Statistics show that long-term threats to the Turkish economy come less from the November 24, 2015 Russian warplane incident than from Turkish president Recep Tayyip Erdogan’s reluctance to continue International Monetary Fund (IMF) prescriptions for the Turkish economy.

Turkey’s downing of a Russian jet purportedly violating its airspace generated talk of canceling major projects with Turkey, such as the Turkish Stream gas pipeline and the Akkayu nuclear plant, and highlighted existing tensions over the crisis in Syria. Russian President Vladimir Putin referred to it as a “stab in the back”. Mr Erdogan replied, “We very sincerely recommend Russia not to play with fire,” but added, “We really attach importance to our relations with Russia. We don’t want those relations to suffer harm in any way.”

Both leaders are addressing domestic audiences. Russia, Turkey’s second largest trading partner, provides 60% of its energy. As Mr Erdogan indicates, both countries need each other.

Mr Erdogan continued IMF reforms after his 2003 election, giving Turkey the macroeconomic stability to attract foreign capital. Large capital inflows led to to rapid growth in both private sector credit and consumption. From 2002 to 2012, per capita income almost tripled and the economy grew an average of 5% per year.

Agriculture comprises about 30% of Turkey’s economy, while its industry includes heavy and light manufacturing of both consumer and industrial goods. FDI as a percentage of GDP, according to IMF charts, averaged 12.8% of GDP between 2009 and 2013, and was projected to go to between 11% and 17% in 2014/15.

The Turkish Economics Ministry reports that there are more than 44,000 foreign companies active in Turkey in 2015. About 20,000 were European – mainly German, British, and Dutch – about 12,000 Middle Eastern, and about 1500 American. Several large projects underway include a tunnel under the Bosphorous, a new Istanbul airport, and a canal connecting the Black Sea and Sea of Marmara. 

A large current account deficit and high inflation followed Turkey’s growth. Severe turbulence in 2014 led to a 15% currency depreciation resulting in rapidly depleting international reserves.  Externally, Turkey’s current account deficit worsened to 7.9% of GDP from a 2013 average of 6.4% as public demand increased. Growth in 2014 fell to 2.9%.

The IMF forecasts Turkish growth at about 3% with low domestic savings and competitiveness problems limiting investment and exports. While limiting inflation and the current account deficit, this will slow income growth. Sudden falls in capital inflows remain the big risk. The country’s external gross financing, which requires more than 25% of GDP, leaves it vulnerable to sudden shifts in capital flows.