Research – Focus Turkey

We offer continuous coverage in the form of a bi-monthly Newsletter (Sign up below!), Research Notes that expand the newsletter posts as well as an annual Country Risk Report and our Focus Reports on strategic industries like the Turkish construction, defense and tourism industry or industries like the jewelry industry, which officially ranks as the fifth largest industry in Turkey but is hardly more than an expensive way of buying gold for Turks (more about this in our upcoming Newsletter).

Our Newsletter: The Risk Briefing for Turkey

In each issue we take a single industry, product or risk dimension, like political or security risk, to paint a picture of the total risk environment. We will explore Turkey’s unreliable sources of forex and their seasonal patterns from tourism via remittances to foreign pensions. With reserves depleting as they did last year, even comparatively small money flows like remittances can be a lifesaver. We will look into Turkey’s money sinkholes like the decrepit tax system and its miniscule tax base as well as the blatant tax evasion of companies and citizens (on top of the tax avoidance of AKP clients). Speaking of clientelism, we will describe the system of give and take built by the AKP over two decades, seeking rents in every corner of the economy, particularly trying to capture the future rents of large infrastructure projects.

Countdowns

At this point almost any risk index for Turkey is going through the roof. A third of the population, half of production as well as one of the three nuclear plants being built are sitting on a tectonic fault line and the earth is already shaking in a countdown to the “Big One”. 

Your chances of getting killed in an express train accident are probably higher than anywhere else (while Anatolian trains are often so slow, you can watch sheep graze). As a worker your chances of surviving a Turkish construction site are also slim, building the new Istanbul airport cost more lives than people die on all British construction sites in a whole year (55 official deaths, the real numbers are reported to be in the hundreds).

12-year-old Kurdish boys are plucking hazelnuts, while their 12- year-old sisters are married off and never see the inside of a school again. ESG compliance or any compliance as a matter of fact is a challenge.

Erasing the map

We will cover these and many more dimensions of risk in our upcoming research, but clearly geopolitical risk overshadows any domestic concerns, so let’s step back for a moment and state the obvious first:

Turkey is the most dangerous country in the world right now.

The usual suspect North Korea does not deserve this distinction, it is caught in a reassuring state of mutual assured destruction with South Korea (courtesy of US nuclear capability). Iran clearly can be contained, as its recent restraint after the killing of Qassem Soleimani showed. And the US probably did more damage under Bush jr. than any other country will manage for the remainder of this century. After all Americas’ two wars have literally wiped three countries off the world map (or two and half, since Afghanistan was hardly a country anymore in 2001). The ensuing refugee crisis destabilized many more countries (Lebanon!) and invigorated as well entrenched the power of populists, made Brexit succeed, pushed the EU towards breaking point and turned it into the victim of Turkish blackmail.

When your house is burning, and you lay fire to the neighborhood… 

Turkey has threatened and aggravated most of its neighbors, almost all of his Western allies and many of its most important trading partners. Erdoğan threatened Germany, France and the US with violence as well threatened and insulted Macron and Merkel personally, the first as “mentally retarded”, the second as a “Nazi” (clearly the worst of all insults to a German). The Turkish government not only claims that the US instigated the 2016 coup, it actually believes it! It bought the S-400 system solely to protect the president in his palace against the attack of its NATO ally (one needs quite a few more to protect the whole country, plus satellites, AWACS etc. – an integrated air defense that only NATO can offer). This shouldn’t come as a surprise, since you can blame the US and Israel (or the Jews) for almost anything in Turkey across the political spectrum.

Turkey has fought an almost continuous civil war at home for nearly four decades. For nearly three decades it has also fought the PKK in Northern Iraq, where it’s now entrenched in dozens of bases, hosted by the Kurdish Peshmerga (whom they also trained). Having fully surveyed the PKK territory, there are now few caves left for the guerilla to hide in. Constant drone surveillance and a border wall and fence along its border with Syria and Iran have put enormous pressure on the guerilla. But then again the PKK has founded their own state(let) in the wide-open plains of North Eastern Syria, while sitting on the region’s largest oil field. Whereas Turkey is trying to strike a development deal for the exploration of a gas field, that is destined to be smaller than the official propaganda statement and might turn out to be uneconomical altogether.

