The Turkish Currency Crisis and its Political Implications  

How the US-Turkey Conflict Began

The whole squabble between Turkey and the United States began with a 50-year old pastor named Andrew Brunson. Pastor Brunson has been living in Turkey for more than 20 years serving as pastor for the Izmir Diriliş (Resurrection) Church. In October 2016, in the midst of the nationwide purges that Turkish President Erdogan had unleashed following the failed coup attempt of July, pastor Brunson was detained by the Turkish authorities.

At first, the pastor was under the impression that he was being summoned for an interview for the visa renewal that he had recently filed for. Instead, he, all of a sudden, found himself facing a combination of accusations that included the support for the Gulen movement which the Turkish state considers to be a terrorist organization and the main perpetrator of the 2016 coup attempt, political and military espionage, and involvement in the failed coup. By adding up these charges together, pastor Brunson would be looking at the possibility for a life sentence.^[1]

 For the last few months, the Trump administration has been pressuring the Turkish government to release Pastor Brunson, who the president believes to have been “persecuted in Turkey for no reason.” “This innocent man of faith should be released immediately!” tweeted President Trump in April.^[2]

 Secretary of State Mike Pompeo was the first top official to explicitly warn that sanctions would be imposed on Turkey in case this demand was not to be fulfilled. In keeping with his late authoritarian leanings and notorious stubbornness, the government of Turkish President Recep Tayyip Erdoğan refused the United States’ demand. The pastor was put into house arrest in July for his deteriorated health condition, though.^[3]

 The administration’s final warnings before any actual sanctions were imposed came in late July in statements made by both President Trump and Vice President Mike Pence, upon which the Turkish lira began its decline.^[4] The first list of sanctions was then issued on the first day of August, cutting 4.5% of the Turkish currency’s value. It also added to the decline of the Borsa Istanbul 100 index, which has seen a 36% decline since the beginning of the year, a performance that only surpasses that of Venezuela’s stock market.^[5]

The US Sanctions

The first sanctions imposed by the US against Turkey were namely directed at the ministers of justice and interior for bearing the primary responsibility of what the US views to be unjust indictments against Pastor Brunson. Seeing no signs of retreat from the Turkish president, President Trump imposed a new set of sanctions on Turkey on the 10th of August. This time, the sanctions came in the form of the doubling of tariffs on Turkish steel and aluminum. On that single day, the Turkish lira lost 20% of its value against the US dollar.

Nevertheless, these sanctions did not seem to curb President Erdoğan. Instead, President Erdoğan chose to enter into a tit-for-tat feud with the US. The day before the steel and aluminum sanctions were imposed, Erdoğan had addressed the Turkish people with a fiery speech that appealed to them to not “lend an ear” to those who are trying to bring Turkey to submit to their agendas, by that meaning the United States, of course.^[6]

 As the pressures increased from the US, Erdoğan became even more determined to proceed in this battle. On the 15th of August, the Turkish government raised the tariffs on American automobiles up to 120%, the leaf tobacco tariffs up to 60%, and the tariff on American alcoholic drinks up to 140%. In addition to these, tariffs were increased on a number of other commodities including cosmetics, rice, and coal.^[7]

Were the US sanctions the sole reason for the lira’s downfall?

 The brief answer is NO.

Turkish Currency Crisis: Turkey’s Economic Downfall

After years of impressive economic growth under the Justice and Development government led by President Erdoğan, one that has been considered a true 21st-century success story, the Turkish economy has been in crisis for the past two years. Much of the decline can be attributed to mismanagement, cronyism, and the fact that the growth was primarily fueled by foreign borrowing that hugely burdened the Turkish lira. Although the US sanctions added to the injury, the lira has lost 40% of its value since January, a large portion of which preceded the Trump administration’s measures. Inflation has remained in the double-digit territory since February 2017, reaching a peak of 15%.^[8]

The question here is: Can the Turkish lira in this state endure against a strengthened US dollar? And if so, how long can it go?

Granted, the US dollar in its current state is a major threat to the Turkish lira. After all, Turkey is still an emerging economy, and the United States the leading economy in the world. There have been a few factors that somewhat curtailed the lira’s freefall, though.

