light industry. It should be noted that the products of these industries not only meet domestic needs, but are also exported to many countries of the world.
The unemployment rate in Turkey, where more than 85 million people live, is 10-12%. About 3.7 million people are officially unemployed. The average salary in the country in 2022 is about $1,000. For comparison, the average salary in Germany is about €4,000, and in the USA, $4,300.
The competitive advantages of the Turkish labor market are clear. It seems that the availability of qualified personnel and millions of free hands, the opportunity to reduce production costs on the salaries of employees can be considered by potential business migrants from the EU as sufficient arguments in favor of choosing Turkish jurisdiction.
Free economic zones
The Turkish government continues to pay much attention to creating a favorable investment climate for attracting foreign capital. At the moment, the country is not an offshore zone, but approximately 300 preferential enclaves have been formed – industrial and technological, as well as free economic zones (FEZs).
The enclaves have created the most comfortable regime for investors, including non-residents. In particular, reduced customs duties and value-added taxes (VAT) are provided, while a number of product groups are completely exempt from customs duties, and there are tax benefits on employees’ wages.
The first preferential enclaves appeared in Turkey in 1986. Then they were opened to attract additional investment in the development of transport infrastructure, primarily seaports. Now the priorities have changed, and “points of growth” – in a sense, an analogue of the Russian territories of advanced development – are being created in other sectors of the economy: heavy industry, the agro-industrial complex (AIC) and IT.
According to statistics, over 40,000 companies are registered in Turkish FEZs, employing about one million employees. Free economic zones are divided into two types: organized industrial zones (OIZ), focused on the creation of business clusters, and technological development zones (ZTR), an analogue of our technology parks.
OPPs located in the southeastern (with the center in Antalya) and northwestern (with the center in Istanbul) regions of the country are considered the most promising, some companies prefer the industrial zone of Izmir.
There are about thirty technical development zones in Turkey, they are located mainly in large cities. ZTR have a rather narrow specialization, that is, they work in the interests of certain sectors of the economy. For example, ZTR in Istanbul is focused on the textile industry, trade in household appliances and the IT sector, in Mersin – on the agricultural industry, in Izmir – on telecommunications.
Each location is allocated to a separate customs zone with a priority for export and with certain restrictions. That is, legally they represent special jurisdictions in Turkey. In some OIZs and ZTRs, it is possible to work both for foreign and local markets (paying taxes as from imports), while in others – only for exports.
Turkey has signed a customs union agreement with the European Union. FEZs belong to the customs territory of the European Union, therefore, all goods produced by enterprises of the economic zones of Turkey have an ATR.1 certificate (customs document for bilateral trade between the EU and Turkey), which allows them to be freely imported into the eurozone countries. For companies focused mainly on the European consumer, this is a clear competitive advantage for Turkey.
Developed multimodal transport infrastructure schemes in Turkey make it possible to combine cargo transportation by sea, rail, road and air. The container terminals of the port of Istanbul are capable of handling more than 1,200 ships per year. The length of the Turkish railway network has grown in recent years from almost 11,000 km to 13,000 km.
It should be noted that the success of Turkish logistics hubs is not related to the latest events around Ukraine. Progress has been made during the COVID pandemic. A good example is Turkish Airlines. In the IATA ranking of airlines in terms of cargo transportation, Turkish Airlines has risen from 20th place in the world to eighth in a few years. In 2021 alone, the volume of Turkish Airlines cargo transportation grew by 46% in value terms and by 26% in physical terms.
The power of another’s example
One of the industries that confirm Turkey’s attractiveness for international corporations is the automotive industry. In the early 1960s, factories specializing in the so-called screwdriver assembly were built. Two decades later, the country began the transition to the creation of full-fledged production facilities for the production of cars. At the same time, projects in the field of research and development (R&D) were actively developed.
