Turkey doesn’t deserve an economic crisis
The Turkish people do not deserve a financial crisis and President Recep Tayyip Erdoğan must step back from a confrontation with the United States or else risk a complete meltdown of the country's wealth.
U.S. President Donald Trump also would be well-advised to refrain from excesses and keep sanctions targeted to Turkey’s leadership, rather than impose wider measures such as those against the steel industry on Friday. These only serve to galvanise public support around Erdoğan and his authoritarian march forward.
The inherent weakness of Turkey’s economy has revealed itself clearly over the past few weeks as the lira fell to successive record lows against the dollar. The currency’s slide is reminiscent of the financial crisis in 2001, which sent the currency plummeting and required an IMF bailout.
The collapse of the lira on Friday, when it fell 15 percent at the close of trading, shows that Ankara is far short of the firepower required for a protracted diplomatic battle with Washington.
Trump’s sanctions on Turkey over the internment of U.S. pastor Andrew Brunson, first against two Turkish ministers last week for their role in his detention and later his doubling of import duties on Turkish steel and aluminum, have already pushed the country’s financial institutions and companies, saddled with more than $200 billion of foreign currency loans, towards the abyss of bankruptcy. Erdoğan should understand that these steps are mere warning shots by a far more powerful United States.
Should Trump decide to impose the kind of sanctions now in place against Russia, Turkey’s economy would be left in tatters. For instance, Trump could follow up his initial “jabs” at Erdoğan with full-blown measures against Turkey’s banking system.
To Trump’s likely ire, a Turkish state-run bank has been working with Iran to funnel tens of billions of dollars through the international financial system in direct contravention of U.S. sanctions.
A deputy CEO of the lender, Halkbank, is already doing time in a U.S. jail after a Manhattan jury found him guilty of the financial crime in January. Senior Turkish officials and Erdoğan himself have been implicated in the scheme. A U.S. Treasury investigation is ongoing.
With the lira on the ropes, Turkey’s economy would most likely take a knockout blow should the United States bar Halkbank from the dollar banking system and follow through with anticipated penalties that some analysts say could exceed $10 billion. If not, widening the probe to other Turkish banks allegedly involved in the scheme would certainly do so.
The U.S. government could also extend sanctions now in place against Turkey’s justice and interior ministers for the detention of Brunson on terrorism charges to other top officials.
Erdoğan should understand that a Turkey in opposition to U.S. policies is not Russia, or China, and has little economic defence against such measures.
For instance, while Russia earns tens of billions of dollars every year by exporting its natural gas and oil, Turkey has almost no natural resources of its own and imports nearly all of the energy it consumes. It also relies on imported goods more generally to produce the lion’s share of its exports.
But on Friday, Erdoğan doubled down in his political confrontation with the United States by declaring that Turkey wouldn’t tolerate threats and intimidation. He also blamed the lira’s slump, which is beginning to resemble a death spiral, on the actions of “economic hitmen” and a so-called “interest rate lobby” hell-bent on bringing the nation to its knees.
To Erdoğan, U.S. politicians and Western financial institutions investing in Turkey are part of one and the same group. They are the leaders of a U.S.-dominated financial system that Erdoğan depicts as unjust and that’s forcing fast-developing, ambitious nations such as Turkey into submission. Erdoğan sees himself as a knight doing battle against this order, and is building his support in Turkey and elsewhere in the Muslim world on this foundation.
But even before the crisis escalated with the United States, Erdoğan’s government had brought relations with foreign investors to the breaking point with a series of irresponsible steps relating to the economy. Those measures included spending tens of billions of dollars on infrastructure projects and energy investments to fuel economic growth and introducing tax breaks and financial amnesties.
As a result, inflation has surged to almost 16 percent, about four times higher than the average in major emerging markets, and the current account deficit has widened to an alarming 6.5 percent of GDP. To top things off, Erdoğan has prevented the central bank from raising interest rates to tackle inflation and defend the lira, claiming, against conventional economic wisdom, that higher borrowing costs are inflationary. Investors are understandably heading for the exit door.
In an op-ed for the New York Times on Friday, Erdoğan accused the United States of interfering in Turkey’s judiciary by calling for Brunson’s freedom, claiming Turkey’s courts were independent. This assertion is clearly false.
The current super-presidential regime, formalised after elections on June 24, has meant a suspension of the rule of law and the independence of the judiciary in the country. Apart from Brunson and several other Americans, tens of thousands of people are in Turkish jails, many without formal charges, for their alleged role in the 2016 coup attempt or, simply, dissent. They include more than 100 journalists, opposition MPs, top academics and leading human rights campaigners. Many, including the leader of Turkey’s main pro-Kurdish party, appear to have done little more than voice their opposition to Erdoğan’s autocratic rule.
Erdoğan also claimed in the op-ed that the United States is mistreating a loyal NATO ally by imposing sanctions on its economy. Turkey has worked closely with the United States for decades, fighting side by side with America in the Korean war, sending troops to Afghanistan and helping to battle Islamic State (ISIS) in Syria and Iraq. It allows the U.S. military to keep bases in the country for operations in Syria and beyond, Erdoğan points out.
However, it is high time for Erdoğan to leave aside his grievances with the U.S., along with his ambitions for Turkey to be a global power, for at least a few months in order to stabilise the economy. An IMF program would be advisable.
Erdoğan should release pastor Brunson and other Americans incarcerated in Turkey, who also include local consular workers and a NASA scientist, immediately and start rebuilding investor confidence. He must, too, assure the world that all the intellectuals and opposition figures held in jail arbitrarily or on bogus charges will be released forthwith.
The recent collapse of the lira means that Turks on a minimum wage now earn little more than $50 a week after tax. Ordinary citizens, along with hundreds of thousands of dedicated bureaucrats, politicians and business leaders who have helped build a more prosperous and dynamic Turkey since Erdoğan came to power in 2003, deserve the chance to continue their great work. And Turkey surely deserves a return to democratic order.