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The Turkish Emerging Market Timebomb

Turkish President Recep Tayyip Erdoğan’s populist economic policies have finally caught up to him.

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Authored by Jim O’Neill, originally on Project Syndicate:


As the Turkish lira continues to depreciate against the dollar, fears of a classic emerging-market crisis have come to the fore. Turkish President Recep Tayyip Erdoğan’s populist economic policies have finally caught up to him, and sooner or later, he will have to make nice with his country’s traditional Western allies.

Turkey’s falling currency and deteriorating financial conditions lend credence, at least for some people, to the notion that “a crisis is a terrible thing to waste.” I suspect that many Western policymakers, in particular, are not entirely unhappy about Turkey’s plight.

To veteran economic observers, Turkey’s troubles are almost a textbook case of an emerging-market flop. It is August, after all, and back in the 1990s, one could barely go a single year without some kind of financial crisis striking in the dog days of summer.

But more to the point, Turkey has a large, persistent current-account deficit, and a belligerent leader who does not realize – or refuses to acknowledge – that his populist economic policies are unsustainable. Moreover, Turkey has become increasingly dependent on overseas investors (and probably some wealthy domestic investors, too).

Given these slowly gestating factors, markets have long assumed that Turkey was headed for a currency crisis. In fact, such worries were widespread as far back as the fall of 2013, when I was in Istanbul interviewing business and financial leaders for a BBC Radio series on emerging economies. At that time, markets were beginning to fear that monetary-policy normalization and an end to quantitative easing in the United States would have dire consequences globally. The Turkish lira has been flirting with disaster ever since.

Now that the crisis has finally come to pass, it is Turkey’s population that will bear the brunt of it. The country must drastically tighten its domestic monetary policy, curtail foreign borrowing, and prepare for the likelihood of a full-blown economic recession, during which time domestic saving will slowly have to be rebuilt.

Turkish President Recep Tayyip Erdoğan’s leadership will both complicate matters and give Turkey some leverage. Erdoğan has  constitutional powers, reducing those of the parliament, and undercutting the independence of monetary and fiscal policymaking. And to top it off, he seems to be reveling in an escalating feud with US President Donald Trump’s administration over Turkey’s imprisonment of an American pastor and purchase of a Russian S-400 missile-defense system.

This is a dangerous brew for the leader of an emerging economy to imbibe, particularly when the United States itself has embarked on a Ronald Reagan-style fiscal expansion that has pushed the US Federal Reserve to raise interest rates faster than it would have otherwise. Given the unlikelihood of some external source of funding emerging, Erdoğan will eventually have to back down on some of his unorthodox policies. My guess is that we’ll see a return to a more conventional monetary policy, and possibly a new fiscal-policy framework.

As for Turkey’s leverage in the current crisis, it is worth remembering that the country has a large and youthful population, and thus the potential to grow into a much larger economy in the future. It also enjoys a privileged geographic position at the crossroads of Europe, the Middle East, and Central Asia, which means that many major players have a stake in ensuring its stability. Indeed, many Europeans still hold out hope that Turkey will embrace Western-style capitalism, despite the damage that Erdoğan has done to the country’s European Union accession bid.

Among the regional powers, Russia is sometimes mentioned as a potential savior for Turkey. There is no doubt that Russian President Vladimir Putin would love to use Turkey’s crisis to pull it even further away from its NATO allies. But Erdoğan and his advisers would be deeply mistaken to think that Russia can fill Turkey’s financial void. A Kremlin intervention would do little for Turkey, and would likely exacerbate Russia’s own .

The other two potential patrons are Qatar and, of course, China. But while Qatar, one of Turkey’s closest Gulf allies, could provide financial aid, it does not ultimately have the wherewithal to pull Turkey out of its crisis singlehandedly.

As for China, though it will not want to waste the opportunity to increase its influence vis-à-vis Turkey, it is not the country’s style to step into such a volatile situation, much less assume responsibility for solving the problem. The more likely outcome – as we are seeing in Greece – is that China will unleash its companies to pursue investment opportunities after the dust settles.

That means that Turkey’s economic salvation lies with its conventional Western allies: the US and the EU (particularly France and Germany). On August 13, a White House spokesperson confirmed that the Trump administration is watching the financial-market response to Turkey’s crisis “very closely.” The last thing that Trump wants is a crumbling world economy and a massive dollar rally, which could derail his domestic economic ambitions. So a classic Trump “trade” is probably there for Erdoğan, if he is willing to come to the negotiating table.

Likewise, some of Europe’s biggest and most fragile banks have significant exposure to Turkey. Combine that with the ongoing political crisis over migration, and you have a recipe for deeper destabilization within the EU. I, for one, cannot imagine that European leaders will sit by and do nothing while Turkey implodes on their border.

