fHe did not mediate peace in Russia’s war against Ukraine. But his efforts to export corn, wheat and other crops from Black Sea ports have earned Recep Tayyip Erdogan the thanks of the world community. The Turkish President can really use the encouragement of the UN Secretary-General. Because at home fewer and fewer voters find anything praiseworthy about their president due to the poor economic situation. Frowns are raised elsewhere too: Washington warned him not to circumvent sanctions against Russia.
It would not be the first time that Erdogan has played a double game: a foothold in NATO and a free foot somewhere between Moscow, Beijing and Africa. Turkey is still too weak as a regional hegemon, despite building up its military muscle, but nothing can be done against it in the region: in Kurdish areas, in Syria, on Cyprus or in gas exploration around the island. The autocrat that Erdogan has developed into sees himself on an equal footing with Russia’s Vladimir Putin or China’s Xi Jinping. He looks condescendingly at the largest trading partner, the EU.
Many citizens don’t know what to do next
But the greatness on display is on shaky ground. The economic situation is difficult. The inflation rate is 80 percent. Critics put it twice as much. Many citizens do not know how to make ends meet. Twice this year the government has raised pensions and the minimum wage to curb impoverishment.
This is threatening for Erdogan because it damages his core brand. Turkey has enjoyed solid growth for a long time under him. Twenty years ago, he reduced inflation, which was still higher at the time, and kept the promise of more (albeit unequally distributed) prosperity. Industrial centers emerged, the infrastructure was modernized. Erdogan has made Turkey attractive to tourists and investors. As repressive as domestic policy is with a compliant judiciary against critics, economic policy has been liberal.
It’s over. The “palace” often intervenes directly in the economy, not only with occasional price reductions for food, used cars or regulations on companies to give foreign exchange for lira. But what is that compared to the conformity of a central bank?
Low interest rates despite huge inflation
Confidence in a monetary policy based on economic calculations has been gone since three governors had to go who didn’t do what Erdogan wanted: lowering interest rates in order to boost the export economy in order to generate more foreign currency. The central bank lowered the key interest rate from 14 to 13 percent last week, even though inflation is 80 percent. The following day, bank interest on corporate loans was indirectly capped at 30 percent. So much for the government’s confidence in the market or its ability to organize the necessary framework.
The consequences can be viewed at the lira rate. If the dollar cost 8.50 lira a year ago, 18.12 lira were due on Monday. An unprecedented crash, also in the context of other emerging markets. The Turks flee in foreign currency, gold and material assets.
pressure on the lira
Erdogan’s economic recipe is useless. Even the 20 percent increase in exports in the first half of the year does not cover the costs of imports. The current account dollar gap is widening. The pressure on the lira is increasing. The less it’s worth, the more lira it takes to pay off dollar debt.
The currency shortage was great before the war, and the prices that have risen since then have increased it. All the more Erdogan is looking for a balance. Approaching countries with which Turkey crossed paths (Arab Emirates, Saudi Arabia, Israel, Egypt) follows the desire for export, energy or foreign exchange deals. So it is not surprising that Turkey, which does not support sanctions against Russia, is becoming a “warehouse and bridge” for deliveries there. Somehow the Russian gas, grain and oil have to be paid for. The rapid increase in Turkish shipments, albeit from a low base, speaks volumes, even if not everyone violates sanctions. Alleged upfront payments by Russia of billions of dollars for a nuclear power plant fit the picture. Erdogan will know how to use his advantage.
Companies that are talking about expanding Turkish instead of Asian locations should be aware of the risks, especially since trade improvements such as the reform of the customs union with the EU are a long time coming. The mood of the local investors was better. The Erdogan hangover will probably continue – at least until the election in mid-2023.