Over the last two decades Turkey actually managed to turn the Kurdish Regional Government into a Turkish proxy, that relies on Turkey for foreign investment and the proceeds of oil sales, because it can only access the world market through the Turkish pipeline to Ceyhan. Now Turkey threatens the long-time peace in the region by blackmailing the KDP Peshmerga to join them into fighting the PKK again (as they did before in the mid-90s). Oil might actually help to keep the peace, since the PKK develops the oil field with the help of a US company which exports it via the KRG and will have to pump it through the Turkish pipeline! The company itself, Delta Crescent, is just a shell for some stealthy American investors and corrupt KRG officials to benefit when the oil fields changed owners from ISIS to the YPG.

Turkey’s wars

A civil war at home doesn’t seem to be enough, Turkey also had to meddle in several other theaters of war with little to show for. The sea border agreement with Libya, while not binding to any neighbors, tries to upset the existing border agreements in the region, but most importantly shortchanges the Libyan people. A new democratic or authoritarian government might simply not find it binding. And Turkey certainly has a good shot at rebuilding the country anyway, after all Turkish construction companies have realized large infrastructure projects in Libya since the 1970s (and apparently left many projects unfinished, while AKP client companies pocketed the money). In the confrontation with Greece Turkey gained nothing but instead lost the last good will left on the part of its Western allies. Ironically, Turkey indeed has a point here, the definition of what constitutes a continental shelf (and therefore mining rights) overly disadvantages Turkey.

Is Northern Syria a success story? Parts of it indeed feel like a Turkish colony with price tags in lira and Erdoğan’s portrait looking down on Syrian schoolchildren. But that suggests a false reality, Turkish gains in Syria are anything but secure and its military campaigns have further destabilized the region.

Only the Turkish-engineered victory of Azerbaijan against Armenia seems to have been decisive enough to create a new status quo. More importantly this victory should have substantially lowered Turkey’s gas bill, the gas delivery contract was up for renegotiation and the terms will be very favorable for Turkey. The Turkish defense industry will also benefit, Turkey has armed Azerbaijan for many years, now the order books will be even fuller.

Between strategy and paranoia

It is tempting to consider all this part of a new aggressive foreign policy, but instead it just follows the demands of political survival at home. Any mid- or long-term foreign policy goal is sabotaged by this paranoid style of politics as well as by the reality that Turkey is now facing a hostile environment that it helped to create more than anybody else. And as any psychologist knows, the paranoid who has reason to be paranoid is mostly incurable.

It seems to have been large forgotten, that Turkey made a militarized attempt of breaching EU borders last March, by having refugees overrun the border to Greece at the risk of getting them killed. The fact that Turkish border guards shot at German and Greek Frontex guards with live ammunition at least five times since March, doesn’t even seem to have registered with the public.

The EU wants to avoid another refugee crisis at all cost (except by shooting at refugees and there are certainly enough populists ready to do so). If it sanctions or otherwise corners Turkey, its borders will be flooded with refugees and this time tens of thousands of young Turks will join them. A recent opinion poll showed that 62.5% of Turkish youth (15-25) want to leave the country, almost half(!) of young AKP voters (47.3%) and a breathtaking two thirds(!!) of MHP voters (68.6%). The great majority is already either unemployed or working way below minimum wage and only seasonally. Erdoğan promises Turks that their country will rise like a star (or at least to the moon) but towards the EU he behaves like a suicide bomber with his own country strapped to his body, screaming “Try to stop me and I will pull everybody down with me”. This valid threat gives Erdoğan more protection than any S-400 battery ever could.

Until death do us part?

In case his own countrymen should fail him, Draconian laws are already in place to silence any protest. Even if the loyalty of the police or military should waver, Erdoğan can still command a shadow army of paramilitary forces on top of millions of armed followers.

By now most Turks and probably most observers will agree:

They will be no peaceful transfer of power.

