Turkey prepares to conduct foreign trade with Ukraine in lira

Turkey’s President Recep Tayyip Erdoğan announced on
Aug. 11 preparations to denominate trading contracts with the nation’s major
trading partners – China, Russia and Ukraine – in the national currency, the
Anadolu news agency reported on Aug. 11. Turkey is ready to apply the same
approach to European countries as well “should they want to get rid of their
dollar shackles,” Erdogan said.

This statement is Turkey’s response to recent
sanctions imposed by the U.S. on several Turkish Cabinet members over the
ongoing detention of American Christian pastor Andrew Brunson.

Evgeniya Akhtyrko: This
statement is worrisome, as it might have negative consequences for Ukraine’s
balance of payments. Turkey is the third-largest destination of Ukrainian
exports (USD 2.52 bln in 2017 and USD 1.20 bln in 5M18, or 5.8% and 6.2% of
Ukraine’s total goods exports, respectively). Exports to Turkey are twice that
of import volumes to Ukraine. Meanwhile, the Turkish lira has devalued 23%
during the last two week, as the US-Turkey scandal developed, bringing YTD
devaluation to 41%.

Ukrainian exporters will be exposed to higher
exchange rate risks should they be forced to denominate their contracts with
Turkey in the unstable Turkish lira. This may result in decreased turnover with
Turkey and a worsened current account, adding devaluation pressure to Ukraine’s
national currency. Additionally, Ukraine’s involvement in tensions between
Turkey and the U.S. can itself become a negative psychological factor for the
Ukrainian currency. But we expect the possible negative impact will be minor
and short-lived.