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Turkish Textile Manufacturers Feel Russia-Ukraine Pain

More than $1 billion in Turkey’s textile trade may be at risk if Russia’s war on Ukraine continues unleashing chaos in Eastern Europe.

Seref Fayat, head of the Union of Chambers and Commodity Exchanges of Turkey (TOBB) Clothing and Apparel Industry Assembly, told Sourcing Journal that order cancellations “could exceed $1 billion if this situation continues,” in contrast to the industry expert who told Reuters earlier this month that buyers had already nixed $200 million.

The Istanbul Ready-to-Wear Clothing and Apparel Exporters’ Association (IHKIB), a Turkish textile trade organization with more than 19,000 exporter members and the third-largest apparel supplier to the E.U., stopped short of confirming the monetary impact of the cancellations. But the industry group is currently working with members to crowdsource their individual issues in the current trading environment before submitting them to Turkey’s Ministry of Trade.

IHKIB president Mustafa Gültepe said it’s still difficult to calculate the impact due to the many ongoing uncertainties at play.

“The continuation of war will surely affect the sales and may decrease the consumer demand,” Gültepe said. “More sanctions will lead to a decrease and the exclusion of Russia from the SWIFT system may create problems in money transfers. We have many local Turkish brands in Russia and Ukraine and the closure of their sales shops will affect the exports.”

Gültepe noted that these Turkish brands operate more than 1,000 retail stores across Russia and Ukraine, further illustrating that the loss of business in these countries has enormous implications for both importers and exporters alike.

Finding suitable replacements in the near future isn’t going to be an easy task for Turkish manufacturers, particularly if Russian and Ukrainian sellers are primary clients.

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“The apparel industry has reacted to the war by looking alternative ways to continue the exports,” Gültepe said. “The exporter firms are also looking for alternative markets to balance the losses in Russian and Ukrainian markets. However, as these markets are big markets, it may be difficult to find alternatives easily for those apparel exporters especially working only for these markets.”

Manufacturers of one of Turkey’s leading material exports, leather, are feeling the heat as cancellations pile up. As the 10th-largest leather producer in the world, per UN Comtrade data, the animal-derived material is big business for the Turkish economy. Turkey’s leather and leather-product exports totaled $1.73 billion in 2021, according to the Turkish Exporters Assembly.

Mustafa Senocak, head of the Istanbul Leather and Leather Products Exporters Association, told Reuters that buyers cancelled orders for “hundreds of thousands of pairs of shoes and thousands of leather jackets.” He estimated Russia and Ukraine accounted for more than $1 billion in Turkey’s leather exports in 2021.

These cancellations don’t even account for the country’s “suitcase trade,” an informal but still common practice that has roots in the Soviet Union. Business owners from across Russia, Ukraine and other former Soviet republics like Kazakhstan and Uzbekistan will travel to Istanbul’s Laleli district to visit its bazaars and shops to buy cheap clothing in bulk. Upon filling a suitcase with merchandise, buyers travel back home to sell the goods in their own shops.

The Central Bank of Turkey last tracked the suitcase trade in 2014, estimating that the market value at as much as $8.6 billion then, with Russia-specific trade accounting for $4.2 billion. Now, the Association of Industrialists and Business People of Laleli estimates the practice’s value is closer to $3 billion, amid economic volatility in Russia and competition with products manufactured in China.

In the first two months of 2022, as tensions continued to rise ahead of the Russian invasion, Turkish apparel exports to Ukraine fell 30 percent to $21 million, according to the IHKIB.

During that same time, Russia benefited from a 27 percent year-over-year increase to 53.6 million, the Turkish trade association said. However, the longer term implications of global businesses exiting the nation and crippling economic sanctions from world governments will take a toll on the country’s financial stability.

Since Russian President Vladimir Putin launched the invasion Feb. 24, the Russian ruble has depreciated more than 36 percent, and has declined more than 43 percent from earlier in the month.

As such, people in Russian will be forced to deal with price increases on all goods, not just textiles, which ultimately heightens any added risk for order cancellations. Weekly inflation came in at 2.2 percent between Feb. 26 and Mar. 4—the largest increase in prices over a seven-day period since 1998—according to data published by Russia’s Economy Ministry.

‘For Russia, the biggest problem is about transferring money,” Gültepe said. “For Ukraine, exports to this country [are] not possible for the time being.”

As the economy further weakens and the ruble plummets, The Bank of Russia on Wednesday said it would suspend citizens from buying foreign currencies through September, further isolating the country’s individuals and businesses alike from the global market.

“The payments from Russia will be difficult without transactions via banks,” Gültepe said. “The ruble’s value declining will make it more difficult to export to Russia because the export goods will be more expensive in ruble value.”

Turkey’s textile manufacturing firms are experiencing similar issues to that of other producing nations such as Bangladesh. The Bangladesh Garments Manufacturers and Exporters Association (BGMEA) asked its members to proceed with caution when fulfilling orders from Russia, because of sanctions such as those relating to the SWIFT financial messaging system, which has shut out several Russian banks.

One Russian retailer, O’Stin, asked Bangladeshi manufacturer Patriot Group if it could pay for $30,000 in owed funds in Chinese yuan rather than in American dollars. LPP, a Polish retailer with stores in Russia, asked the maker to halt production.

The one saving grace for Turkey is that both Russia and Ukraine, despite the former’s size and the proximity of both countries, still represent a small fraction of the country’s total exports.

Turkish apparel exports to Russia accounted for 1.6 percent in total share ahead of the conflict, whereas exports to Ukraine had an even smaller 0.6 percent share. In total, IHKIB calculated $20.3 billion in total worldwide apparel exports.

The uncertainty surrounding Turkey’s textiles industry comes as the country’s government hosts continuing talks between Russian and Ukrainian officials in an attempt to negotiate a ceasefire. The most recent of the meetings was held Thursday in the southern city of Antalya, but no such progress has been made.

“Turkey will continue its efforts for a political resolution between Russia and Ukraine, and its ability to speak with both sides as a facilitator in search of a solution is important in the event the crisis deepens,” Turkish President Recep Tayyip Erdogan told U.S. President Joseph Biden in a phone call after the meeting. “That the meeting even occurred was a diplomatic victory.”