Erdogan plays brinkmanship on Israel-Turkey economic ties

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In view of its rapidly developing economic crisis, Turkey experts doubt that President Erdogan will carry out his threat to cut off economic relations with Israel.

Israeli tourism wholesalers have already been through this more than once: Turkish President Recep Tayyip Erdogan verbally assaults Israel and destabilizes relations between the two countries. The immediate result is a drop in the volume of tourism. This pattern resulted several years ago in Antalya, until then a destination for hundreds of thousands of Israelis, being replaced by other destinations, mainly Greece. The number of Israelis visiting there is now estimated at 100,000 at the most, almost all of whom are Israeli Arabs.

The termination of Israeli tourism to Turkey was not dictated from above; it was an authentic public reaction. For his part, Erdogan, during all his years in power, never dealt directly with Israel-Turkey economic relations. This changed last week when he threatened to consider severing economic relations with Israel after the Turkish elections scheduled for late June.

Most commentators are inclined to predict that in view of the rapidly developing economic crisis in Turkey, Erdogan will not dare to break off economic relations with Israel, but the Antalya precedent shows that even his mere statement, and certainly if he adds to it, will have a considerable effect, certainly at a time when import-export companies are looking for stability - and that does not even mention Turkish air carriers, which transport two million people a year to and from Israel.

In general, experts on Turkey doubt whether the threats will be carried out. "The pronouncements are very dramatic," says Prof. Miri Shefer-Mossensohn of the Department of Middle Eastern & African History at Tel Aviv University. "This is the man and this is his style. We know that there are elections in a few weeks. At the same time, there is a very substantial economic crisis in Turkey, so it is possible that in view of this situation, what he says is mere rhetoric. Experience shows that even after the Marmara flotilla, the rhetoric was very belligerent, but nothing actually happened."

"Were I a businessperson," says Dr. Hay Eytan Cohen Yanarocak, an expert on Turkey at the Moshe Dayan Center for Middle Eastern and African Studies at Tel Aviv University, "I would think twice about whether to continue importing from Turkey. I might prefer another country that is less profitable, but more secure."

According to the Israel Export and International Cooperation Institute, bilateral trade between Israel and Turkey totaled $4.3 billion in 2017, 11% more than in the preceding year, following several years of consecutive decline: $2.9 billion in imports and $1.4 billion in exports. A point worthy of note is that these sums do not include civil aviation, from which Turkish air carriers earn several hundred million dollars annually.

Yanarocak adds, "This means that if the threats are carried out, Turkey will be damaged far more than Israel. I think that these statements are designed to give the Turkish people the impression that Turkey is a strong country and is no longer afraid."

"Globes": Why do you think that he will not follow through on his threats?

Yanarocak: "Trade is the last bridge between the countries, and since Erdogan still wants a foothold in Israel, he has to preserve it. Take Cyprus, for example, which Turkey does not recognize. They call it "the southern Cypriot entity." At the same time, when there was a soccer match in Cyprus, the Turks traveled there and played against players whom they don't recognize. In spite of the hostility, they retain a channel for dialogue."

What about Erdogan's election rivals?

"They are more moderate people, although at the moment, they are making even more extreme remarks against Israel than Erdogan. That, however, is for internal purposes. In practice, they are far friendlier to Israel, both ideologically and personally."

Imports: Cement and tomatoes

Israel's $2.9 billion of imports from Turkey is concentrated in food products, construction products, cars, and electrical goods. Shefer-Mossensohn predicts that the main damage to the Israeli consumer if imports from Turkey are halted will be in food, due to the need to import more expensive products from more distant countries, but the effect on construction can also be significant.

Cobalt Trade, which represents Israeli companies that import from Turkey, will undoubtedly suffer damage from a cooling in economic relations. "In the food industry," says Cobalt Trade CEO Eyal Peretz, "Israel imports dry goods, mineral water, tomato paste, cooking oil, candy, legumes, and disposable products from Turkey. Some shortage in these areas will result and prices will rise, although it will be relatively marginal.