If Erdoğan enjoys the same good health as his parents, he will not leave office in a casket before 2039 or later. Considering the advances of modern medicine, you might want to round that up to 2045!

Ready to rumble?

No matter if you are invested in Turkey or feel lucky and want to invest (there sure is plenty of opportunity to buy into infrastructure rents at a bargain for example) – we want to help you forecast the trajectory and velocity of the risks and threats that will hit you with every turn of the road.

While the risk of contagion to emerging markets is probably low by now, geopolitically the destinies of Turkey and Europe are joint. We all ignore Turkey at our own risk!

We want to help you navigate the chaos that is Turkey for many years to come! 

Upcoming Newsletters and Research Reports

This newsletter will hit your mailbox every two weeks. Amongst others, look forward to these newsletter posts and research reports in the upcoming weeks and months:

The Great Heist 

Or what is the Sovereign Wealth Fund up to?

Turkish drones and warmongering 

The Turkish Defense Industry and the economics of war in an age of dual-use technology

Concrete Economy 

Coating the country and its ancient relics in concrete 

Ferrero’s invention

The Second War had only ended a few years before, when chocolatier Ferrero made a fateful decision. Chocolate was hard to get by and expensive and therefore simply unaffordable to most people, but hazelnuts grew in abundant supply in Ferrero’s native Piedmont at the foot of the Alps. They decided to make the expensive ingredient, chocolate, last longer and “cut” it with hazelnuts. It turned out to be their most successful creation, ruining the teeth of children and adults alike all the way to China. Granted, they just created a spreadable version of the famous dark nougat Gianduia from Turin, which looks like chocolate but got rid of most of it for the same reasons: its price. Ferrero Rocher might be its most ingenious creation, a “chocolate” praliné filled with Nutella, basically selling the same thing for almost 10 times the price. Apropos China, Ferrero Rocher have become a very popular gift in China, particularly for the Chinese New Year. They are mostly sold in gift boxes for that very purpose. Unsurprisingly they are therefore rather expensive and Chinese demand is price-sensitive accordingly. It’s a sign of their popularity that Ferrero had to fight fakes for years in China, which is rather ironic, considering that Ferrero started Nutella as a “fake” chocolate crème (they only called it “Nut”ella in 1964). Today Ferrero buys a quarter of the world supply of hazelnuts, two thirds of their hazelnuts come from Turkey alone!

Regrettably, the post-war economics do not apply anymore. Whereas the cocoa price moves between US$ 2 and US$ 3 per kilo, and sugar as well as palm oil are “too cheap to meter” the world market price of hazelnuts by now is around US$ 12 per kilo on average, while Turkish shelled hazelnut kernels sell for at least US$ 7 per kilo on average (unshelled ones for about half). But prices can double in case of shortages as they did in 2014 because of heavy frosts. Hazelnuts are after all the second most popular nuts after almonds and the prices show that. 

Turkey’s hazelnut empire

Turkey produces 66% of the world’s hazelnuts and 76% of total world exports. In other words, Turkey supplies a strategic amount of hazelnuts to the world. A major loss or cut of Turkish hazelnut production would make a Nutella breakfast not just an unhealthy but a very expensive choice.

Until recently a third of them were grown in a single province: Ordu, on the Northern Black Sea, which relies on its hazelnuts for 80% of its income. Here they are grown on a narrow, 60 km wide stretch of land along steep slopes, up to 750 m above sea level. Hazelnuts are native to the Northern Black Sea Region and its produce is considered the finest in the world, but it was the command economy of the newly founded Turkish state that made it the cash cow it is today. In the 1930s the state decided the region should grow hazelnuts, since it promised good business and its deep roots kept erosion and therefore landslides at bay. The soil, sun and rainfall of Ordu are indeed ideal for growing hazelnuts, but heavy frosts are devastating because of the altitude. On the other hand you might also wonder what else they should have grown on this steep, rugged terrain. 

