Turkish Economy Improves amid Russian Sanctions

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According to government data, the economy grew 4.0 percent in 2015, the fastest pace since 2014, surpassing analyst expectations, according to AFP. The good news may prompt the central bank to raise rates unless Russian sanctions hamper economic progress. Prime Minister Ahmet Davutoglu promises such measures as pension reform, increasing the minimum wage and fostering a suitable business climate.

Turkey may be riding high from the good news, but officials must not fall into the trap of complacency, as the country has to deal with overwhelming odds—most notably Russian-Turkish relations. Economists believed the Turkish economy would have been in a worse state given geopolitical tensions and fights against terrorism, but leaders also achieved a third straight month of zero deficits, stoking more investor confidence.

Despite the government's human rights stain, many investors feel leadership has created a stable investment atmosphere—a crucial element of Turkey's economy. Turkey has relied on foreign investment for decades, which explains why officials must maintain close ties to the business community. Turkey still has to convince investors that the country remains a suitable business haven, especially as the financial markets adjust to the U.S. Federal Reserve's interest hike, and some in the business community express concern about the viability of long-term growth, notes Bloomberg Business.

However, Russia represents a significant problem that looms over Turkey, and President Vladimir Putin could turn up the heat at any moment in response to the shooting down of a Russian warplane in Ankara. Under Russian sanctions, Russia has banned food imports, including certain holiday restrictions on gifts and the number of Russian tourists in Turkey have fallen. Currently, only the tourist sector of the Turkish economy has sustained damage, but further tensions could cause greater harm.

Turkey relies on Russia for 30 percent of its oil and 55 percent of its natural gas. This prompted the president to consider alternative energy strategies if the Russians impose further restrictions. For instance, the president traveled to Qatar to cement a natural gas deal, and the prime minister headed to Azerbaijan to strengthen energy ties. There is no sign that Putin will reduce energy exports to Turkey, but things could change if relations grow worse.

However, the Russians must be careful in not isolating Turkey too much, as energy restrictions would hurt state-run energy giant Gazprom, and the Russian economy remains in a fragile state due to Western sanctions. Currently, Russian-Turkish ties are at an all-time low, and there is little sign of open dialogue in the near future. Turkey's economy could lose $9 billion and shed up to 0.4 percent from the economy under the sanctions.