Middle East // Analysis

19 december 2016

Features and Prospects of Russia–Turkey Cooperation in Construction

Ivan Starodubtsev Ph.D. in Engineering Science, Postdoctoral researcher, International Institute of Energy Policy and Diplomacy, MGIMO University, RIAC Expert
Photo:
REUTERS/Mikhail Voskresensky
Moscow International Business Center

Since the 1990s, Russia–Turkey bilateral relations have, despite a number of contradictions, been of a generally progressive nature.

Cooperation between the two countries reached a qualitatively new level in 2002, when the Justice and Development Party (JDP) led by Recep Tayyip Erdogan was elected into power. President of the Russian Federation Vladimir Putin noted the intensive development of bilateral relations during Erdogan’s first visit to Moscow as leader of Turkey on December 23–24, 2002 [1].

The first visit of a Russian head of state (as a successor to the USSR) to Ankara took place on December 5–6, 2004, and was described in the Russian and Turkish media as “historic” [2].

The first decade of the 21st century was marked by dynamic growth in bilateral trade: $5.1 billion in 2002; $15.3 billion in 2005; and a record $37.8 billion in 2008. Once the negative effects of the global financial crisis had been overcome, trade between Russia and Turkey resumed its positive growth trend: $29.9 billion in 2011 and $31.2 billion in 2014 (Turkish Statistical Institute http://www.tuik.gov.tr/). Shortly before his official visit to Ankara on November 28, 2014, the President of the Russian Federation talked about a potential threefold increase in trade turnover between Russia and Turkey, to $100 billion [3].

The crisis in bilateral relations that arose as a result of the unprecedented “stab in the back” that took place on November 24, 2015 led to a freezing of political ties between the two countries. Trade and economic cooperation was also affected, with the Government of the Russian Federation introducing a series of bans and restrictions on the import of Turkish products and services. It was partly due to these bans and restrictions, and partly due to the drop in energy prices on the global markets that trade turnover between the two countries fell to $24 billion in 2015.

www.yugopolis.ru
Construction of the Krasnodar Stadium, built by
Esta Construction (Turkey)

Russia and Turkey were only able to resume contacts after President Erdogan sent a message to President Putin on June 26, 2016 officially apologizing for the downing of the Russian plane [4].

1. Bilateral Relations in the Construction Industry before November 24, 2015 and Changes in 2016.

a) Turkish Construction Companies in Russia

A total of 8755 projects worth some $325.4 billion have been carried out in since Turkish contractors entered the global market in 1972 (up to and including the first three months of 2016). This includes 1939 projects worth $64.8 billion in the Russian Federation, or 19.9 per cent of the overall volume of construction activity carried out abroad (Turkish Contractors Association, TCA, http://tmb.org.tr/).

It should be noted that the unit cost of Turkish contractors in Russia had been trending upwards during the pre-crisis period: $47 million in 2011 and $207.2 million in 2015. Despite the nonlinear process, we can still conclude that Turkish positions on the Russian construction market had been strengthening all the way up to the crisis that broke out on November 24, 2015 (see Table 1). Not a single contract has been signed in 2016.

Table 1. Projects Implemented by Turkish Construction Contractors in 2011–2016 (September)

Year Total number of projects Total value of contracts, USD
2011 107 5 027 290 459
2012 76 6 483 464 494
2013 67 4 803 111 951
2014 47 3 851 852 079
2015 26 5 387 168 757
2016 — сентябрь 0 0

The total amount of contracts currently being implemented by Turkish contractors – airport terminals, roads, various businesses, shopping centres, hospitals, residential complexes and business centres – is worth $9.9 billion. Notable players on the Russian market which have major contracts include such companies as RÖNESENS, ENKA, AE ARMA – ELEKTROPANÇ, ANT YAPI, İÇTAŞ, LİMAK (data provided by TCA). According to various estimates, the share of Turkish construction companies on the Russian market before the crisis was between 20 per cent and one third.

b) Russian Construction Companies in Turkey

The following major construction projects carried out during the Soviet period should be taken into account when discussing the early period of bilateral relations between Russia and Turkey: [5]

  • Seydişehir Eti Aluminium Plant. Built in accordance with the Inter-Governmental Agreement signed on March 25, 1967. Commissioned between 1973 and 1979.
  • The metallurgical plant in Iskenderun. Built in accordance with Inter-Governmental Agreements signed on March 25, 1967 and December 24, 1972. The first phase was put into operation in 1979. The plant has been working at full capacity since 1987.
  • Izmir Refinery. Built in accordance with the Inter-Governmental Agreement signed on March 25, 1967. The first phase was put into operation in 1972. Expansion was completed in 1987.
  • Orhaneli Coal Power Plant. Built in accordance with Inter-Governmental Agreements signed on July 9, 1975 and June 5, 1979. The plant’s equipment was commissioned in 1993.
  • Construction and operation of the Blue Stream gas pipeline under the Black Sea. It is being carried out in accordance with the Inter-Governmental Agreement signed on December 15, 1997 and the commercial contract on the supply of natural gas signed between Gazprom and the Turkish company BOTAŞ in 2003.

