Aug 06 2018

Washington’s escalating sanctions could cripple Turkish economy  - analysis

Turkish President Recep Tayyip Erdoğan would do well to follow Russian President Vladimir Putin’s example by putting experts in charge of economic policy, and allowing the central bank to reassert its independence as Turkey braces for hard times ahead, wrote Tatiana Orlova in a piece she penned for the Financial Times.

The announcement by the US Treasury last week that Washington will sanction two Turkish cabinet ministers over the detention of an U.S. Pastor Andrew Brunson did not come as a surprise as tensions have been brewing on the Ankara-Washington line for some time now.

Turkey’s central bank has already stepped in on Monday to modify its reserves rules to free up commercial lenders’ foreign-exchange in order to boost the country’s currency, which has been on a six-day free fall following the sanctions announcement.

‘’Turkey has often been at odds with the EU and US in both its domestic and foreign policies. US president Donald Trump has previously threatened Turkey with sanctions if it goes ahead with its plan to purchase an S-400 missile system from Russia, and the US is investigating state-controlled Halkbank for breaches of Iranian sanctions,’’ Orlova recalled.

With reports  that the US has also prepared a broader list of Turkish entities and individuals that could be subject to further sanctions, looking to the experience of the Russian economy after Russia annexed Crimea in March 2014, she noted.

The  “biting” EU and US sanctions introduced after the invasion triggered a currency crisis, Orlova wrote, explaining that Russian institutions were cut off from international capital markets and unable to roll over their debt.

‘’Demand for forex soared. The crisis combined with falling oil prices to force a 50 per cent devaluation in the rouble against the dollar. Fortunately for the economy, President Vladimir Putin had delegated economic policy to a team of technocrats. The central bank courageously floated the rouble and raised its policy rate by 750 basis points in late 2014. Containing the crisis came at a cost: the government ran down one of its sovereign wealth funds, and the central bank’s net forex reserves fell by more than $150bn,’’ she said.

On the other hand, Turkey’s overheated economy expanded by over 7 per cent in 2017.

Widening current account deficit and moderate growth of the budget deficit came as part of that package.

‘’Although Turkey’s public debt is relatively modest, external debt is much higher as a percentage of gross domestic product than that of Russia in 2014. Unlike Russia, Turkey does not have a sizeable fiscal or foreign exchange cushion. With its net foreign exchange reserves of only $74bn, the Turkish central bank has very limited ability to help local businesses refinance forex debt. Crucially, Turkey is as dependent on investment flows as Russia is on oil. Global investor flight from emerging market assets has weakened the Turkish lira by 25 per cent versus the dollar this year. This has fuelled inflation and made further lira depreciation highly undesirable for Turkish authorities,’’ Orlova wrote.

‘’I think that the new US sanctions have increased the odds of a balance-of-payments crisis in Turkey.’’

Turkey’s shift in June to a more powerful executive presidency following the snap presidential and parliamentary elections leaves little hope for independent institutions, according to Orlova.

While Turkey’s strongman hopes that Turkey will attract more loans from China and other emerging market countries, the Russian experience shows that some foreign direct investment may be substituted, but that takes time.

In short, the only to avoid a larger crisis is for Turkey to repair its relationship with the west quickly.