on geopolitics

Making Sense of Turkey's Economic Crisis

Reva Goujon
VP of Global Analysis, Stratfor
11 MINS READAug 16, 2018 | 09:00 GMT
A teller holds Turkish lira banknotes at a currency exchange office in Istanbul on Aug. 13, 2018.

A teller holds Turkish lira banknotes at a currency exchange office in Istanbul on Aug. 13, 2018. Turkey's troubled lira tumbled on August 13 to fresh record lows against the euro and dollar, piling pressure on stock markets on fears the country's crisis could spill over into the world economy. (Photo by Yasin AKGUL / AFP)

(YASIN AKGUL/AFP/Getty Images)
  • Even as Turkey's economy bleeds capital in the midst of crisis, President Recep Tayyip Erdogan resists breaking from the outdated pro-growth economic model that built his political dynasty.
  • The president's framing of the economic crisis as a foreign plot to weaken the state is proving effective in building nationalist fervor, giving him the option to move up municipal elections to November and hold off on economic tightening in the interim.
  • Geopolitical friction with the United States is bound to grow in the coming months, especially as Turkey comes under sharp scrutiny for violating Iran sanctions.
  • As Turkey balances among the great powers, Ankara will likely look for financial assistance from sources other than the International Monetary Fund, including China, Qatar and Kuwait.

Once again, economists and financial experts are pulling out their hair trying to understand the populist, authoritarian enigma that is Turkish President Recep Tayyip Erdogan. With the lira plunging to scary new depths, many will ask incredulously how the political steward of an $850 billion economy could be so reckless as to brand utterly rational investors as enemies of the state. Why, they ask, would the government accuse us of conspiring across global financial capitals to take Turkey down — when it's precisely that kind of bombastic language that will send more capital fleeing? And why won't Erdogan just strike a seemingly simple diplomatic bargain over an American pastor if that will surely bring down the lira's fever? Welcome to Turkey, my friends. To understand Erdogan's behavior today, we have to rewind 15 years.

The Big Picture

Stratfor's Third-Quarter Forecast said that Turkey will face strong economic and political headwinds as President Recep Tayyip Erdogan strong-arms the central bank to defy market pressure and as frictions escalate with the United States. A financial storm is now battering Turkey and driving Ankara to look outside the West for help.

The Rise of a Pious Street Kid

At the time, Turkey was emerging from a heavy economic storm that had banks reeling and had sent the government into the arms of the International Monetary Fund (IMF) for billions of dollars in life support. Politically, the country had also reached a major turning point: a stunning 2002 election victory by the recently founded Justice and Development Party (AKP) gave the Islamist-oriented organization a resounding majority. The victory was largely attributed to the resounding charisma of a pugnacious and pious politician from the tough streets of Kasimpasa district in Istanbul. As mayor of Istanbul and upon becoming prime minister in 2003, a humble and impassioned Erdogan dazzled the disillusioned masses with his promises of economic reform, battles against corruption and the spread of religious tolerance as "democratic Muslims," taking great care to distinguish himself from the more severe, anti-Western line of his mentor and the country's first Islamist prime minister, Necmettin Erbakan.

Turks fed up with runaway inflation and the economic mismanagement of the old political establishment were eager for, or at least open to, a change. And change did come. Between 2002 and 2007, the gross domestic product grew at a galloping average of 7 percent ahead of the global financial crisis. GDP per capita nearly quadrupled in those years, giving rise to a new and optimistic middle class. The Western world, meanwhile, eyed this emerging market darling with great interest. Turkey was on a rapid economic rise and was poised to provide a strategic bridge to markets east and west. And after the 2001 banking crisis forced it to make some deep and painful repairs, Turkey appeared locked into a reform path, reinforced by Ankara's political decision to formally begin negotiations for EU accession in 2005. The West was slow to recognize, however, that Turkey was also awakening from its post-Cold War slumber. The West was also slow to understand that, under an Islamist-oriented political model, Turkey would be naturally drawn to the chaos that was being created in its Middle Eastern backyard by the United States with the start of the Iraq war. The West's nostalgic view of a secular and stable NATO ally in an otherwise volatile part of the world was already starting to crack.

