THE IMPACT OF GEOPOLITICAL DEVELOPMENTS IN THE RED SEA ON GLOBAL TRADE AND INFLATION

Assessing risks in global trade has gained heightened significance, particularly in the wake of the Covid-19 pandemic. The ensuing conflict between Russia and Ukraine, followed by Israel’s recent attacks on Palestine, has started to exert notable impacts on global inflation through disruptions to global trade and trade routes, as well as the escalation of energy and logistics expenses. The attacks by the Houthis in Yemen on merchant and tanker ships traversing the Red Sea are also viewed as a risk that demands close monitoring for its potential effects on global trade.

WHY IS THE RED SEA IMPORTANT?

Roughly 12 percent of global trade flows through the Red Sea, which is linked to the Mediterranean via the Suez Canal. Around 50 ships utilize this canal a day, facilitating the transportation of approximately USD 10 billion worth of goods across the Mediterranean to European nations and the East Coast of North America. Trade between Asia and Europe, two of the most important actors in global trade, takes place through the Red Sea and the Suez Canal. Risks along this trade route compel companies to resort to trading via the Cape of Good Hope in the southern region of South Africa, which historically served as the primary trade corridor between Asia and Europe prior to the opening of the Suez Canal.

The number of ships traversing the region in January surged by 67 percent compared to December of the previous year, and there has been a noticeable uptick in activity around the Cape of Good Hope as well. However, in contrast to the Red Sea route, utilizing the Cape of Good Hope extends delivery times due to its longer distance, consequently raising freight and insurance costs owing to increased fuel expenses. Ships opting for the Cape of Good Hope route typically experience an increase in delivery times by approximately 10-15 days. Extending the distance by approximately 6500 km translates to an additional fuel expense of around USD 1 million.

Besides these factors, insurance costs may also see additional increases. Following recent developments, it is observed that insurance prices have surged by up to 7 times due to insurance companies factoring in the heightened risk of war in the region. Therefore, the Red Sea and Suez Canal, being the shortest route between Europe and Asia, are considered the most optimal trade corridor for companies in terms of cost management.

GLOBAL IMPACTS OF DEVELOPMENTS ON THE RED SEA

Trade disruption in the Red Sea was previously encountered in March 2021, when the container ship “Ever Given” became stuck in the Suez Canal. On one hand, this incident occurred at a time when global logistics were already facing challenges due to the pandemic, leading to the closure of the Suez Canal for approximately a week and temporarily slowing down trade. However, it is anticipated that the current events will have a significantly greater impact compared to the one-week delay experienced back then. Certainly, the crucial factor here is whether the ongoing events are temporary and whether they will escalate to affect other parts of the region.

The primary and most significant impact of the conflict in the region will likely be felt through Egypt. The income loss that the country, which annually earns approximately USD 10 billion through the Suez Canal, may reach considerable levels due to conflicts in the region. Another important region that will be adversely affected by conflicts in the area is Europe. Imports from Asian countries are anticipated to become more expensive due to rising costs. However, a greater peril for Europe may lie in the realm of energy.

The timing of events in the Red Sea coinciding with European countries’ efforts to transport oil and natural gas from the Middle East via ships to reduce their energy dependence on Russia has a detrimental impact on oil and natural gas transportation in the region. The absence of an alternative source for importing the 1.1 million barrels of fuel that Europe supplies via this route poses a supply risk for the continent. From this perspective, European countries emerge as the most vulnerable region in terms of oil supply.

On the contrary, Russia has recently escalated its exports of oil and natural gas to Asian countries, notably China, with the Red Sea serving as a conduit for this trade. As a consequence of these developments, the recent downward trend in oil prices has started to reverse. This could potentially harm global inflation, which has begun to recede after reaching its peak. Indeed, the President of the European Central Bank underscored the significance of the issue, stating that one of the four risks they monitor closely will be supply shocks. While there has not been a notable surge in energy and general product prices thus far, observable increases are evident in transportation-related items.

POSSIBLE EFFECTS OF DEVELOPMENTS IN THE RED SEA ON TÜRKİYE

Certainly, a development that adversely affects global trade, inflation, and supply chains should not be expected to yield positive outcomes for Türkiye. The risk that conflicts in the region will persist and potentially spread to additional areas poses a significant concern for Türkiye.

Rising costs of food, commodities, and oil could also hinder Türkiye’s efforts to combat inflation. Costs are also expected to rise as freight transportation prices increase for ships arriving in Türkiye. Particularly, companies that rely on imported inputs from China for manufacturing will be adversely impacted by this increase in costs. Despite these negative developments, Türkiye may still experience certain partial gains in this process.

Developments in the region, such as the Covid-19 pandemic, have once again underscored Türkiye’s importance as a trade partner for Europe. Following these developments, European companies that source intermediate goods from China have begun to redirect some of their orders from China to Türkiye. However, it is crucial to closely monitor whether this advantage will persist, contingent upon the duration of the ongoing process.