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Zülfikar Doğan
Jan 03 2019

2018's legacy for Turkey is crisis

As we enter 2019, it is worth looking back at events over the last 12 months for insight into Turkey’s economic and political direction.

The year began with Operation Olive Branch in which the Turkish military captured the northwestern Syrian district of Afrin from the Syrian Kurdish militia, the People’s Protection Units (YPG), after a two-month offensive.

By the time Turkish forces took Afrin town centre on March 18, President Recep Tayyip Erdoğan had already set his sights on the YPG-held towns Manbij, Tel Abyad and Ras al-Ain, east of Afrin. But the presence of U.S. troops, which have backed the YPG in the fight against Islamic State (ISIS), was an obstacle to Turkish operations in these areas.

By year’s end, U.S. President Donald Trump had agreed to withdraw his troops and hand the battle against ISIS over to Turkey. If Trump is true to his word, Ankara will be free to tackle ISIS, but also to try to defeat the YPG, which Turkey sees as a terrorist organisation linked to the Kurdistan Workers’ Party (PKK) that has fought Turkish forces since 1984.

The question remains whether Turkey will now extend its operations and areas of control in Syria, or will Russian and Iran, its partners in the Astana peace process, block its advance?

Another point to watch will be Turkey’s relations with Iran. Since the U.S. presence in Syria was partly designed to check the expansion of Iranian influence, it is reasonable to assume that Trump passed on this duty to Turkey when deciding to withdraw U.S. troops.

While Erdoğan may have called Iranian President Hassan Rouhani his brother while hosting him in Ankara on Dec. 19 when the U.S. withdrawal was announced, there is no shortage of professed friends and brothers of the Turkish president who have suddenly become enemies as circumstances change. The likelihood is that Turkey’s favour in 2019 will be transferred from Erdoğan’s friends the Russian and Iranian presidents to Trump, his new buddy in the United States.

As with Syria, Turkey’s relations with Iraq have soured, and there are no signs they will improve under the country’s new prime minister, Adel Abdul Mahdi. Before Abdul Mahdi was elected in May, Turkey and Iraq had begun negotiations for a joint operation against PKK bases in northern Iraq, but those negotiations have since been shelved.

Baghdad has objected to Turkish air strikes against PKK militants inside Iraq, calling them a violation of its national sovereignty.

Things would improve by the year’s end, but the beginning of 2018 was far from auspicious for U.S.-Turkish relations. The trial of Turks involved in contravening U.S. sanctions on Iran and the investigation of Turkey’s state-owned Halkbank on the same charges were the most immediate point of contention at the beginning of the year. Turkey’s purchase of S-400 missile defence systems from Russia and long pre-trial detention of a U.S. pastor, Andrew Brunson, on terror charges would continue to sour relations throughout the year.

It was the detention of Brunson that led the United States to take measures against Turkey in August, sanctioning two Turkish ministers and raising tariffs on imports of Turkish metals. These contributed to a severely problematic year for Turkey’s economy and helped the fall in the value of the lira, which was around 30 percent down on the dollar over the year.

The release of Brunson in October kept things from boiling over, but Turkey’s insistence on buying the S-400 systems from Russia has led to a delay in the delivery of F-35 jets. U.S. senators have expressed concerns the S-400 purchase would undermine NATO defences and prepared draft bills to prevent Turkey from obtaining funding from the International Monetary Fund, World Bank and other international institutions as a result.

These amendments are one example of the military, political and economic leverage the United States continues to hold over Turkey. Another recent example came with the reports that Ekim Alptekin, a Turkish businessman with close ties to Erdoğan, has been hit with a series of charges in the case against his business partner, Mike Flynn, a retired U.S. general and former national security adviser for Trump.

Flynn has pleaded guilty to the charges against him, and is likely to receive a lenient sentence due to his cooperation with U.S. Special Counsel Robert Mueller. Speculation has mounted that the ongoing investigations could reach the upper echelons of the Turkish government.

Relations with Europe were not much better with European leaders continuing to express grave concerns about the Turkish government’s human rights record.

Turkey enters 2019 with diplomatic links cut with Egypt and Israel and the Turkish diplomatic involvement in resolving the Libyan conflict severely curtailed. Turkey’s regional isolation is likely to continue in the new year. So too are the problems that plagued the country’s domestic politics and economy throughout 2018.

