14 Aug 2018 19:24 IST

Turkey’s hopeless economic war with the US

Erdogan would do well to recommit Turkey to NATO; or have Turkey suffer economically

Last week I wrote about how Iran is facing an existential threat to its economy as its rial collapses, and real incomes rapidly fall because Iran is squarely in the sights of the United States Treasury Department.

This week, a country facing a similar crisis is Turkey, Iran’s northwestern neighbour, for reasons, and a history, that are vastly different.

Turkey is a member of the vaunted North Atlantic Treaty Organization (NATO) — a military alliance of 29 countries from North America and Europe — that has acted as a unified deterrent force to thwart the power of the erstwhile Soviet Union throughout the Cold War, and since its end, Russia. There has been no armed conflict between NATO countries and Russia as a result; although NATO has fought multiple battles in Bosnia, Serbia, Libya and other places.

The Supreme Commander of the NATO forces is always an American, although the Secretary General of NATO, a political position, is held by various NATO countries by rotation. The current incumbent in this diplomatic role is Jens Stoltenberg, the former PM of Norway.

Turkey has been a NATO member since 1952, just three years after NATO’s founding. In the last seven decades, it has been a key security player because of its geographical perch as the only member with shared borders with some of the world’s most volatile countries, including Syria, Iran, and Iraq. During the first Gulf war, Turkey allowed Americans to conduct military sorties from its airbases and later, to launch overflights to monitor UN security resolutions against Saddam Hussain’s Iraq.

Fighting ISIS

So what did Turkey do to invite the wrath of President Trump? There have been many policy differences between him and recently re-elected Turkish leader President Recep Tayyip Erdogan, but the key disagreement has been over how to fight the war against ISIS in Syria, a top priority for Trump. America has outsourced the fighting to the YPG militias in Kurdistan, a province of Iraq that has a proud heritage of trying to become an independent country for generations. Although this has not come to pass, the Kurds do not like the Turks who border them in the mountainous regions of northeastern Iraq— and the feeling is mutual. In fact, Erdogan classifies these YPG militias as terrorists who have been responsible for the poor state of security in Turkey, including an attempted coup two years ago.

Troublemaker Russia, already a key player in the Syrian conflict, has been reaching out to Turkey — including promising it favourable terms for the purchase of Russian aircraft and other hardware. If Turkey were to accept, not only would it be incredibly odd, but it would also result in an automatic expulsion from NATO.

The coup in July 2016 failed to unseat Erdogan and he believes it only happened because the US lent tacit support to the effort. Andrew Craig Brunson, an American pastor in Turkey, was arrested in October 2016 and charged with helping to orchestrate the coup. Having just been re-elected, Erdogan is digging his heels in, comfortable that he has sufficient political equity to go after the US.

Back in America, Trump and Vice President Pence have deep pockets of support from the country’s evangelical community of church leaders. In deference to them, Pence went so far as to threaten Turkey with sanctions if Pastor Brunson was not immediately released. Erdogan refused.

Turkey’s situation

Turkey is a nation that is already in some economic trouble. It has continued to borrow billions of dollars from foreign banks to fund real estate construction in the country. With returns coming out to be lower than expected, the country is heavily indebted, which has been driving down the Lira. Because Turkey is not part of the European Union, it still has an independent central bank which has refused to raise interest rates to make the Lira more attractive to foreign investors. The fear is that rising the interest rates would worsen inflation and further diminish the economy. There is also the fear that without the support of the powerful EU Central Bank, Turkey will have a hard time trying to find bailout partners.

The result has been that the Turkish Lira has been steadily falling. A year ago, $1 was buying 3.52 Lira. Today, $1 buys 6.82 Lira, which is a drop in currency of almost 50 per cent.

When Erdogan refused to release the pastor, Trump acted as only he does — hitting at a time when his new adversary was already at a low point. He announced that America would impose a tariff of 50 per cent on Turkish steel and 20 per cent on Turkish aluminum. This created havoc in international markets because Turkey relies on metal exports to the US to earn valuable foreign exchange.

The tariff made Turkish metals so expensive that no one in America would buy them, which led to the Turkish economy tanking further over a short period. The Lira dropped 20 per cent in a single day. The Euro, which has a lot at stake given Turkey’s position in NATO and its ability to control Syrian migration, fell to a 13-month low against the dollar. On Monday, the Indian rupee also slid to its lowest-ever against the dollar.

What Erdogan should do

Turkey would do well to release the pastor immediately, renounce any talks with Russia regarding military hardware, and recommit itself to NATO like never before. NATO has too much to lose if Turkey were to leave the alliance; and such a gesture of re-commitment would endear NATO nations closer to Turkey. In return, Turkey could negotiate a favourable treatment of its foreign loans and a return to no-tariff exports to America.

Erdogan probably wouldn’t do any of the above because to him, it’s a matter of ego. He is seen as a strongman in Turkey and such actions would allow his political opposition to portray him as weak and subservient to the US. In Erdogan’s thinking, it is better to have Turkey suffer economically than lose his face on the global stage. Although most Turkish citizens would probably vote for economic stability every time.