Despite his escalating rhetoric, Erdoğan may soon find that he has little choice but to abandon his isolationist and antagonistic policies of the last few years. If he does, many investors may look back next year and wish that they had snapped up a few lira when they had the chance.

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VeeNarian (Yerevan)CheviHelga FellayAM HantsMarc Landreville Recent comment authors
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VeeNarian (Yerevan)
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VeeNarian (Yerevan)

This is a very limited and blinkered analysis. Listen to Erdogan: Turkey does have other partners. Then the US/EU/NATO gangsters will be well and truly stuffed.

Chevi
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Chevi

who the heck is this guy Jim ???????? the EU is bankrupt………usa is kaput………. end of story……..

Helga Fellay
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Helga Fellay

This author seems utterly clueless. Turkey has – finally – realized that its future lies with the new alliances that are gaining power as the old order, the western alliance, is going down fast. Quatar has already offered a bailout, and while the transition period is painful, Turkey will rise again, without the help of that sinking ship, the EU, which will go down alongside its master, the USA.

AM Hants
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AM Hants

Sorry, this is off topic, but, might be of interest.

BREAKING: Ukrainian Army & Blackwater Prepare Use Of Radiation Weapon On Donbass (DOCUMENTS, MAP)
Major development, Cyber-Berkut reveals all… https://www.fort-russ.com/2018/08/breaking-ukrainian-army-blackwater-prepare-use-of-radiation-weapon-on-donbass-documents-map/

Wonder if they will time it, to kick off the mid-term elections, whilst blaming Russia?

Remember, the Blackwater mercenaries, who are now run by Monsanto, back in February 2014, over in Ukraine? Isn’t Eric Prince’s sister, the Education secretary, over in the US? So why is he heavily involved with Soros funded organisations, or does brother Eric, just follow the money, no matter who pays the bills?

Marc Landreville
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Marc Landreville

The US thinks that it can influence Turkey’s future economic development. What they have trouble realising is that the US economic dominance is waning. Turkey may switch to China/BRICS rapidly developing economic infrastructure. The US thinks that Turkey is tied and committed to NATO and will eventually cede to US demands. However, under previous governments, Turkey wanted to become part of Europe, and many decades ago, the EU told Turkey that joining NATO was the first step. In the last decade, it has become clear to Turkey that Europe doesn’t want them. Therefore, there is little benefit for Turkey to… Read more »

John R Balch Jr
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John R Balch Jr

It seems the United States wants to be the only “Super Power” in the world and now “Outer Space” so they can tell other countries who they can trade with and who they can not trade with and what they can trade and what they can not trade. They even have a White House Adviser who wants to kick China out of the World Trade Organization because China won’t bow down to the United States will on trade. The United States are now trying to become like the former Roman Empire, the former Ottoman Empire or the former British Empire,… Read more »

Poovizhi arasan
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Poovizhi arasan

You seem to have forgotten history, in writing this essay, Mr Zuesse . On August 15, 1971, US defaulted on its international obligations, making it the first sovereign default post war in post WW II history. So defaulting on its international obligations is potential answer. But it could damage credibility. Credible alternatives, would be to abrogate the Incrilik treaty arrangements, and insist that rentals on the base be made in Gold or Euros or any other non dollar currencies. Since Yuan comprises at least 10 per cent of the trade basket, it could also be an alternative ! Simultaneously hike… Read more »

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‘I will take over as Brexit Party leader’: Nigel Farage back on the frontline

Nigel Farage says that if the UK takes part in European elections, he will lead his new Brexit Party.

RT

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Former UKIP leader Nigel Farage has announced that he will lead his new Brexit Party into the European elections if UK MPs decide to delay Brexit beyond May 22.

Farage, who has ostensibly appointed himself leader, told various media, including the BBC and Sky News on Friday morning: “I will take over as leader of the Brexit Party and lead it into the European Elections.”

It comes after the Brexit Party’s leader, Catherine Blaiklock, quit over a series of alleged Islamophobic statements and retweets of far-right figures on social media.

It is not yet thought that Farage has officially been elected as leader, as the party does not, as yet, have a formal infrastructure to conduct such a vote.

The right-wing MEP vowed to put out a whole host of Brexit Party candidates if the UK participates in the upcoming EU elections in May, adding: “If we fight those elections, we will fight them on trust.”

On Thursday night, the EU agreed to PM May’s request for a delaying to Brexit beyond the March 29 deadline. Brussels announced two new exit dates depending on what happens next week in the UK parliament.

The UK will have to leave the bloc on April 12 unless British MPs agree to May’s Brexit deal. If the withdrawal agreement is passed by next week, EU leaders have agreed to grant an extension until May 22.

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Baltics cannot rely on Germany any more

The matter is NATO today is not as strong as it is supposed to be. And it is not only because of leadership blunders.