"Another area that will suffer is tomato imports. Every time there is a tomato crisis in Israel, we import them from Turkey. The fact that there are imports from there constrains Israeli growers, because they know that they won't be able to demand any price they like."

Beyond that, he adds, "Israel imports iron and cement (via Israel Shipyards, amounting to a third of local consumption, H.M.), marble, ceramics, and sanitary tools from Turkey. A halt in these imports will cause higher prices in construction inputs."

"Turkey is an important supplier of products constituting the construction inputs index in Israel," adds a construction industry source. He says that local plants are unable to produce the required amount of cement - over 10 million tons - they supply only two thirds of this. Turkey is also an important supplier of iron. "It is difficult to find a substitute for Turkish iron and cement," the source says. "The Turks are very efficient and inexpensive manufacturers and transportation is cheap because of the geographic location. If imports from there are ended, everyone in the sector will maximize prices. The result will be an increase in construction input prices, and in the longer term, there will be an effect on real estate prices."

Where vehicles are concerned, some of the manufacturers have assembly plants, and spare parts manufacturers also operate in Turkey, but no significant change is projected, due to the global deployment of the players. "There is also a substitute for white electrical goods from Turkey, such as washing machines and dryers, dishwashers (the main manufacturer in this sector is Turkish company Beko)," says Manufacturers Association of Israel Foreign Trade Division director Dan Catarivas. "If not from Turkey, they buy German or Chinese goods. Where raw materials and specific equipment are concerned, however, it's more complicated. These raw materials are especially suited to specific production processes. For example, iron casting is produced in Turkey according to specific orders, and it takes time to find a replacement source. On the other hand, there are many Israeli industries that will rejoice, for example the packaging products industry, which has been hit hard by imports from Turkey." Worthy of mention in this context is the local ceramics industry, headed by Negev Ceramics, which closed down and is up for sale because of stiff competition from Turkish imports.

Will Israeli companies collapse because they are based on imports from there?

Catarivas: "There are no companies dealing solely with the Turkish market. The Israeli companies are small with diverse markets. Israel businesspeople are smart enough to realize that it is unhealthy to base your activity on one supplier, so they diversify both their suppliers and customers."

"There is nothing in international trade without a substitute," says Israel Turkey Business Council and Chamber of Commerce and Industry chairperson Menashe Carmon. "The question is at what price. There are companies and networks that have invested in import products from Turkey, dealt with the question of kashrut, made special packaging, and so forth. If it ends, all of this investment will be lost, not to mention the companies that have set up plants there.

"The cost of shipping is very significant in the price, so if we have to import certain products from China instead of Turkey, it is reasonable to assume that the price will be higher because of both the distance and because China is becoming more expensive."

Incidentally, certain sources familiar with the business ties between the countries mention the fact that among the first to be harmed by the termination of economic relations will be Erdogan's sons, Bilal and Ahmet, who own (together or separately - the information about the subject is unclear) a fleet of cargo ships that at least formerly worked on the route to Israel.

Also liable to be damaged by the measure is giant Turkish firm Yilmazlar Construction Group, which has been operating in Israel for 20 years and is responsible for construction of several luxury towers in Tel Aviv.

Who exports to Turkey?

The chemicals and refined oil products sector accounts for 75% of Israel's $1.4 billion exports to Turkey, now that security exports were totally halted a few years ago. A decline or halt in these exports will affect first and foremost companies such as Oil Refineries and Carmel Olefins. These products are important for Turkish industry, but substitutes can be found relatively easily on the global market. "Keep in mind that even if the threats materialize, it will not take place in a day," Catarivas says, attempting to relieve anxieties. "There are procedures for every such measure. Even of they decide to abrogate our trade agreement with Turkey tomorrow, it will take time before it goes into effect. There are also contracts and orders on the way. Unless Turkey declares war on Israel, and that is not the situation, these things are still going on. There may be some slackening of demand, but the potential damage is mutual and it is important to stress that we and Turkey have a history of keeping economics and politics separate. It is true that we are currently undergoing a new phase that is different from the past and this is the first time that Erdogan has spoken in this way, but keep in mind that he said it following a conference of Muslim countries where they called for a boycott against Israel. From what we understand, this is probably a declaration designed mainly for internal consumption, not for foreign policy.

