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Turkey's Fragile Economy Faces a Blowback

11 MINS READOct 9, 2019 | 22:34 GMT
Turkish Treasury and Finance Minister Berat Albayrak speaks during the launch of Turkey's New Economic Program for 2020-2022 in Ankara on Sept. 30, 2019.
(EVRIM AYDIN/Anadolu Agency via Getty Images)

Turkish Treasury and Finance Minister Berat Albayrak speaks during the launch of Turkey's new economic program for 2020-2022 in Ankara on Sept. 30, 2019. Turkey believes it's ready to cope with the economic consequences of its invasion of northeastern Syria.

Editor's Note: Since 2018, Turkey's economy has been fragile, suffering from high inflation, a tanking currency and rising levels of debt. And with some congressional leaders in the United States threatening to hurt Turkey's economy in response to its invasion of northeastern Syria, we're revisiting some of our past pieces that lay bare the plight of the Turkish economy — and what might happen if Washington turns the screws on Ankara.

For Turkey's economy, the day of reckoning may be near. The White House and U.S. Congress may disagree on Turkey more than ever, yet both the president and a top Republican senator alike have been bellicose in their economic threats to Ankara in recent days, pledging, respectively, "to destroy and obliterate the economy of Turkey" and impose "sanctions from hell" on the country over its invasion of northeastern Syria. After plumbing the depths in summer 2018, Turkey's economy has stabilized somewhat, possibly convincing Ankara that it is prepared to handle whatever comes next. Nevertheless, Turkey's invasion will put its economy at risk amid the threat of U.S. sanctions — and potentially drive even the European Union to take an economic shot at Ankara itself. All told, Turkey's new venture into Syria against the Kurds means the country is facing a potentially long period of economic pain. 

The Current Situation

Turkey's economy remains fragile. In mid-August 2018, the Turkish lira fell as far as 6.95 to the U.S. dollar, but it has since stabilized. In fact, after Ankara launched its offensive into northeastern Syria on the afternoon of Oct. 9, the lira had only dropped slightly to around 5.87 to the dollar. Other aspects of the economy that were especially weak in summer 2018, including inflation, have improved slightly. But even if the lira is stronger than it was 14 months ago, Turkey's economy remains fragile enough that an external shock, such as U.S. sanctions, could severely damage it, sending the country's currency spiraling downward once more.

The divide between the U.S. Congress and the White House over Turkey is deepening. Some members of Congress seem more determined than ever to punish Turkey for its actions in Syria, expressing deep anger at how the White House has ignored their concerns. This means the likelihood of punitive sanctions or penalties from Congress is high. U.S. Sens. Lindsey Graham and Chris Van Hollen have drafted a bipartisan bill that includes sanctions ranging from limits on arms sales and military assistance to Turkey to specific targeted sanctions on individuals, including Turkish President Recep Tayyip Erdogan, and economic sectors, including the Turkish energy sector. If the bill were to pass (which is not a given, let alone with a veto-proof majority), President Donald Trump will have to certify to Congress every 90 days that Turkey is "not operating unilaterally in Syria." This sets up a sharp divide between Trump, who is scheduled to host Erdogan in the White House on Nov. 13, and congressional leaders who want to sanction the Turkish president.

As it has done previously, Turkey is displaying its willingness to risk incurring sanctions in pursuit of national security objectives. In response to the delivery of a Russian S-400 missile defense system to Turkey, the U.S. Congress sought to use the Countering America’s Adversaries Through Sanctions Act (CAATSA) to punish Ankara. However, Trump has so far refused to implement any such sanctions, and there is no legal mechanism stipulating when he must do so. Last month, U.S. Treasury Secretary Steven Mnuchin said the United States was still considering CAATSA penalties, but the executive branch is clearly in no rush to financially penalize Turkey. This has likely bolstered Ankara's confidence that it can move forward with a military operation in Syria without facing economic penalties.

The European Union could pursue action independent of the United States that could financially damage Turkey. In response to the Turkish incursion into Syria, France and the United Kingdom are calling for a U.N. Security Council meeting. Although any potential U.N. sanctions or action is unlikely to be powerful enough to dissuade Turkey from pursuing its objectives in Syria, Turkey could face punitive EU measures that include a halt to cooperation agreements between Brussels and Ankara, as well as an end to accession funds. Indeed, the European Union already approved a sanctions package against Turkey in July over the country's ongoing drilling operations in Cypriot waters.

Turkey's new venture into Syria against the Kurds means the country is facing a potentially long period of economic pain.

Trump Targets Turkey With Tariffs

Last summer, Trump first took aim at the Turkish economy with a series of tariffs in response to trade spats — as well as Ankara's intentions in Syria and its increasing coziness with Russia.

Turkey's Economy Takes a Tumble. What's Next?

Aug. 10, 2018: The United States and Turkey are already at loggerheads over trade, defense deals, the future of the U.S. mission in Syria and Ankara's warming ties with Russia. On the morning of Aug. 10, U.S. President Donald Trump intensified these divisions by tweeting that he had authorized a doubling of tariffs on Turkey's steel and aluminum, rising to 20 percent on aluminum and 50 percent on steel. Erdogan's nationalist campaign and Trump's "America First" policy clash perfectly. Trump's public announcement of tariffs will only fan Erdogan's economic warfare narrative, which puts the source of Turkey's economic woes outside its borders. Furthermore, consternation in the U.S. Congress has led to a nascent bill that could limit Turkey's ability to obtain loans from any U.S.-based financial institutions.