Today, the Turkish auto industry is a self-sufficient industry. Many well-known world brands such as Daimler, FIAT, Ford, Honda, Hyundai, Isuzu, Renault, MAN and Toyota have placed their enterprises here at different times. The volume of production exceeds 1.7 million vehicles per year, of which 80% is sold abroad. In addition to passenger cars, trucks and buses are produced in Turkey.
In terms of deliveries of new cars to the European market (about 1 million units), Turkey came out on top in 2021. Key buyers include Germany, France, Italy, the UK and Spain. The products of Turkish car factories are in demand in these countries not only because of the affordable price, but also due to decent quality.
It is impossible not to note the high level of localization of the production of automotive components. At present, there are 1.1 thousand companies producing various components and parts in Turkey.
In recent years, Ankara has managed to attract many foreign corporations from various fields. European manufacturers of furniture, textiles, pharmaceuticals and packaging actively implemented investment projects with Turkey: Swedish IKEA, Polish LPP, Belgian DW Reusables and a number of others.
Their experience can become an example for those Europeans who are looking for a country of refuge from the energy crisis. Massive business migration should be expected in 2023: according to the forecast prepared by the International Monetary Fund (IMF), Europe is threatened by inflation, record high prices for gas and electricity. This will be the result of sanctions against the Russian Federation, including the voluntary renunciation of cheap Russian pipeline gas. The terrorist attacks on the Nord Stream 1 and Nord Stream 2 gas pipelines left virtually no chance for the resumption of full-fledged fuel supplies from Russia in the foreseeable future.
Pipe crossword: will the Turkish hub save Russia’s gas exports
Ankara does not harm itself and continues cooperation with Moscow in the energy sector. Russia’s share in the Turkish gas market reaches 40%. Turkey imported 58.7 bcm in 2021 m of gas, in 2022 the volumes remain approximately at the same level. At the same time, it became known recently that Ankara would like to receive discounts and deferrals in payments for the supplied gas. Turkish Treasury and Finance Minister Nureddin Nebati said this in an interview with The Financial Times. The preferences should help relieve pressure on the Turkish lira and strengthen Erdogan’s position in the presidential elections to be held in the summer of 2023.
In October, Russia and Turkey reached an agreement in principle to establish a gas hub, the largest in southern Europe. In addition to Russia, Turkey receives blue fuel from Azerbaijan, and in the future, exporters from Turkmenistan, Iran and Iraq will most likely join the supply through the Turkish “pipe”. Projects can be implemented within 3-4 years.
The Turkish authorities expect to significantly increase the investment attractiveness of the country through the commissioning of new generating capacities that can provide the industry with cheap electricity. Next year, the first power unit of the Akkuyu NPP, which is being built by Rosatom, will be launched. There are four blocks in total.
What are the risks
And yet today there are objective reasons that create a negative background for investment. First of all, extremely high inflation rates. The growth of consumer prices in Turkey in September reached 83.45% in annual terms. In August, this figure was at the level of 80.21%.
Experts explain what is happening with the peculiarities of the monetary policy of the Turkish Central Bank, which, unlike other regulators, continues to play to lower the key rate. As a result, the lira weakened against the US dollar by 43% in 2021 and by almost 30% by the end of September this year. Among the currencies of emerging economies, only the Argentine peso is worse today.
Another obstacle to investment in Turkey from the point of view of European business is the tense relationship with Greece. The conflict did not start yesterday and has led to a cooling of cooperation with the European Union. In 2021, Ankara took steps to defuse tensions, demonstrating its desire for a diplomatic solution to contentious issues. However, at the end of August this year, the situation escalated again. The reason was the actions of the Greek air defense system, which captured the Turkish F-16 fighter jet, which at that moment was flying over the Aegean Sea, with the S-300 air defense system.
Disagreements over the ownership of a number of islands and the continental shelf in the eastern Mediterranean Sea, sea and air borders between neighboring countries and NATO allies remain. From the point of view of European business, this creates foreign policy risks for long-term investments in the Turkish economy.
The author is Associate Professor of the Department of Statistics of the Russian University of Economics. G.V. Plekhanov