The Turkish Lira Crisis
Photo Credit: Reuters
By Tai Wei Lim

The Turkish Lira Crisis

Aug. 23, 2018  |     |  0 comments

Turkey has come under the siege of a financial crisis. Turkey’s currency dropped by 1/5 of its value against the US dollar on August 10, 2018. It was partly a reaction to the US decision to increase steel and aluminum tariffs against Turkey. This economic measure was partly in response to Ankara’s detention of American church worker Andrew Brunson. With this crisis, the Turkish Lira has effectively lost 40 percent of its value against the US dollar overall in 2018. It needs all the help it can get for damage control and shore up support. A number of countries have come to the aid of Turkey to help stabilize its currency. Some of these have helped more than others but, collectively, they all serve as important avenues to shore up regional and international confidence in Turkey’s economy.

One of the most significant rescue packages came from Qatar which came up with USD 15 billion worth of investments for Turkey on August 15. Qatar and Turkey have a close relationship and Turkey has done its part to help Qatar when the Gulf state was facing its own crisis. A Saudi Arabia-led Arab coalition that consisted of other Gulf states, including the United Arab Emirates, isolated Qatar for a number of reasons, including their suspicions of Qatari ties with Turkey, Iran, the West and the operation of pro-democracy media outfits like Al Jazeera. The Saudis had demanded the condition of an end to Qatari Turkish ties amongst other conditions to break the stand-off. Turkey broke this blockade when it boldly deployed airlifts and cargo planes to supply Qatar with meat and essential foodstuff for the Gulf state. In this context, a friend in need at this point of time from the Qatari perspective is now repaid with a friend indeed as Qatar returned the favor by investing in Turkey at its time of financial crisis.

The Western Europeans are equally concerned about developments in Turkey. German Chancellor Angela Merkel stepped up to offer a meeting between her country and Turkey. Turkey’s crisis comes at a delicate time as the United Kingdom may be leaving the European Union without a deal. Germany is also facing flak from the Trump administration in the US. In his recent meeting with the German leader, President Trump was critical about Germany’s energy ties with Russia and former German Chancellor Gerhard Schroeder’s executive and management leadership in a Russia conglomerate. Germany is also the second largest investor in Turkey. Germany does not want to be in a situation where Brexit is finalized without a deal, and the onging trade frictions with the US and the Turkish Lira crisis come together as a triple whammy to affect the German economy. It is therefore now contemplating help for Turkey.

Turkish President Recep Erdogan also called on Russia’s President Vladimir Putin to seek help for his country and hedge against what some perceive as dependence on the West, including the US. This was laid bare in his op-ed in the influential and liberal New York Times. Erdogan also named international and regional multilateral organizations as future partners for Turkey, including the African Union, the Association of Southeast Asian Nations (ASEAN), and the BRICS (Brazil, Russia, India, China, South Africa). Erdogan has self-styled Turkey as an important country and wants more diversification to other players and entities in managing its global affairs and economy. Turkey’s long-awaited rapprochement with Russia came after years of animosity between the two countries.

There are also regional and global fears that if the Turkish crisis is not contained, it may reverberate through the emerging economies. The crisis has already triggered a knee-jerk reaction to sell off.

In 2015, three years ago, Turkey’s F-16 shot down a Russian Sukhoi SU-24M. A dispute over the position of the downed fighter jet followed. Turkey argued that the fighter jet was in Turkish airspace and the pilot did not respond to repeated calls to leave while Russia claimed the fighter was in Syrian airspace. Russia is a major ally of the Assad government in Syrian which is fighting the Islamic State and anti-Assad government rebels which are supported by a number of NATO countries of which Turkey is a member state. The Russian pilot ejected but was killed when parachuting down but the weapons system expert on board survived. Russian rescue personnel sent into Syria to extract the pilot was also killed. A stand-off between Russia and Turkey in the Turkish-Syrian border ensued.

The current rapprochement between Turkey and Russia indicates a complete reset of relations between the two after the 2015 incident and an apology was issued by the Erdogan government in 2016. In some ways, when Erdogan talks about diversifying from the West, he is also reflecting the importance of Turkey as pointed out by veteran commentators and experienced pundits who predicted Turkey would become a major regional power with its economic strength, size, and military capabilities. This crisis has affected such perceptions and Ankara is anxious to shore up the aftermath through damage control. Erdogan needs to regain international confidence in Turkey. In some ways, Erdogan’s political direction for Turkey has diverged from the political pathway that liberals, the left and pro-democracy activities in the Western liberal democracies favor. They have criticized Erdogan for tightening up authoritarian rule and ignoring democratic features after an unsuccessful coup was carried out to bring down his government.

Besides Russia, China is another major power that has also stepped out to support Ankara. Beijing has come out publicly to declare that it is confident that Turkey would overcome the crisis. The Chinese Industrial and Commercial Bank of China (ICBC) had already dispensed a loan before the crisis with USD 3.6 billion forwarded in July for developing energy and transportation infrastructure. The Chinese are also encouraging collaboration in items that are driven by free market forces of supply and demand. Beijing itself is also facing trade tariffs and the growing risks of a trade war with the US and has itself courted Japan, South Korea, the EU and ASEAN to hedge against Washington’s economic measures to reduce US trade deficits with China. In this way, there is convergence in the political and geopolitical objectives of Ankara and Beijing. The trade rival of my trade rival is my trade friend appears to be the situation here. Beijing needs all the hedging help it can get as it continues to negotiate with the Trump administration to mitigate and turn down the temperatures on the potential trade war. Both sides, and the world along with them, stand to get hurt if the trade war really materializes, especially US consumers and farmers and Chinese companies that serves the all-important US consumer market.

President Recep Erdogan needed all the help he could get to shore up economic stability after his country’s currency was attacked. Some zero-sum realists have already started calling countries appearing to assist Turkey as “Turkey’s other friends.” Realists see them as a counterbalancing hedge against the US, although this is too reductionist and simplistic an interpretation. From a non-realist point of view, there are also regional and global fears that if the Turkish crisis is not contained, it may reverberate through the emerging economies. The crisis has already triggered a knee-jerk reaction to sell off. The contagion effect is enough fodder to create fear amongst other international economies to buffer against such a possibility. Ultimately, it may be pragmatic reasons that compel others to step up to assist Turkey.

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