By now 95% of Turkish hazelnuts are grown further East along the Black Sea Coast as well as, generally speaking, in Northern Turkey. Here, they are not grown on slopes, which allows for mechanization, while the on the slopes of Ordu the plucking has to be done entirely by hand. Imagine one big field with a 50 km radius to get a sense of the size of the total cultivated area. Annual production fluctuates between 400,000-800,000 t, this year’s output is estimated at around 600,000 t. It mostly follows the natural of cycle of trees yielding less every second year, while the tree regenerates. In recent years, the process of drying the hazelnuts in the sun has been replaced by drying machines. The results are of course more stable color, texture and size. Only the separation of kernels and husks is uniformly done with machines. This work can last until October, from then on the dry kernels can safely be stored for up to two years in normal warehouses. In years of oversupply, that is when production yields more than around 700,000 t, this storage capacity helps to keep prices in check.

Hazelnuts make up about 20% of all Turkish agricultural products, more than any other crop and 12% of all agricultural exports or 1.5% of total exports. Only 15% of hazelnuts are consumed at home. They are just too expensive. Also while Turkey produces the best hazelnuts in the world, and arguably very good tea and tobacco, often only the lower-quality pickings end up in Turkish supermarkets. You may laugh or cry at the scene of Almancıs (German-Turks) arriving at Adana or Gaziantep with their suitcases full of Turkish(!) tea for their relatives. 

Except for major frost losses as in 2014, exports have risen every year for over a decade. 85% of exports alone go to the EU, a quarter of which are bought by Germany, with Italy buying another quarter (being a major producer itself). France alone buys another 10%. Chinese demand, while still small, has doubled over the last five years. 

90% of hazelnuts are used in sweets, candy, cakes, chocolate and of course Nutella. People in Turkey and the Middle East love them for their Ramadan desserts, which often creates a seasonal run on them and makes prices peak. German imports from Turkey show a downward trend though, since German buyers are eager to diversify their sources and Turkey’s neighbor Georgia is eager to accommodate them (but more about the competition later).

Once in a while, frosts in March in April or heat waves in June or July can take out large parts of the harvest, also extreme weather events have risen significantly over the last decade. In 2014 frost destroyed almost a fifth of the harvest, pushing prices up by 60%. The Ebola outbreak in the same year also brought the cocoa production in West Africa to its knees, making it one of the worst years for Ferrero. But Turkish scientists are working on a cold-resistant strain. The main variety Tombul, while big and beautiful (or less poetic: high kernel percentage, high fat content, high pellicle removal), does not take cold easily. The Allahverdi variety seems to be a promising contender with double the yield and a low sensitivity to drought, frost, diseases and pests.

Plucking hazelnuts

Plucking hazelnuts is hard work. It happens in August for most varieties (one to two months earlier than in more Northern climates), when the sun is still blazing hot. One group collects the nuts in bags, while the other group carries the 50-kilo bags to the truck. In Ordu that entails balancing on steep ground, and carrying the load all the way down to the bottom of the mountain.

Mostly Kurdish seasonal workers, whole families, from the South and Southeast of Turkey often pluck away 12 hours a day, 7 days a week with little rest in between, to make their meager pay checks. In recent years many Syrian families have joined them. On the Eastern Black Sea there is also a sizable contingent of guest workers from nearby Georgia. The work is backbreaking, even more so when it’s done by 10-year-old children, roped to rocks for safety. They are being forced to work by their parents out of sheer financial necessity, with at least some employers being forced by the parents into employing them (they threaten to leave for a more accommodating employer). With the arrival of millions of Syrian refugees child labor has only increased. A perfect case of “entrenched” poverty if there ever was one. It’s of course perfectly illegal to employ a 10 or 12-year-old child but the state does very little to fight the problem. Instead it even sent whole school classes to help out on the fields when the Covid-lockdown brought transportation to a standstill.

The Kurdish and Syrian families are cramped into a small metal shed without running water or electricity right on the premises or in tents along the road. The local population sometimes mistreats them or worse. In a recent case the father of a Kurdish family was beaten by six people and finally shot, allegedly for speaking Kurdish.