An infographic on the economic crisis in Turkey focus on inflation, debt and foreign exchange reserves.

Old Habits Die Hard

To make sense of Erdogan's virulent resistance to tightening monetary and fiscal policy in the face of crisis, remember one simple fact: He built his political dynasty during an era of heady growth and will remain loath to break from an economic model that has brought him immense success. An economic environment characterized by low interest rates, booming consumption, heavy portfolio inflows and massive, government-backed construction projects gave him the ingredients he needed to build an extensive patronage network. Erdogan worked quickly and craftily to secure his political base, first by building up allegiances in the heartland and by replacing secular elites from key institutions with loyalists. Then, he aggressively neutralized the military's political clout and eventually sacrificed his former Islamist allies in the Gulen movement.

The anti-corruption banner that he waved in coming to power gradually gave way to unapologetically blatant displays of nepotism. This was to underscore the perception that political challenges to Erdogan would invite only economic ruin while ardent support would bring riches. As the country's EU accession bid plummeted in priority and as Erdogan cemented institutional dominance in the country, the Turkish leader was easily able to fend off a broader anti-corruption wave that was sweeping other emerging economies.

A strategy of fixating on a core base of support to consolidate power while staving off economic correction cycles has served Erdogan well, even against daunting odds. No matter how polarizing Erdogan has become to Turkey's deeply divided electorate, he has maintained the steadfast support of roughly half of the electorate. The more his electoral margins get shaved down in each cycle, the more resourceful he has to be in maintaining his already strong grip on power. This explains the gamble he took on a 2017 constitutional referendum to empower and extend his tenure as president. It also explains why he is ideologically stuck to the outdated economic model that fueled his political ascent. It is little wonder then that Erdogan replaced market-friendly technocrats in his Cabinet with his inexperienced but ever loyal son-in-law to run the powerful Ministry of Treasury and Finance. For better or for worse, Erdogan is determined to stay on this economic course for as long as he can and does not care to have technocrats get in his way.

When Erdogan declares war against "evil" interest rates and likens dollars, euros and gold to "bullets, cannonballs and missiles" in a war that aims to take Turkey down, he is channeling a deep-seated paranoia rooted in the 1920 Treaty of Sevres, which dismembered the Ottoman Empire at the hands of Allied powers.

Fanning the Flames of Nationalism

When Erdogan declares war against "evil" interest rates and likens dollars, euros and gold to "bullets, cannonballs and missiles" in a war that aims to take Turkey down, he is not entertaining the Western financial community; he is channeling a deep-seated paranoia rooted in the 1920 Treaty of Sevres, which dismembered the Ottoman Empire at the hands of Allied powers. The so-called Sevres syndrome can be channeled in Turkish politics to this day to raise hysteria of outside powers conspiring to kick Turkey while its down in the dust. It can also be used to enforce politically motivated boycotts of foreign goods. Many educated Turks who despise Erdogan but are bombarded with propaganda of Turkey coming under economic attack are rationally trying to sell lira and secure more stable assets, but they are also seriously questioning whether their country is coming under siege by foreign powers. U.S. President Donald Trump's attempt to fan Turkey's economic flames through a tariff-loaded tweet last week only compounded those suspicions.

Trump is also unintentionally boosting Erdogan's political credibility at home. Erdogan has already crossed the big referendum-and-election hurdle to secure the presidency for at least the next five years and potentially the next decade. In the short term, though, he has to worry about municipal elections next year. Pro-government pundits say they are getting signals that Erdogan may move up the local elections by six months, to Nov. 4 this year. The reasoning would be that stronger economic headwinds are coming anyway, and Erdogan may as well take advantage of the political solidarity he can reap from his nationalist battle cries against enemy speculators. This is a rumor that I would take seriously. It would also imply that any serious structural reform would only have a chance of coming after the election while Turkey tries to ride out the storm in the near term.

