Turkey’s lira crisis exposes reliance on imported energy

Turkey is surrounded by some of the world’s richest reserves of fossil fuels, in the Middle East and Central Asia, but produces little oil, gas or coal of its own. The country imports 93% of the oil and 99% of the gas it consumes, a vulnerability when energy prices in dollars climb and the lira slides.

Both factors have hurt the economy of Turkey, a member of the Group of 20 and the North Atlantic Treaty Organization. Benchmark Brent oil prices are up 45% in dollar terms this year. Factor in the plunge in the Turkish lira, and the cost is up 150% even after the slide in crude prices since the Omicron variant of the coronavirus emerged. The lira has lost more than a third of its value since Turkey’s central bank began to cut interest rates in the face of accelerating inflation in September.

Rising energy prices are further straining Turks, who are already struggling with rising prices for food, medicine and transportation. The government lifted the price of gasoline by more than one lira a liter last week, prompting long lines to form at gas stations before costs went up at midnight.

Turkey’s energy situation is precarious because supply contracts that cover 8 billion cubic meters of natural gas a year—almost 15% of annual demand—are due to expire next month, just as Europe endures its biggest gas-price crises in a generation.

The long-term deals are for gas sent by Russia’s Gazprom PJSC to state-controlled Botaş Petroleum Pipeline Corp. and a group of private companies. Talks to renew them are continuing.

“The situation is really disturbing," said Gulmira Rzayeva, senior visiting research fellow at the Oxford Institute for Energy Studies. Turkey might experience power outages over the winter, she added.

Gazprom is a big winner from the global gas shortage, generating record profits. Sales to Turkey have helped: Gas began to flow through the TurkStream pipeline under the Black Sea in early 2020 and Gazprom says supplies to Turkey more than doubled in the first 10 months of 2021. Ankara has tried to reduce its reliance on Russian energy, sourcing gas from the U.S. and generating more power from renewables.

Turkish President Recep Tayyip Erdogan will want to avoid a gas shortfall this winter. Russia could push Turkey to move away from prices linked to oil and toward prices that reflect spot trading at international gas hubs such as the Netherlands, which are currently higher.

Energy prices are a big factor behind Turkey’s inflation problem. Consumer prices rose almost 20% in October from a year before, according to the Turkish Statistical Institute. Transportation and a category of goods including electricity, gas and other fuels contributed 6.5 percentage points to that rise.

“Households won’t be able to spend as much on other things," said Viktor Szabo, a fund manager at asset manager abrdn, which has sold all the lira-denominated assets in its emerging-market debt portfolios.

The Turkish lira fell 2.5% against the dollar on Monday, trading near a record low of around 12.5 to the dollar.

Gas powers more than a quarter of energy consumed in Turkey and demand is expected to reach a record 60 billion cubic meters this year. Russia is the biggest supplier despite a sometimes rocky relationship between the regional power rivals. Gazprom cut flows to private Turkish importers that owed the Russian company hundreds of millions of dollars earlier this year.

State-owned Botaş, for its part, is under strain from the slumping lira. The state firm sells gas at government-mandated prices that are lower than the cost of gas it imports from abroad. Adding urgency to the contract renewal with Gazprom, high international gas prices have deterred Botaş from topping up supplies with cargoes of liquefied natural gas from the U.S. and elsewhere.

Ali Arif Aktürk, an energy consultant who used to work at Botaş and sits on the boards of two gas-distribution companies, estimates that Botaş will lose between $4 billion and $5 billion this year.

A Botaş spokesperson didn’t respond to requests for comment.

Mr. Aktürk said the contracts will ultimately be part of discussions between Mr. Erdogan and Russian President Vladimir Putin, also encompassing topics such as Syria and Ukraine.

Russia’s relations with Turkey are less frosty than its ties with the European Union, which should help Ankara access the gas it requires, said Christof Rühl, a research fellow at Columbia University’s Center on Global Energy Policy and former chief economist at BP. The Kremlin has, however, protested in recent months against the use of Turkish drones by Ukrainian government forces fighting Russia-backed separatists.

In one way, Turkey is better placed to weather rocketing energy prices than when it last faced a currency crisis in 2018. The country’s current account—a measure of transactions with the rest of the world—is in a rare surplus in part because of a revival in tourism before the emergence of the Omicron variant.

Nonetheless, the rise in global energy markets is sucking dollars from the economy that is home to companies laden with foreign-currency debt. Turkey spent $3.67 billion more on energy imports than it collected from exports in September, central-bank data show, its biggest net outlay since December 2014.

 

 

This story has been published from a wire agency feed without modifications to the text