Failures Of An Economic Hitman In Turkey: Erdogan Re-elected

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by Tyler Durden
Sunday, Jun 04, 2023 - 11:00 AM

Authored by Tom Luongo via Gold, Goats, 'n Guns blog,

President Erdogan’s re-election in Turkey is a monumental failure of Western pressure. Because of it, it’s time to take our eyes off Ukraine and look at a different theater of World War III with equal if not bigger implications.

Turkey is another in a now long string of failed Economic Hitman operations cum Color Revolutions. The last big one to fail was in Belarus in 2020 following the re-election of Alexander Lukashenko.

Turkey has been the subject of a seven-year campaign to be rid of Erdogan, beginning with the 2016 coup attempt organized out of the NATO airbase at Incerlik. Turkey’s been through a persistent five-year brutal devaluation of its currency, the lira, seeing it drop from less than 2 versus the US dollar to nearly 21 this week in the wake of Erdogan’s victory.

I’ve covered this story in detail (see my Turkey archives here) being one of the lone voices out there trying to parse Erdogan’s monetary policy actions which I’ve argued sought to de-dollarize Turkey’s foreign exchange liabilities and forge an independent path.

Erdogan, wily as a fox, has been deftly playing the US and Russia/China off each other for years, positioning Turkey simultaneously as a member of NATO, the gatekeeper to the Black Sea, and the financial and trade crossroads linking East and West.

The West’s campaign to overthrow President Assad in Syria beginning in 2011 couldn’t have gone forward without Erdogan’s help. He went along with it very willingly having been promised Turkey claiming Idlib province in the West and taking most of the north. Vladimir Putin accepting Assad’s invitation for assistance in fighting ISIS and Erdogan’s pets in Idlib (Hay’at Tahrir al-Sham or HTS) began the unraveling of those plans.

Turkey shooting down a Russian SU-31 in November 2015 was supposed to push Putin to war against Turkey, giving NATO every reason to engage the Russians directly. But Putin and Erdogan came to an understanding over this incident, implying that it wasn’t on Erdogan’s orders the Russian plane was shot down, but rather the usual suspects at Foggy Bottom, Langley, GCHQ in London who did.

If you wonder why I’m never worried by the latest lame attempt to draw Russia into a wider conflict in Ukraine by events like the Nordstream or Kerch Strait bridge bombings it was Putin’s handling of this moment with Erdogan and then later the shooting down of the Russian IL-20 ELINT plane over Syria by someone who definitely wasn’t Syria, who took the blame to avert WWIII.

These were moments where Russia and NATO were being pressed into conflict and Putin refused to follow the ready-made Tom Clancy script prepared for him by the spooks who never seem to run out of at-bats no matter how many times they strike out.

It is against this background that we have to analyze the complete failure that is the West’s campaign to unseat Erdogan and his AKP party from power in Turkey.

The ZIRP years in the West coincided with the big degradation of Turkey’s finances as Erdogan invited Western investment into the country to support his territorial ambitions. But, Erdogan, as pointed out by Baris Doster of Marmara University noted:

The government at the head of Turkiye is extremely pragmatic, which is expressed in the ability to make a sharp turn in foreign policy,” Doster told Sputnik.

“There are many examples of this: these are relations with Israel, Qatar, the United Arab Emirates, Egypt, Saudi Arabia. When relations with the East are not going well, Turkiye turns to the West, and in case of difficulties with the West, it turns to the East. However, in the current situation, I believe that the existing political vector will remain intact.”

I agree. In effect, Erdogan’s pragmatism led him to nearly every move he’s made over the past decade, going along with NATO when they were on the offensive, but quickly pivoting and cutting bait on a policy the minute they were put on the defensive, c.f. my above comments about Syria.

In fact, it’s easy to argue that Erdogan’s breaking point with the West over Syria is what has dominated geopolitical headlines for the past seven years. He relishes the role as the guy with the leverage over all NATO policy in the Eastern Mediterranean and the Black Sea, whose access he controls thanks to the 1936 Treaty of Montreaux.

He’s still holding Sweden’s entry hostage, something I get the feeling the new government in Stockholm prefers.

With his re-election and Turkey’s finances improving Turkey’s importance will only grow. He will not leave NATO willingly, instead using his veto power to slow the roll of the neocons, Eurocrats, and globalists who have betrayed not only him but Turkey. For all of his aspirations, Erdogan is a Turkish nationalist through and through.

He will now throw more sand in the gearworks of NATO’s plans for wider conflict in the region from Ukraine to Iran and Armenia until the West kicks Turkey out or someone assassinates him.

All the while he will continue to invite Russian, Iranian and Chinese money into Turkey with the goal of lowering its dependence on foreign energy trades settled in the dollar.

The Turkish people have given him another five years to complete this transition away from the West to an independent trade hub. If the West is smart they will not antagonize him further.

