Turkey’s importance to the EU increases as Azerbaijan gas exports begin

Last week, Azerbaijan began exporting natural gas to the EU from one of its biggest fields (Shah Deniz II) via the Trans Adriatic Pipeline (TAP). The TAP is a part of the 3,500 km pipeline which connects Azerbaijan’s gas reserves in the Caspian Sea to Europe. While the TAP’s successful completion could be viewed as another victory for Azerbaijan (following its recent military one against Armenia), this actually makes Turkey more relevant to the EU.

The TAP is an extension of the Trans-Anatolian Natural Gas Pipeline (TANAP) that comprises over 50% of the Southern Gas Corridor which the EU proposed back in 2008 to reduce its dependence on Russian gas.

TAP and Azerbaijan gas exports are both reminders of how important Turkey is to the EU, not forgetting Turkey’s role in exporting Iraqi Kurdistan’s oil since 2014 as well as its connection to the Middle East region, which is also key to optimising the Southern Gas Corridor’s potential.

This reinforces our view that Turkey is better placed than Ukraine and North Africa for the EU’s 2050 climate-neutral strategy. We feel that the recent sanctions imposed by EU leaders on Turkish officials and entities involved in the gas-hunt in disputed waters, may not extend to other sectors like banking.

Turkey is one of the markets to watch for 2021 as it shifts to orthodox economic policy following the replacement of leadership at the finance ministry and central bank (CBRT) in November 2020. The shift in the CBRT’s policy stance is evidenced by the second consecutive repo rate hike in December 2020, allowing the real interest rate to finally inch above +1% for the first time since December 2019. Turkey’s FX rate is one of the cheapest in emerging markets and its equities are valued cheaply.