Getting paid

Hazelnut harvest is very labor-intensive and unsurprisingly the labor is dirt-cheap. Seasonal workers end up earning way below the official minimum wage, which at this point is considered below the poverty line already. They earn a flat salary, which is paid out after the fact, and are not getting paid for overtime. On top of that they have to hand over a 10% commission to their contractor. They also have to pay for their living expenses, which are normally higher than at home, as well as their travel expenses, which can easily equal three days’ pay for an adult. The going rate for refugees is even lower, and sometimes they end up working for much less than promised or are not paid at all. Few have work permits and therefore have no means of legal recourse. The contractors, called dayibasi, normally arrive at an orchard with a group of 100 to 150 workers. They advance workers the travel and living expenses, the indebted workers are thus tied to the group.

Turkey’s labor code is very lenient and doesn’t apply to farms with under 50 employees at all, in other words for most of them. Many of these seasonal laborers travel from one harvest to the other (first harvesting tea, then hazelnuts, and starting in November, oranges for example). They make up a full fifth of Turkey’s workforce (among them at least 200,000 Syrian refugees, probably hundreds of thousands more). 

Half a million farmers, around 4 million people are directly or indirectly involved in hazelnut production and about 400,000 families solely depend on it. The field size on the other hand shrinks, every time a farmer dies and the land is divided among his sons the field shrinks. By now the average field has shrunk to only 1.5 hectare. Though it employs a fifth of the working population, Turkish agriculture only contributes 6% to the GDP.

The supply chain and compliance

Ferrero as well as Nestlé, as the biggest buyers, do make an effort to stop child labor and to enforce compliance for worker’s rights and fair pay. But by 2017 they claimed to be able to trace a mere 25% of their hazelnut supply (there are no separate numbers for Turkey).

Tracing the source of hazelnuts is indeed a challenge, given the long and intransparent supply chain. First, the farmers pay the contractors, who then pay the workers (minus their fee). Most farmers pay with money they have borrowed from one of the thousands of merchants to whom they sell their produce in sacs of dried hazelnuts. They get paid by quality, which is measured by the weight ratio of shells to kernels, but the credit arrangement diminishes their bargaining power of course. Both workers and farmers are therefore kept in debt and weak respectively. These merchants sell the hazelnuts to brokers, directly to exporters, to manufacturers like Ferrero, Nestlé or Turkish Yıldız or to cracking factories which sell their end product to retailers. Turkey’s cracking plants by the way, have an annual capacity of 1.8 million tons, more than three times the average annual harvest. 

The low productivity curse

Ferrero also works with farmers to raise productivity by improving pruning, irrigation and pest control. Here as in other Turkish industries the low productivity curse is blatant. With the right care a hazelnut tree can yield clusters of up to 21 nuts. On a typical Turkish orchard it’s more like 4(!), which is the lower than anywhere else in the world. While exports have risen enormously since 2001, productivity has fallen each year. The reasons are manifold:

Deathly debt

The cost of inputs like seeds, fertilizers and diesel have indeed skyrocketed, since the economy took a deep dive after the 2016 coup which also sent the lira into free fall. The opposition party CHP boldly claims that farmers’ debt has increased by 72 times under AKP rule, with the prices of inputs rising by almost 900 percent. 

It’s not surprising many farmers have decided it’s not worth the hassle and join their family members in Istanbul or Ankara, creating an ever-growing class of urban poor. Inflation and decreasing yields are a major reason for the rural exodus. Many have also been displaced by the ill-guided real estate development under AKP rule, which often built on prime soil for short-term speculative gain.

Land lost

But most cultivated or cultivable as well as grazing land was lost due to the endless civil war with the PKK. Over the last four decades millions of people were displaced, most of them farmers and shepherds, who were forced to leave their homes and livelihood behind. Whole villages were deserted. Over the last few years tens of thousands of farmers lost their land along the Southern and Southeastern border to Syria and Iraq, where the government built a border wall and fence against the PKK and cleared a large corridor along the border. This loss of land easily represents several percentage points of GDP in lost export income, threatens food security and requires Turkey to import crops like grain or cotton, which it could easily produce at home.