Turning to the later period of bilateral relations, the list of major projects carried out by Russian companies in Turkey in partnership with Turkish contractors currently looks like this:

  • Construction of the Torgul Hydroelectric Plant. The plant was put into operation in 2008.
  • Laying a tunnel under the Bosphorus as part of the Melen project to supply Istanbul with fresh water. Construction was completed in 2009.
  • Construction and operation of the MMK Metalurji metallurgical plant in Iskenderun. Construction began in 2008 and production commenced in March 2011.
  • Construction of the Deriner Dam and Hydroelectric Plant. The project was approved as part of the Russia–Turkey Inter-Governmental Protocol signed in 1994. The plant was put into operation in 2013.

Among the projects currently being implemented with the participation of Russian companies, the construction of the Kigi Hydroelectric Station in particular stands out. The contract signed in November 2013, and construction is set for completion in late 2017.


www.meg-int.com
Deriner Dam and Hydroelectric Plant

The most important project for the Russian side in Turkey is the construction of the country’s first nuclear power station, the Akkuyu Nuclear Power Plant. Construction is being carried out as part of the “Agreement Between the Government of the Republic of Turkey and the Government of the Russian Federation on Cooperation in Relation to the Construction and Operation of a Nuclear Power Plant at the Akkuyu Site in the Republic of Turkey” signed in May 2010. The project is part of the “Build – Operate – Own” (BOO) model, and its preliminary cost will be around $20 billion.

c) Changes in 2016

Following the tragic downing of the Russian fighter jet, Presidential Decree No. 583 dated November 29, 2015, Decree of the Government of the Russian Federation No. 1296 dated November 30, 2015 and Decree of the Government of the Russian Federation No. 1458 dated December 29, 2015 introduced a series of restrictive measures aimed at Turkish businesses which primarily affected construction companies. The measures came into effect on January 1, 2016:

  • The visa-free regime with Turkey was cancelled.
  • A ban was introduced for employers and customers (of works or services) on the use of Turkish workers, with the exception of a separate list of approved companies (initially containing 53 organizations).
  • A list banning companies operating under Turkish jurisdiction or controlled by the Republic of Turkey in certain fields of professional activity (goods and services) was drawn up. Such activities include the construction of buildings and other structures and architectural and engineering and technical design work.

Despite the fact that the Government of Turkey did not introduce counter measures with regard to Russian companies, it should be noted that work on the Akkuyu Nuclear Power Plant, a key project for the Russian Federation, was frozen.

2. Key Issues and Constraints in the Implementation of Construction Projects with the Participation of Russia and Turkey.

In addition to the sanctions imposed by Russia against Turkey that we have already listed, the following factors also complicate matters when it comes to establishing partner relations between Russian and Turkish companies in the construction of industrial and civilian buildings:

  • The potential of the Turkish construction industry is significantly higher than that of Russian businesses. Suffice it to note that 40 Turkish companies are included in Engineering News-Record’s list of the top 250 international construction contractors. According to these rankings, Turkey has the second highest number of firms in the list, behind China (with 65) and ahead of the United States (with 38). There is not a single Russian company (!) in the list (http://www.enr.com/).
  • Turkish companies have considerable experience, as well as stellar reputations, in Russia. This often eliminates the need to engage a Russian partner when carrying out projects in the country. In addition to this, there are a number of powerful trade unions defending the interests of Turkish business abroad, including the Turkish Contractors Association.
  • The high level of competition on the Turkish construction contractors market. Supply is greater than demand. Switching to major construction projects on the basis of public-private partnerships is considered a high-risk investment for foreign businesses, including Russian enterprises.
  • Against the background of international sanctions imposed against Russia by the United States and Europe, Russian organizations, including construction companies, are experiencing obvious difficulties attracting “long money” to finance their projects. This is in stark contrast to the financial leverage enjoyed by Turkish companies, including export finance, commercial loans and their own funds.

In practice, and this is borne out by the details of the deals listed above, Russia–Turkey consortiums are set up either as part of projects that were initially implemented on a bilateral basis or in cases that require specific equipment or knowhow that Turkey simply does not possess, but which Russian suppliers can provide by beating out stiff competition from other countries. At the same time, the Turkish side makes every effort to ensure that the participation of local contractors is kept to a minimum.

