By Ian Armstrong
Turkey’s downing of a Russian aircraft presents the threat of economic and geopolitical consequences for both nations. Among these consequences, the potential cancellation of a nuclear power agreement poses a feasible risk with a broader than expected impact.
In November 2015, a Russian Su-24 bomber aircraft was shot down by a Turkish F-16 fighter jet along the Syria-Turkey border. Now over a month removed, implications of the military dilemma are still materializing.
Analysts have already forecast a risk outcome based on carefully measured economic and diplomatic policy responses, and others have identified how visibly increased tensions will continue to inflict financial consequences on both Ankara and Moscow across a range of projects.
Foremost among the potential economic risks is the possible cancellation of a $22 billion nuclear deal signed between Ankara and Moscow — one that would see Rosatom, Russia’s nuclear firm, construct the first Turkish nuclear plant in Akkuyu by 2020.
At present, the Akkuyu plant is currently the subject of conflicting information. Though Russian media has reported that construction is still underway, Reuters asserts that Rostam froze the project on December 9th.
Regardless of accuracy, the opposing reports highlight both the increasing tensions between Russia and Turkey as well as the declining certainty of the nuclear agreement. With termination increasingly feasible, an untimely fate for the Russian-built Akkuyu Nuclear Power Plant presents a relatively broad range of risks for investors.
Turkish Energy and Economic Woes
Much like the economic sanctions that Russia has already imposed against Turkey as punishment for the Su-24 debacle, freezing or cancelling Akkuyu’s atomic energy contract would have immediate and important consequences for Turkish financial security.
Turkey is currently highly energy-dependent and is also facing the difficult challenge of providing enough energy for its rapidly maturing economy. The Russia-Turkey nuclear power contract would provide Turkey with an additional annual power output of 35 billion kWh per year — which some analysts have projected to amount to as much as 17% of Turkish electricity demand.
The cancellation of the Akkuyu plant would therefore deal a significant blow to Turkey’s energy security and its strategic calculus as it anticipates shifting the energy burden towards nuclear in the medium term. The end of the contract would serve as unwelcome news for investors in Turkish industry across the board by representing an instantly less certain energy future, and could contribute to a brisk slowdown of the 4% economic growth seen out of Ankara in Q3.
In addition, the nuclear power plant promised by Rostam through the bilateral agreement is projected to result in the employment of roughly 10,000 people while also serving to reduce Turkey’s negative balance of payments by 10%.
A terminated contract would erase this potential and contribute to a prolonged account deficit. This is significant considering that Turkey has recently overseen the highest negative balance of any G20 economy and has struggled with capital outflows.
These economic and energy-related risks would of course be less severe in the event that Turkey is able secure a replacement contract — a prospective economic opportunity for other aspiring nuclear exporters, like China, that Ankara has already begun considering. The same would hold in the event that the agreement with Russia is only frozen in the short-term and then resumed once tensions have simmered down.
The bottomline is that even these more favorable circumstances would still require costly delays in the development of Turkey’s economy and energy profile.
Complications for Russia’s Nuclear Empire
While the premature termination of the Russia-Turkey atomic energy contract would naturally bring negative impacts to Turkey — and would, in the most likely scenario, even come as an intentional act of spite from Moscow — it would also incur severe costs on Russian prestige and prosperity.
First and most forthright would be Rosatom’s loss of a $22 billion agreement, under which Russia has already accrued sunk costs totalling $3.5 billion. These losses would come with particularly unfortunate economic blowback considering the already fragile state of the heavily sanctioned Russian economy.
However, the more remarkable consequences for Russia would come from the damage inflicted upon the future of Rosatom’s emerging brand as the world’s foremost global nuclear power provider — and with that, challenges to the international prestige, influence, and strategic calculus of Moscow.
Rosatom has currently secured contracts to construct roughly 30 nuclear reactors abroad, with plans to nearly triple that number within the next five years. The four prospective Akkuyu reactors ordained by the agreement with Turkey represent something of a watershed within Rosatom’s international expansion, as the Turkish plant serves as the first to be contracted under the build-own-operate model.
Nuclear power plants constructed under the build-own-operate model involve Moscow financing, building and operating the plant — an enticing offer to countries previously barred from pursuing nuclear power due to the high buy-in costs. In exchange, Moscow acquires not only consistent, long-term financial dividends, but a permanent base of operations within a foreign country.
Russia’s nuclear contract with Turkey thus stands as the litmus test for this incisive strategy — a business model that it seeks to employ across the developing world to bring nuclear power into henceforth untapped markets. The failure or cancellation of the Akkuyu contract would jeopardize Russia’s ability to market its nuclear program, weaken its international prestige, and dampen its chances for bolstered influence.
In the coming weeks, the direction of relations between Moscow and Ankara will be an important indicator for whether the planned Akkuyu Nuclear Power Plant will be realized on schedule.