The government held snap elections in June and the ruling party came out on top in both the parliamentary and presidential elections. The early elections brought forward the transition to an executive presidential system by more than a year, a turning point that introduced what is essentially one-man rule. Erdoğan wasted no time using his power to rule by degree, tying all the countries most significant institutions to himself and his son-in-law, Treasury and Finance Minister Berat Albayrak.

The ruling Justice and Development Party (AKP) has also undergone radical transformation, with Erdoğan insisting on a large scale changing of the guard to remedy what the president called metal fatigue in the party. The mayors of major cities including Ankara, Istanbul and Bursa were forced out, and the AKP has called in fresh faces ahead of March local elections.

The opposition remains stuck in a rut, with the leftist main opposition Republican People’s Party (CHP)’s presidential candidate unable to unseat Kemal Kılıçdaroğlu who has lost four general elections and two referendums since he became party leader in 2011.

Behind all the political machinations stood what will be the main concern for Turkey in the new year. Mehmet Şimşek, a minister responsible for the economy in the previous administration, warned of the signs of an impending economic crisis in March last year. It is likely the coming economic slowdown spurred the call for early elections in June.

Şimşek’s words prompted an angry response from Erdoğan, but his warnings would be vindicated throughout a difficult year for the economy, during which the lira’s value plummeted, inflation peaked at over 25 percent, and hundreds of companies were forced to seek bankruptcy protection.

Erdoğan and Albayrak blamed the woes on foreign attacks, but foreign investors were likely scared off by the president’s promise to take tighter control over monetary policy. Erdoğan’s unorthodox economic beliefs, which hold that high interest rates lead to inflation, led many to fear that the president’s growing power would curtail the central bank’s independence.

By the end of May, the lira had lost over 20 percent of its value against the dollar.

In May, the central bank was forced to intervene with a 3-percent interest rate hike, but the extraordinary events of the year would mean pressure continued to mount. At the height of Turkey’s feud with the United States in August, the lira reached a record breaking 7.2 to the dollar, and in September the central bank again stepped in to hike rates.

The combination of high interest rates and a weak currency wreaked havoc on the economy, resulting in extraordinary measures by the AKP, including a ban on foreign currency contracts and forcing exporters to convert 80 percent of their cash holdings to lira.

Growth slowed from 7.3 percent in the first quarter to 1.6 percent by the third, and virtually every economic indicator is showing signs of a crisis that could take years to overcome.

Despite the grim outlook for the economy, Erdoğan has continued to offer incentives to voters, including VAT discounts, discounts on staple goods used to measure inflation, and – at the expense of Turkish banks – reduced interest rates. The president’s fear of losing elections is likely to drive the country further towards crisis.

As the situation worsened in 2018, the president was forced to take extreme measures to keep the economy afloat, and this has led to several contradictory policies.

When the lira reached its lowest point last summer, the president called on citizens to exchange their gold and foreign currency savings for lira. Yet now it is the Treasury that is selling dollar, euro and gold bonds to the public.

The rates for these bonds has been set at 4 percent, but the government itself is paying higher rates for its external debts – 7.5 percent for dollar loans and 5.25 percent for euros. Meanwhile, the central bank has pushed rates up to a peak, and with interest rates for commercial loans at around 30 percent, borrowing has virtually ground to a halt in Turkey.

Mortgage rates, however, have been kept to a monthly rate of 0.98 percent in a government-backed effort to maintain demand and prevent the collapse of the real estate and construction sectors.

The severe economic situation means that many have been unable to pay tax debts that have already been restructured, meaning the debt is often being restructured a second time. Meanwhile, the amount set aside for investment in the government’s 2019 budget was reduced by 36 percent, while interest payments have risen by close to 70 percent.

Many now suspect the government will look to alternative sources, such as the Unemployment Benefit Fund, to plug the gaps in the budget and keep the wheels of the economy turning, despite the fact the money in the fund is earmarked for Turkey’s unemployed, which make up nearly 12 percent of the workforce.

The gravest issues plaguing Turkey’s economic and foreign policy in 2018 are still a danger this year. How these factors play out will have much to do with the results of the March 31 local elections.