3. The Prospects for Turkey’s Participation in Construction Projects in Russia.

AFP / Kayhan Ozer / Anadolu Agency /
East News
Vladimir Likhachev:
State and Prospects of Russia–Turkey Energy
Relations

The Turkish side, particularly the Turkish Contractors Association, estimates a possible annual contraction in the total value of projects implemented based on the statistics presented in Table 1 (see above). The estimates for the short- and medium term, taking into account the removal of restrictive measures on the part of Russia, are around $4–6 billion.

Turkey’s hopes rest primarily on the upcoming 2018 FIFA World Cup and the attendant infrastructure (sports facilities, tourist areas and transport) that will need to be built in the 13 host cities: Moscow, St. Petersburg, Kaliningrad, Yaroslavl, Nizhny Novgorod, Saransk, Kazan, Yekaterinburg, Samara, Volgograd, Krasnodar, Sochi and Rostov. The Turkish side estimates the amount of investment needed just to bring the stadiums up to FIFA standards at $3.8 billion.

On September 29, 2016, Ambassador Extraordinary and Plenipotentiary of the Russian Federation to the Republic of Turkey Andrey Karlov noted in a speech to the Turkish Contractors Association that 80–85 per cent of the activity of Turkish contractors is concentrated in four or five Russian regions, including Moscow, Moscow Region, Saint Petersburg, Leningrad Region and Tatarstan. Karlov recommended that Turkey expand its geographic presence in the country and turn its attention to the Russian Far East and Crimea.

4. The Prospects for Russia’s Participation in Construction Projects in Turkey.

The prospects for Russia participating in projects in Turkey in the short and medium term depend primarily on the construction of the Akkuyu Nuclear Power Plant, as well as on the Turkish Stream gas pipeline project, which was the subject of an Inter-Governmental Agreement signed on October 10, 2016 in Istanbul during the World Energy Congress.

Russia should concentrate its efforts on the Kanal Istanbul project to build a unique hydraulic structure that will bisect the European side of Turkey, running parallel with the Bosphorus. It should also focus on projects to lay subway lines in various Turkish cities, including Istanbul and Ankara, where Russian know-how could be useful. Kanal Istanbul will be about 50 kilometres in length and will cost an estimated $13 billion.

5. Recommendations for Overcoming Problems in the Development of Bilateral Relations in the Construction Industry.

Given the need to maximally protect the interests of Russian businesses in the post-crisis period, the following can be offered upon the return of Turkish contractors to Russia:

  • Projects implemented on Russian territory should be done so in a maximally competitive environment in order to ensure the optimal ration of price to quality and delivery time. The conditions of competition should protect Russian businesses to the fullest extent, create jobs for local construction workers, and ensure that locally produced materials and components are used. The competences of workers should also be improved. Encouraging Turkish companies to enter into partnerships with Russian firms would help to do this. Special measures should be taken to attract Turkish companies to work in the Russian regions, as well as on projects where their expertise is particularly in demand.
  • The potential of Russian contractors should be increased, primarily in terms of their accumulated know-how and experience, as well as in terms of references. The best way to do this is to stimulate their participation in projects overseas, including in the Republic of Turkey. To this end, Russia should take advantage of opportunities that arise to participate in such landmark projects as the Akkuyu Nuclear Power Plant and Turkish Stream, where Russia would be more than suitable contractor, as well as Kanal Istanbul.
  • The Joint Investment Fund is an important tool that can be used for increasing the potential of the Russian construction industry through joint projects with the Republic of Turkey and third countries. Plans to create the $1-million fund were announced during the World Energy Congress in Istanbul.

1. Opening Remarks at the Meeting with the Leader of the Justice and Development Party Recep Tayyip Erdogan. December 24, 2002. Moscow. URL: http://kremlin.ru/events/president/transcripts/21825

2. Putin Arrives in Ankara // Izvestia. December 6, 2004. URL: http://izvestia.ru/news/297274

3. Vladimir Putin: Russia is Effectively Creating a New Industry in Turkey // Russia Today. November 24, 2014. URL: https://russian.rt.com/article/61769

4. Erdogan Apologizes to Putin for the Downing of the Su-24 // TASS. June 27, 2016. URL: http://tass.ru/politika/3407975

5. V.N. Koptevsky. Russia–Turkey: The Stages of Trade and Economic Cooperation. The Institute of Oriental Studies of the Russian Academy of Sciences. Moscow, 2003.

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Ivan Starodubtsev, “Features and Prospects of Russia–Turkey Cooperation in Construction ,” Russian International Affairs Council, 19 December 2016, http://russiancouncil.ru/en/inner/?id_4=8503

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