Since 2003 alone, thus years after the desertion of the Southeast at the height of the civil war, the number of farmers has fallen from 2.8 m to only 2.1 m. Meanwhile, Erdoğan blames Covid, droughts and foreign “food terrorists” for the inflation of food prices. Overall inflation has reached close to 37% according to the independent Turkish research institute ENAGrup.

The competition

While Erdoğan promises Turks their country will rise to become one of the top 10 biggest economies in the world, Turkey is already in the top 10 of agricultural exporters. Granted, Turkey only made last place, for which there are many fierce contenders. 

It’s neighbors Azerbaijan, Georgia and Iran are able to produce and sell hazelnuts at much cheaper prices than Turkey, so cheap indeed that Turkish retailers are buying hazelnuts from them only to export them. Turkey moved quickly and applied a steep tariff of over 40% on hazelnut imports. So far Georgia and Azerbaijan only produce 100,000 t a year, a fifth of the Turkish average production, but they are adding new orchards constantly.

The reluctantly benevolent state

It was the idea of the state to farm hazelnuts as a cash crop to begin with and the state has also, in most years, subsidized production since the 1960s by purchasing overproduction at guaranteed prices. For the last 15 years the state has bought at least part of the oversupply and sold it off when demand increased. It also produced and sold hazelnuts products itself, like chopped kernels or hazelnut oil.

The high guaranteed prices created an incentive to further expand cultivation, creating an even larger oversupply. The AKP therefore decided to liberalize the market in 2003. That conviction lasted only two years under the pressure of farmers, many of whom also came from Erdoğan’s home province and electorate on the Eastern Black Sea. Then a new law prohibited the planting of new orchards as well as the renewing of old orchards without permission. The government also offered farmers compensation if they grew alternative crops. At least the latter policy turned out to be an utter failure, since almost nobody gave up their orchards. In 2010 the state stopped buying excess produce again, only anew became a buyer after the post-coup economic downturn. The guaranteed prices though have hardly kept up with inflation and were set at only 22 TL per kg this season.

What now?

Ending the low productivity curse must be the key priority, and it’s obvious what has to be done: Proper pruning or terraced cultivation go a long way to improve things and mostly require education and persistence. A country which is 90% slopes must make fighting erosion a priority. Landslides are already a major problem in Turkey and will only become more frequent with climate change. It just happens that the Eastern Black Sea is already a hotspot. Such measures would also reduce inflationary pressure significantly without having to spend a dime more on seeds or fertilizer. 

Mechanization presents a dilemma though. If Turkey does not expand cultivated land, mechanization could put the poorest and most uneducated part of Turkey’s work force out of work, millions of people. Since Turkey still has no meaningful social security system this would be a recipe for disaster.

But there is also an obvious solution for this dilemma:

End the civil war. Repopulate the countryside. Make a 25-year plan for food security, while keeping in mind that Iraq and Syria (though having lost a lot of population) are sharing the same major river system. An irresponsible expansion of Turkish agriculture in Eastern Turkey can create life-threatening water scarcity in Syria and Iraq. Things are so bad already, if Syria and Iraq were still actual countries they would soon be at war with Turkey over water. Regarding water supply, Turkey already lives at their expense. 

By the way, it also doesn’t seem too much to ask for Turkey to enforce compliance to its own work, health and wage standards. And all this can be part of a high-tech endeavor too. The same drone that now kills insurgents and villagers alike can be sent on surveying and remote sensing missions to measure soil quality, estimate production or forecast biotic stress (the prevalence of diseases and pests) as well as abiotic stress (like high salinity or low water levels). Considering it costs a mere US$ 150,000 to build and send a “cube satellite” into space, scrap the ridiculous moon mission and send thousands of Turkish cube satellites into space instead. They can constantly monitor the state of Turkish agriculture and environment or bring fast internet to millions of people in Eastern Anatolia. 

It looks like Turkey has a lot of homework to do, but it also looks like the payoff will be magnificent!