The Duran

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Submitted by Adomas Abromaitis…

On March 29 Latvia, Lithuania and Estonia will celebrate 15 years of becoming NATO member states. The way to the alliance membership was not simple for newly born independent countries. They have reached great success in fulfilling many of NATO demands: they have considerably increased their defence expenditures, renewed armaments and increased the number of military personnel.

In turn, they get used to rely on more powerful member states, their advice, help and even decision making. All these 15 years they felt more or less safe because of proclaimed European NATO allies’ capabilities.

Unfortunately, now it is high time to doubt. The matter is NATO today is not as strong as it supposed to be. And it is not only because of leadership’s blunders. Every member state does a bit. As for the Baltic states, they are particularly vulnerable, because they fully depend on other NATO member states in their defence. Thus, Germany, Canada and Britain are leading nations of the NATO battle group stationed in Lithuania, Latvia and Estonia respectively.

But the state of national armed forces in Germany, for example, raises doubts and makes it impossible not only defend the Baltics against Russia, but Germany itself.

It turned out, that Germany itself remains dissatisfied with its combat readiness and minister of defence’s ability to perform her duties. Things are so bad, that the military’s annual readiness report would be kept classified for the first time for “security reasons.”

“Apparently the readiness of the Bundeswehr is so bad that the public should not be allowed to know about it,” said Tobias Lindner, a Greens member who serves on the budget and defense committees.

Inspector General Eberhard Zorn said (https://www.reuters.com/article/us-germany-arms/germany-not-satisfied-with-readiness-of-submarines-some-aircraft-idUSKBN1QS1G7) the average readiness of the country’s nearly 10,000 weapons systems stood at about 70 percent in 2018, which meant Germany was able to fulfill its military obligations despite increasing responsibilities.

No overall comparison figure was available for 2017, but last year’s report revealed readiness rates of under 50 percent for specific weapons such as the aging CH-53 heavy-lift helicopters and the Tornado fighter jets.

Zorn said this year’s report was more comprehensive and included details on five main weapons systems used by the cyber command, and eight arms critical for NATO’s high readiness task force, which Germany heads this year.

“The overall view allows such concrete conclusions about the current readiness of the Bundeswehr that knowledge by unauthorized individuals would harm the security interests of the Federal Republic of Germany,” he wrote.

Critics are sure of incompetence of the Federal Minister of Defence, Ursula von der Leyen. Though she has occupied the upper echelons of German politics for 14 years now — and shows no sign of success. This mother of seven, gynecologist by profession, by some miracle for a long time has been remaining in power, though has no trust even among German military elites. Despite numerous scandals she tries to manage the Armed Forces as a housewife does and, of course, the results are devastating for German military capabilities. The same statement could be easily apply for the Baltic States, which highly dependent on Germany in military sphere.

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Crimea: The Geopolitical Jewel Russia Continues to Polish

As Putin continues to polish his Black Sea jewel, Europe has to decide if it is going to continue playing the U.S’s games over Ukraine or begin the next phase of its independence.

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Authored by Tom Luongo via The Strategic Culture Foundation:


With all that is happening in the world Crimea has taken a bit of a backseat recently. Yes, the US, EU and Canada just added more sanctions on Russia via the odious Magnitsky legislation but this is inconsequential.

There’s been a flurry of good news coming out of Crimea and the Black Sea recently that bears discussion. Let’s start with the most important. President Vladimir Putin was in Crimea earlier this week to celebrate the fifth anniversary of the peninsula’s reunification with Russia. There he also officially inaugurated two major upgrades to Crimea’s power grid.

Located in Simferopol and Sevastopol, two new power plants will produce 940 megawatts and secure Crimea’s energy needs for now and into the future.

Power has been Crimea’s Achilles’ heel since breaking off from Ukraine in 2014. It received almost 90% of its power from the mainland. In November 2015, the trunk lines into Crimea were sabotaged by Ukrainian nationalist radicals, encouraged by President Petro Poroshenko plunging it into darkness as winter took hold.

Does this sound familiar? A place that defies US edicts geopolitically is first hit with a full trade embargo, sanctions and threatened militarily by proxies before having its electricity shut off?

*Cough* Venezuela *Cough*

And there are reports that the US has game-planned a similar fate for Iran as well. For Crimea it was easy because of the single-point-of-failure, the trunks from the mainland. For Venezuela it was as well, with the Guri dam, which affected nearly 70 percent of the country.

So, Putin timing the fifth anniversary of reunification with the announcement of the plants moving to full operational status was yet another smooth bit of international political maneuvering.

A not-so-subtle poke in the eye of the Gang Who Can’t Sanction Straight in D.C. as well as lame duck Poroshenko. Elections are at the end of the month and this celebration by Russia and Crimea will not sit well with many Ukrainians, especially the diaspora here in the US which is virulently anti-Putin in my experience.