"It is obviously much more pleasant to do business with a country with which we have pleasant relations, but there are many examples of countries with which diplomatic relations are not so good, but trade with them continues. Europe is unenthusiastic about Netanyahu, but trade with Europe goes on. Things have to be put in their proper proportion."

Civil aviation

With all due respect to cement and tomato prices and the difficulties liable to result for Israeli companies, the place where the Israeli consumer is liable to immediately feel a Turkish boycott is in civil aviation. Three Turkish airlines currently operate intensively in Israel: Turkish Airlines, which is 50% government owned; Pegasus Airlines; and Atlas Global, which began operating only last October. Atlas Global, the smallest of the three, which began operating in Israel in 2017, currently operates one daily flight. Pegasus operates 40 weekly flights to Istanbul and Turkish Airlines has no fewer that 11 daily flights from Ben Gurion Airport. Two million Israel passengers flew with these companies in 2017, and it is believed that at least 85% of them continued to other destinations. There are no accurate data for the revenue from this activity, but a conservative estimate is at least $600-700 million.

"For Turkish Airlines," an industry source says, "abandoning the Israel market will be a tough blow. The Israeli market is the second biggest for the company after the Turkish market. The company carried the most Israeli passengers after El Al Israel Airlines Ltd. (TASE: ELAL) in 2017: 1.2 million.

"It is easy to understand why Israel is attractive for the Turks: the geographic location of Istanbul two hours from Israel. The flight is easy to operate and costs are low. Istanbul is on the way to Europe and the US and flying through there does not even lengthen most of the eastward flights."

Holiday Lines commercial partnerships manager Ilan Shalev sends three daily flights to Turkey in the tourist seasons and one flight during the off-season. He says that the Turkish airlines will be significantly damaged by any change in the situation, because Ben Gurion Airport is an important airport for them.

The big question is of course whether a cancellation, or even a reduction, in the volume of these flights will cause a rise in prices, and the answer is probably yes, even if only in the short term. The airlines plan a long time ahead; reducing the number of seats from Ben Gurion Airport may balance out, but it will take time, certainly where destinations in Asia and the Far East are concerned.

What about tourism to Turkey? Izi Madem, associate and CEO of Easy Travel, a tourism wholesaler specializing in Turkey, says that half a million Israelis used to visit Turkey. The current number is 100,000, mostly from the Arab sector. He says that this is a drop in the ocean for Turkey with its 30 million annual tourist visitors, "but in contrast to other tourists, Israelis spend a lot of money. The Russians and Germans go to clubs and don't leave there. The Israelis go to the market and on trips, so the Israeli tourist is nevertheless important to Turkey."

Since 75% of Easy Travel's business is based on Turkey, Madem is already preparing a shelf plan, even if he does not believe that Erdogan will carry out his threats. He has additional destinations, and recently began marketing other countries to passengers to Antalya suitable for the Arab sector's conception of hosting.

Waiting for the elections

Until after the elections in Turky, Israeli companies doing business with Turkey will await developments with bated breath. The various sources find it difficult to believe that Erdogan will dare to cut ties, mainly because of internal economic reasons, but not only because of that. "I don't believe," Catarivas says, that Turkey will take the risk of breaking off ties. There certain rules of the game, and even Trump is not doing everything he feels like doing. If Erdogan breaches the international rules, it will affect Turkey's relations with not only Israel, but also other countries.

"There were no precedents of Western countries or developed countries that broke off relations. The only examples are African countries in the 1970s, but this behavior is now unacceptable around the world. Our job is to douse the flames started by the politicians, who immediately announce boycotts… There is an economy with large concerns having international activity in Turkey, and he does not control them. Erdogan may be able to intervene in government tenders and prevent Israel from participating in them, but nothing beyond that. Turkey has a free economy with a mature business sector, and they will be hurt to the same degree as us, and even more."

Published by Globes [online], Israel business news - www.globes-online.com - on June 3, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

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