I was asked by Sputnik News for my thoughts earlier this week on these issues directly. You can find my comments in these two articles (here and here). As always, I am publishing the full Q&A below the break in the interests of transparency and to ensure that the context of my comments haven’t been lost.

In the run-up to election day on 28 May, the Turkish lira came under unprecedented pressure from major financial giants. For example, analysts of Western banks JPMorgan Chase and HSBC Holdings began to spread information about the inevitable weakening of the lira to levels of 24-25 lire per dollar. We also saw many other Western financial investors short selling the Turkish lira.

Here are the questions we were thinking about:

Why do you think that Western financial giants have taken these moves against the lira in recent days? Could this be an effort to influence the Turkish election?

Yes, absolutely. The US has made no bones about their unhappiness with the way President Erdogan has conducted foreign policy in recent years. I’ve felt and published previously that the lira has been under consistent foreign actor attack since the summer of 2018, when this issue first reared its ugly head.

Back then only the admission that Italian and French banks had loaded up on dollar-denominated Turkish corporate debt, putting their balance sheets at risk ended that round of pressure. Erdogan, for his part, saw the situation for what it was and took control over the central bank to wrest control of monetary policy from the IMF.

There was little option and the lira was destined for this hyper-devaluation versus the dollar. Turkey’s net foreign exchange liability position, which in 2018 was over $240 billion, was its Achilles heel.

Today that number is down to ~$80 billion, according to recent Bank of Turkey data. So, while the situation is improving, it is still the vector on which Erdogan is most vulnerable. To fix this Erdogan has rightly invited Chinese and Russian capital into Turkey and cut major energy deals with Putin to mitigate their chronic current account and trade deficits as a major energy importer.

So, yes, financial and monetary instability, crushing hyperinflation of the lira, and questionable geopolitical interventions have undermined Erdogan’s popular support putting him in today’s runoff election.

The recent notes from US banks are simply pushing the situation to the extreme. Turkey has few options but to continue to de-dollarize.

Who do you think the Biden admin and Western financial giants prefer in this election? Why?

Clearly not Erdogan. They have put considerable support behind his opponent Kemal Kilicdaroglu, cobbling together a Not-Erdogan “Table of Six” coalition which is the only thing they agree on. It is reminiscent of last year’s Not-Orban coalition in Hungary.

The results there were far more embarrassing for the EU/US neoliberals because Orban wasn’t dealing with the chronic currency issues plaguing Erdogan. That said, Erdogan’s victory wasn’t really in doubt after the general election which he nearly won outright.

Biden and Europe want a Turkey loyal to NATO and their program to maximally confront the Russia/China/Iran axis. Erdogan has been a thorn in that program since late 2015 and Russia’s intervention in Syria laid bare both his and NATO’s complicity in balkanizing it.

He has played both sides against each other to forge an independent path for Turkey. Many of his moves have been questionable but viewed through that lens the pattern of his behavior is quite clear. His attempts to forge a peace agreement between Ukraine and Russia last year was likely the last straw for the West.

Turkey is the lynchpin to the Eastern Mediterranean and continued US presence in the Middle East. Despite the economic troubles of Turkey, he was able to communicate them as continued US anti-Arab behavior. From here, with him in power for another four years (and likely the last four), he has a big task in front of him to stabilize Turkey’s finances. He’s already made the case successfully that NATO turned its back on Turkey, now he’s going to have to turn that into a definitive policy.

Erdogan’s unorthodox monetary policy has been the topic of extensive discussion among Western economists. What is your assessment of it?

I’ve written about this in detail in the past here. Erdogan’s ‘unconventional’ monetary policy was the basis for his exit strategy from the West for Turkey. Erdogan challenged conventional IMF policy of raising interest rates to attract foreign investors.

Why would you want to attract the same people who previously pulled their money out of your country, destabilizing it. Foreign capital inflow under this model is just blackmail, leaving the government dependent on foreign largesse.

If they don’t like your policies, they pull their money out, crash the currency and hope to effect political reform more to their liking. What Erdogan did at the end of 2021 when the lira hit a peak of 18.2 versus the dollar was to use Turkey’s relatively clean balance sheet (less than 40% debt-to-GDP) to encourage Turks to save and invest in lira (which I went into detail in the article linked above) while encouraging Russian and Chinese investment in Turkish sovereign debt and infrastructure/trade projects.

Those have been excellent investments for those investors. In November 2021, Turkish 10-year debt was yielding more than 23%. Today that number is 9.2%. The lira depreciated from an average of 15 to today’s 20 versus the dollar. Even accounting for the exchange rate losses, these have been excellent returns. Remember bond prices rise as yield falls.

Now, with his re-election, Erdogan and Turkey are on the other side of political risk of new leadership changing the course. Turkey isn’t out of the woods yet, but the economic data is improving, in some areas like Manufacturing Confidence (108) and Capacity Utilization (75.4%) quite rapidly.

Political stability is what is needed now. Militaristic adventurism isn’t. Erdogan has been given another four years to complete the turnaround and reimagining of the Turkish economy.

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