Erdogan Wants to Make Turkey’s Currency Crisis About Geopolitics, Not Economics

World Politics Review, 28.08.2018
Iyad Dakka, académico turco (Centre for Modern Turkish Studies-Carleton University)

Turkey’s President Erdogan delivers a speech in Ankara, Aug. 14, 2018 (Presidency Press Service/AP Images).

Turkey is enduring its most severe economic crisis since the Justice and Development Party, or AKP, took power after sweeping elections in 2002. With a nearly 40 percent decline in the value of the Turkish lira this year, Turkey’s foreign exchange troubles risk plunging the heavily leveraged Turkish economy, and with it potentially the global economy, into a tailspin. On one hand, it’s a typical post-Cold War financial crisis in an emerging market whose economic prospects have always been volatile, with high risks and high rewards. On the other hand, the lira’s collapse is the product of a constellation of geopolitical factors that threaten to rewrite the post-Cold War alliance structures on a global scale, with Turkey at the center of it all.

President Recep Tayyip Erdogan blames this all on geopolitical scheming, as he calls the crisis a foreign-engineered conspiracy to bring his government to its knees. He has put the lira, and its struggles, at the center of what has been a complex moment of transition for Turkey on the global and regional scene. Put simply, Erdogan clearly believes—or at least pretends to believe—that the Americans and their supporters are behind it all. He has accused them of waging “economic war” on Turkey.

The Trump administration has not done anything to dispel or counter this narrative. As the political dispute between Washington and Ankara over Turkey’s detention of an American pastor, Andrew Brunson, worsened earlier this month, President Donald Trump decided to impose sanctions, followed up by doubling tariffs—a blunt policy instrument in any case—on Turkish steel and aluminum exports to the United States. With the diplomatic standoff blending into a currency crisis for Ankara, Trump, Vice President Mike Pence and National Security Adviser John Bolton have all warned the Turks that the worst is yet to come if Brunson isn’t released.

Of course, the Turkish lira was on a downward spiral for many months before Trump’s brash escalation. The fact that the U.S. put further pressure on an already vulnerable economic situation in Turkey isn’t the same as “plotting” the crisis, as Erdogan claims the Americans did.

But in a sense, this line of reasoning is a self-fulfilling prophecy. If Erdogan believes the troubles are some foreign-concocted conspiracy against his country, he may behave in a way that genuinely does make the lira’s story about geopolitics, and not economics—or at least not about market dynamics, but instead about so-called national economic resistance to foreign agendas. And this means the crisis itself is likely to have very real geopolitical implications moving forward.

Ankara’s first response was to lean on its few remaining allies to provide immediate relief. Qatar is really the only nation that responded to Erdogan’s call, pledging a total investment package of $15 billion to buoy the Turkish economy and attempt to backstop the lira. Qatar’s moves have deepened its exposure to the Turkish economy, while strengthening the budding alliance between Ankara and Doha in the region. That is bound to worsen the political rift between Qatar and its neighbors, led by Saudi Arabia and the United Arab Emirates, which have accused Qatar of turning its back on the Gulf Cooperation Council and its traditional Gulf Arab allies in favor of the Muslim Brotherhood and Iran. Back in March, Saudi Arabia’s crown prince, Mohammed bin Salman, accused Turkey of belonging to a “triangle of evil,” alongside Iran and militant Islamists.

The lira crisis may also push Turkey closer to European countries, which are themselves feeling the pressure of Trump’s aggressive economic arm-twisting. Turkey’s release of two Greek soldiers who were detained on charges of espionage is one indication of a softening in what had been tense Turkish-European ties in recent years; as are recent high-level meetings and statements between Turkish and German officials. The Turks and Europeans understand they need each other. Erdogan can’t afford to alienate Europe and the United States at the same time, while the Europeans can’t allow Turkey to implode because of the risks of financial contagion. There is also the threat that Turkey would no longer be able, or willing, to stem the flow of refugees, under the terms of a controversial 2016 deal between the EU and Turkey, which is a huge political issue in many European countries.

The crisis is also proving to be yet another golden opportunity for Russia to drive a wedge between Ankara and Washington, weakening NATO in the process. The Turks will test the waters to see whether Moscow could provide financial support to counter American pressures. It’s very unclear whether Russia has the financial capabilities, or even the will, to bail Erdogan out should the need arise, but the Kremlin is surely exploring every avenue to convince Erdogan that it is the more reliable ally moving forward. Putin stated during a Moscow visit by a high-level Turkish delegation last week that relations with Turkey were deepening on the regional and economic fronts. Expect pro-Kremlin media to push this narrative, with the underlying theme that Turkey and Russia are now in the same trenches fighting against Trump’s imperial hubris.

China is still another potential player on the scene that may have the financial muscle to rescue the Turkish lira. But what would China ask in return? It’s possible, if Beijing were so inclined, that it would provide money in return for greater stakes in Turkey’s economy, from the industrial and infrastructure sectors to tourism and technology. Although Turkey’s economic situation is dire at the moment, China may take a longer view and calculate that its fundamentals and long-term economic outlook are more positive than the lira’s immediate troubles would indicate. Turkey’s economy is diversified, open to the world, and its workforce is young, educated and dynamic. If Beijing can convince Erdogan to deepen his engagement with Beijing’s huge Belt and Road Initiative, and further increase Turkish trade with China, there could be a deal on the table for Erdogan to strike with Xi Jinping.

All of this will depend on whether the lira can be stabilized or not, and on whether Ankara and Washington will come to some agreement, not only on the fate of Brunson, but on the many points of contention that have gradually eroded the foundations of their post-World War II alliance. However it unfolds, it’s clear Turkey’s currency crisis is not simply about macroeconomic risk factors and “structural adjustments,” in the traditional lingo of the International Monetary Fund, but about geopolitical implications that may profoundly reshape alliance structures in the Trump era, and after.

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