Venezuela’s state of denial hovers over Turkey
The lira continued in free-fall mode on Monday. Turkey’s currency dropped more than 20 percent following last week’s plunge, setting a new annual low and sending shockwaves throughout emerging markets, from Indonesia to Argentina. Fears that Turkey’s economy is entering a major crisis — of the kind that has brought Venezuela’s to its knees — have intensified.
The culprits, according to the narrative all-powerful President Recep Tayyip Erdogan has been trying to hammer home for some time now, are “the markets” and, of late, US President Donald Trump. Last Friday’s unnecessary tweet from the erratic US president did surely contribute to the sharp fall of the lira; the fundamental issue, however, lies with the past few years of the Turkish government’s economic and monetary policy.
By midweek, Qatar had once more come to the rescue with a $15 billion investment pledge in Turkish financial markets and banks, with the lira reacting positively. The Qatari assistance package masks the disconnection that seems to exist in Ankara these days about the nature of the economic problems in hand, many of which are self-inflicted. Here lies another worrying parallel with Venezuela, where the ruling kleptocracy has resorted to anti-US and imperialistic rhetoric to try to justify its disastrous governance record.
The fundamentals of the Turkish economy are very different from Venezuela’s, for the better, even though the South American country holds the world’s largest oil reserves. But both leaderships seem to live in a similar state of mind about the origins of their woes. A recent indication of that are the reports that Venezuela has been sending hundreds of millions of dollars in gold to Turkey to be refined there, instead of Switzerland, as a protection mechanism against US sanctions. The gold bars are then sent back to Venezuela’s central bank. According to Turkish government statistics, Venezuela has this year exported $779 million of gold to Turkey.
Last Friday, Trump took to Twitter to open a trade war with Turkey. “I have just authorized a doubling of tariffs on steel and aluminum with respect to Turkey as their currency, the Turkish lira, slides rapidly downward against our very strong dollar,” he wrote. The lira fell abruptly and Turkey’s public debt interest rates skyrocketed to a nine-year high.
Erdogan responded on Tuesday with a call during a televised speech for a boycott of US-made electronics, worsening a deadlock that can only hurt the Turkish economy. Various countries were quick to back Turkey against what amounts to economic destabilization: Russia, which has been taking advantage of the frosty state of US-Turkey relations to lure Ankara; Iran, where the regime faces similar economic difficulties, including a plummeting currency; and Italy and Germany, Turkey’s most important trading partners in Europe.
The blame game over Turkey’s economic troubles, with the US of Trump an easy scapegoat, will only intensify Erdogan's growing tendency to look east.Dr. Manuel Almeida
US-Turkey tensions have built up in the last few years over US support for the People’s Protection Units, the Syrian Kurdish militia with close ties to Turkey’s Kurdistan Workers’ Party, both of which are considered terrorist groups by Ankara. Washington’s refusal to extradite Islamist preacher Fethullah Gullen, and the arrest by Turkish authorities of Turkey-based US pastor Andrew Brunson on charges of aiding terrorist groups, have generated the most severe diplomatic crisis between the two NATO allies in years. Just two weeks ago, the US Treasury sanctioned two Turkish ministers over their role in Brunson’s imprisonment.
In the past few days, Turkey’s central bank and Berat Albayrak, the finance minister and Erdogan’s son-in-law, have taken a few steps to try to calm the situation. One of these steps aims at generating more liquidity by reducing the currency reserve levels that financial institutions are required to hold. Albayrak denied rumors that Turkey’s government was looking to seize foreign currency deposits or convert them into Turkish lira. In an interview with local media, the finance minister gave some hints about his “action plan” to address this crisis, including stronger budgetary discipline and some kind of support to Turkish banks. Albayrak also blamed the crisis on an “attack” against Turkey.
The economic conundrum faced by Turkey is characterized by a plummeting currency, double-digit inflation, alienated foreign investors and domestic capital flight, rising levels of foreign debt, and the urgent need to create jobs in a situation that demands at least a moderate degree of austerity. In addition, there are reports of widespread corruption, with all the heavy burdens associated with it.
The inability of the central bank to raise interest rates due to Erdogan’s committed opposition to the move, which would lower the temperature of an economy living on borrowed money, is singled out by experts as a critical factor.
All of this has relevant geopolitical implications. When Erdogan was re-elected back in June, observers predicted that the alliance with the far-right Nationalist Movement Party could take the Justice and Development Party further into an anti-Western foreign policy orientation, giving continuity to or even enhancing a nationalism that leans toward Russia.
With its economy under pressure, Turkey needs to foster its economic ties with the West and attract Western investors. Despite its critical trade ties with the EU, the poor state of relations with the US has been pushing Turkey east, away from NATO and toward Russia and China. The blame game over Turkey’s economic troubles, with the US of Trump an easy scapegoat, will only intensify this tendency.
- Dr. Manuel Almeida is a political analyst and consultant focusing on the Middle East. He is the former editor of the English online edition of Asharq Al-Awsat newspaper and holds a Ph.D. in International Relations from the London School of Economics and Political Science. Twitter: @_ManuelAlmeida
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