First among these factors, of course, is the Qatari investment of $15 billion in the Turkish economy. After a meeting between Qatar’s Emir Tamim bin Hamad Al-Thani and President Erdoğan, Qatar pledged on the 15th of August to provide Turkey with this generous investment package in an attempt to stabilize the currency of one of its closest regional allies. The announcement of the package gave a brief boost to the lira from 6.04 lira to the US dollar up to 5.87 before it fell back to 6.0500. On the same day, the lira saw a 6% rise as a result of the central bank’s move of supplying the market with lira liquidity.^[9]

 The Qatari aid was condemned by GCC officials due to the rift between the Qatar/Turkey axis and the rest of the Gulf nations, especially Saudi Arabia, the UAE, and Bahrain, that reached its heights last year. “Full sovereignty cannot be bought with money,” tweeted UAE State Minister for Foreign Affairs Anwar Gargash following the announcement, “but is achieved by establishing sincere and reliable relations with surrounding countries.”^[10]

That’s not the only area where Turkey’s crisis became of political relevance.

The tensions between the Trump administration on the one side and the EU powers, Russia, and China on the other, all of these nations have rallied themselves behind Turkey as a form of opposition to President Trump’s controversial and inflammatory foreign policy.

For instance, the state-owned Industrial and Commercial Bank of China (ICBC) was reported to have lent the Turkish government $3.6 billion in July, and several Chinese officials have stressed the state’s intention to back Turkey in its economic hardships. Each of Germany and France were also quick to assert their support for the Turkish economy through tighter relations. These are all countries that were affected by President Trump’s tariff raises in recent months.^[11]

 This crisis, along with other feuds that the Trump administration has initiated against other world players, can bring these nations into a tighter political alliance that can possibly tip the scale – at least politically if not economically – in favor of the Qatar/Turkey axis and at the expense of the Saudi-led axis.

Over and above, just as Erdoğan capitalized on the 2016 failed coup attempt in order to crack down on any form of dissent within his country, he is currently framing the US economic pressure as some form of an “economic coup” which can provide him with a pretext to further tighten his grip on the Turkish state.

Also, the Turkish sanctions against the US along with other measures aimed at curtailing foreign investors’ speculation on the lira gave the Turkish currency a 3% upward boost.^[12]

The Prospects for the Turkish Lira

When is the Turkish Lira expected to recover?

Right now, it is hard to tell. The market is surely not rooting for it as the Turkish currency crisis continues to linger. We can see this in the upward trend of gold purchases. The 90-day average daily volume for the Borsa Istanbul’s gold futures has exceeded the double of its March levels of 17,000, reaching 40,000 contracts. The value of an ounce of gold in lira has risen by more than 30%. This is normal when a country’s currency is no longer seen as a reliable store of value.^[13]

Investment in real estate is also on the rise in Turkey due to the amazing decline in property prices there. An apartment that cost $70,000 only one month ago would now cost less than $50,000. The main benefit from this goes to the purchasers rather than the Turkish economy, though. Turkish real estate developers are actually accumulating losses because of the devaluation of the lira and the strengthening of the dollar, since a major part of their costs are in US dollars, whereas they are paid in lira.

Even the investors might bear a huge risk by putting their money in Turkish real estate. “A stronger dollar does tend to put emerging-market economies under stress, so we could see more currency volatility,” commented Danielle Hale, chief economist at Realtor.com. “You might have to end up keeping that investment for a longer term than you anticipated.”^[14]

Generally, despite a few flickers of optimism here and there with regard to the recovery of the lira, the prevailing sentiment among analysts is that of caution. What the Dubai-based global equities strategist and fund manager Matein Khalid wrote in the Khaleej Times back in April still holds today: “When I hear Erdogan accuse his central bank chief of “treason” if he dared to raise interest rates or fulminate against bankers as “evil forces in the economy”, I know the Turkish lira will continue to depreciate against the US dollar.”^[15]

 What investors should watch out for and worry about are capital controls. If Erdogan decides in an act of abrupt burst of anger to introduce capital controls, it could have a severe knock-on effect on all other emerging markets in the region and beyond. Right now, the chances of this happening are small, but these are based on sound rational and logical conclusions. We are afraid, we have long passed this stage.