Secure and stable power generation is a hallmark of a first world territory. Without that economic growth and stability are impossible. This is why to first help stabilize the situation in Crimea after the blackout Russia brought in 400 MW of power across the Kerch Strait from Krasnodor.

Tying Crimea to the mainland via the Kerch Strait bridge was a masterstroke by Putin. The initial power lines were simply a necessity. For those that complain he isn’t doing enough to counter US and European aggression need only look at the Kerch Strait bridge.

Not only did the Russians not seek international approval given the nearly universal refusal to recognize Crimea as Russian they built the thing in a time frame that defies description.

Imagine if this had been an EU project. They would still be debating the initial engineering plans and the political effects on some protected minority.

Not only does it open up the Eastern Black Sea to trade via Crimea but it ends the use of the Sea of Azov as a potential staging ground for naval provocations as last fall’s incident proved. Ukraine is cut off from acting aggressively and cannot count on any help from the US and Europe.

Moreover, Crimea is now permanently Russia’s. And every bit of infrastructure Russia builds there ties the two further together and weakens any bonds Crimea had with Ukraine. The resultant growth and modernization will make its way, economically and culturally back into southern Ukraine and erode the hard border over time.

This is far more important than striking out and metaphorically punching Poroshenko in the mouth, that many of Putin’s detractors wish for.

Presidents change, after all. Patience and attrition is how you beat an aggressive, distant enemy like the US

To remind everyone just how insane the Trump White House has become on matters international, no less than Vice President Mike Pence lobbied Germany to provoke another naval incident at the Kerch Strait.

If there was ever an example of how little Trump’s gang of moldy neocons think of Europe it is this bit of news. In effect, Pence was saying, “We can’t start a war with Russia because it would go nuclear, but you can because Russia can’t live without your trade.”

This coming after the US unilaterally pulled out of the INF treaty and is now flying nuclear bombers to eastern Europe. The message is clear. If the EU doesn’t get with this open-ended belligerent program against Russia and China of John Bolton’s they will be the ones paying the price when chaos breaks out.

On the other side there is Putin; building bridges, pipelines, power plants and roads.

He’s making it clear what the future holds not only for Europe but the Middle East, central Asia and India. We will defend Crimea at all costs, develop it not only into a tourist destination but also a major trade hub as well.

You are more than welcome to join us. But, we don’t need you.

These power plants will raise Crimea’s power output well beyond its current needs, allowing first export of power as well as providing the foundation for future growth.

And as if it weren’t coordinated in any way, the Chinese, on the morning of Putin’s speech, announced that Crimea would be an excellent fit for investment projects attached to the Belt and Road Initiative (BRI).

That’s according to the head of the association of Chinese compatriots on the peninsula, Ge Zhili. “Our organization is bolstering cooperation ties, exchanges and friendly contacts with the Crimean society,” he said at an event dedicated to the fifth anniversary of Crimea’s reunification with Russia, which was held in the Russian Embassy in Beijing on Monday.

It is also ready to contribute to the establishment of “reliable partner ties” and the explanation of legal details of business cooperation with Crimea, Ge Zhili said. “The Chinese society hopes for the development of friendly cooperation with Crimea; we are ready to overcome difficulties for fruitful results.”

Again this is a direct challenge to the US who has Crimea under strict sanctions in the West. China is happy now to move forward with integrating Crimea into its plans. It’s just another example of how Russia and China simply ignore Trump’s fulminations and move on.

I can’t wait until I get to write this article all over again, this time about North Korea, now that Bolton has thrown Russian and Chinese assistance in getting North Korea to the negotiating table back in their face by destroying the Hanoi talks.

This announcement is not to be underestimated given that Chinese Premier Xi Jinping is in Rome this week to open up relations with the new Italian government. Five Star Movement’s Leader Luigi Di Maio said he would welcome becoming a part of BRI, much to the consternation of Trump, German Chancellor Angela Merkel as well as his coalition partner Lega Leader Matteo Salvini.

It’s already well known that Salvini is interested in ending sanctions on Crimea and re-opening trade with Russia. Italy is desperate for new markets and opportunities, currently stifled under the euro itself as well as Germany’s insistence on austerity hollowing out Italy’s economy and its future prospects.

These issues as well as energy security ones are coming to a head this year with Brexit, the European Parliamentary elections in May and the completion of the Nordstream 2 pipeline later this year.

As Putin continues to polish his Black Sea jewel, Europe has to decide if it is going to continue playing the U.S’s games over Ukraine or begin the next phase of its independence. Salvini will lead a Euroskeptic revolt within the European Parliament in May. It may be big enough to finally defy Merkel and end EU sanctions on Russia over Crimea.

At that point the US will also have a choice, burn down the world economy with even more sanctions, tariffs and acts of war or accept the facts on the ground.

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