An Unforgiving Geopolitical Climate

The geopolitical frictions surrounding Turkey are bound to only exacerbate the country's economic crisis in the coming months. The U.S.-Turkey diplomatic standoff, driven by Trump's attempt to curry favor with American evangelicals by pushing for the release of pastor Andrew Brunson, is a piece of shrapnel in the minefield of U.S.-Turkey relations. After framing Brunson for colluding with the same Islamist movement led by Fethullah Gulen that tried and failed to overthrow Erdogan in a coup, Ankara will treat any diplomatic concession involving Brunson as a compromise of its national security and will exact a significant price for his release. This explains Erdogan's arguably unrealistic attempt to equate Brunson with Gulen in a negotiated exchange and the current diplomatic logjam.

Beyond Brunson and Gulen, Turkey is biding its time for the United States to extricate itself from its Middle Eastern backyard. In Syria, Turkey has been adamantly opposed to U.S. support for Kurdish fighters in the Syrian Democratic Forces (SDF), but it can also see the endgame to the civil war approaching and will maintain a strong foothold in the country to ensure that Kurdish cantons in northern Syria remain divided and politically neutralized well beyond the United States' stay in the region. In the meantime, U.S. support for the SDF and Turkey's imperative to divide and weaken the Kurds in Syria will remain a significant friction point.

Turkey is also expected to be one of the biggest violators of Iran sanctions in the coming months as the United States prepares to snap back hard-hitting energy penalties in November. Turkey depends on foreign imports for nearly all its energy needs, and Iran is a significant supplier of its oil and natural gas. Even today, Ankara is trying to negotiate a lesser punishment for the state-run Halkbank, the main Turkish bank involved in violating Iran sanctions under the previous U.S. administration. Though it will take time for U.S. investigations and cases against Turkey to build in the current sanctions wave, the looming threat of secondary U.S. sanctions will add another external stressor on the country's banking sector in trying economic times.

In Search of New Allies

Turkey's search for economic assistance will be a fascinating prism into the balancing act of a strategic middle power caught in the throes of great power competition. The United States is facing rising competition from China and Russia, which are also seeking out like-minded partners to challenge the U.S.-led order. Turkey will maintain a foothold in the West and is not about to walk away from a critical strategic alliance such as NATO. But it is also trying to balance between these Eastern and Western poles, so it will be focusing on building up its strategic ties with China while carefully managing its relationship with old geopolitical foes such as Russia. In the case of the latter, this will involve Turkey maintaining heavy energy ties and building defense cooperation with Russia despite U.S. congressional attempts to coerce Turkey into cutting those ties.

In a time of financial need, economically embattled states under the siege of U.S. sanctions, such as Russia and Iran, are obviously not going to be Turkey's safety net. And it will also be loath to return hat in hand to the IMF — something that a technocrat like Argentine President Mauricio Macri may be able to stomach at heavy political cost, but not an ultranationalist like Erdogan. China, however, has the financial capacity to extend sizable loans to countries that hold strategic value, as can be seen in Beijing's extraordinary financial patience with Venezuela and the imminent likelihood of it — instead of the IMF — extending a $10 billion loan to Pakistan. Similarly, China may see a strategic interest in building ties to a state, such as Turkey, that has critical connections to the Belt and Road Initiative, that is pivotal to both United States and Russian foreign policy, and whose cooperation Beijing needs to limit state backing for Turkic militants operating in Syria and in China's own Uighur borderland. Beyond China, Turkey may also look to the Gulf powers of Qatar and Kuwait for assistance.

Turkey's political defiance in the face of textbook economic challenges will never cease to shock and awe financial investors expecting countries to pursue the maximum economic benefit. But Turkey's economy cannot be understood in a vacuum. Erdogan is merely the contemporary lead in a centuries-old tale of geopolitical intrigue. Protecting a political dynasty in the throes of East-West competition requires a different playbook altogether.

Connected Content

Regions & Countries

Article Search

Copyright © Stratfor Enterprises, LLC. All rights reserved.

Stratfor Worldview


To empower members to confidently understand and navigate a continuously changing and complex global environment.