A Missile System Comes Between Erstwhile Allies

Before the U.S. threat to sanction Turkey over its offensive in northeastern Syria, it had threatened to take aim at the country's defense industry and the wider economy for choosing Russia's S-400 missile defense system.

A Game of Turkish Brinksmanship on Missile Defense

June 27, 2019: Whether by employing the provisions of the Countering America's Adversaries Through Sanctions Act (CAATSA) or ending Turkey's involvement in the high-tech F-35 stealth fighter program, the U.S. could invoke retaliatory options that would hurt Turkey's economy. … But while Turkey is well aware of the economic consequences of its choice, domestic political considerations are propelling Ankara to override economics and choose the Russian system. But the fragile state of Turkey's economy does pose the question of whether such political brinkmanship is worth it for Ankara. The country's economy dipped into a recession during the last quarter of 2018, while growth also slowed in the second half of last year. During this time, Turkey has earned more revenue from exports — but only because the lira is so weak that the country's goods are much cheaper. Over the next year, the Turkish private sector must pay back close to $140 billion in debt, while domestic consumption has slowed. But the five-year gap until the next scheduled elections in 2023 also forms part of Ankara's calculations regarding economic risk, as Erdogan believes he has time to stabilize the economy — even if the United States imposes sanctions that cause foreign investors to flee or further depress the lira's value.

This graph shows the bonds that Turkey must repay this year.

Rising Inflation and a Falling Lira

Even without the threat of U.S. sanctions, Turkey's economy is staring at difficulties that stem particularly from the massive amounts of corporate debt that its companies possess, as well as its skyrocketing inflation and poorly performing currency.

Counting the Costs of Potential U.S. Action Against Turkey

Feb. 4, 2019: The United States is in a position to hurt Turkey's economy in part because of the latter's economic fragility. Turkish corporations are saddled with a high amount of debt, totaling about $200 billion that they must pay back in 2019. What's more, most of this debt is denominated in dollars and euros, meaning companies will struggle to pay it back if the lira remains weak. But debt isn't the only specter haunting Turkey: The country is also suffering from high inflation, decreased consumption and a lack of investor confidence stemming in part from perceptions that the country lacks the rule of law. 

[The arrest of U.S. evangelical pastor Andrew Brunson] demonstrated that the United States' ultimate economic weapon against Turkey is sentiment. Such a tool may be indirect, but Trump proved that caustic rhetoric and the imposition of even limited sanctions can depreciate the lira, rapidly damaging investor confidence and inciting consumer panic that the currency would tumble again, thereby compounding the existing consumption slowdown. Indeed, when the lira plunged last summer, Turks began to lose confidence in the economy, causing them to spend less and convert their liras into dollars or other currencies — in spite of official calls to the contrary — causing the lira to plummet even further.

This graph charts the fall in the Turkish lira in recent years.

An Economic Plan Without Much Support

Last year, in an effort to put the economy back on track, Erdogan tapped his son-in-law — the country's finance minister — to draft a plan. Berat Albayrak's three-year plan, however, has yet to find a ringing endorsement from international investors.

As Turkey Enters 2019, Its Economic Woes Are Never Far Away

Nov. 28, 2018: No matter how intense the economic headwinds become, Turkey's government will refuse to budge on certain issues, which will detract from its ability to deftly manage the fragile economy. With Erdogan now wielding enormous control over all aspects of governance — including issues such as the economy that are not necessarily his area of expertise — the country's economic management strategy has failed to inspire much confidence in external investors. Ankara has outlined a three-year, medium-term economic plan to trim spending, tackle inflation and shore up the lira and consumer sentiment, but its economic team has yet to delve into the onerous task of implementing the promised structural changes. What's more, pledges to cut down on spending contradict Erdogan's preferred strategy of spending to spur growth, to say nothing of the challenge the central bank faces in trying to combat inflation given his past interference. And the economic team is led by Erdogan's son-in-law, the finance and economy minister, underlining the close and opaque ties that bind the president to his financial management squad.

This graph shows Turkey's recent inflation trend.

But regardless of how fragile its economy becomes, Ankara will continue to pursue certain political aims. In pursuing its primary national security goal — namely, to prevent the development of a Kurdish state in the broader Middle East, since Turkey believes that would fuel demands for Kurdish autonomy at home and threaten the country's territorial integrity — Turkey will retain its forces in northern Iraq and northwestern Syria, even if that is likely to tax the country's coffers or irk its regional and Western allies.

Facing Economic Woes, Ankara Plays the Nationalist Card

Time and time again, Erdogan has sought to shore up his administration in the face of economic worries by appealing to a majority of citizens' shared sense of nationalism — as well as the century-old fear that enemies at home and abroad are planning to take down the republic.

The AKP's Thirst for Power Risks Leaving Turkey High and Dry

June 11, 2019: Getting the Turkish economy up and running again will likely require a period of painful structural reforms and austerity measures — not quick-fix solutions. A more secure electoral position would give the government more leeway to embark on such sweeping reforms. But facing the potential loss of the Istanbul mayoral position come June 23, the AKP [ruling Justice and Development Party] knows it has to weather the political blowback of pursuing unpopular measures such an overhaul would entail. Thus, the AKP will instead opt to zero in on its tried-and-true playbook of nationalist policies in the coming months, as it grasps to retain what power it has left to stave off electoral challenges in 2023. Yet this short-term strategy will ultimately be short-sighted by creating even worse conditions for the economy, and more problems for the government to fix.

In this photo, Haki Pacha signs the Treaty of Sevres on behalf of the Ottoman Empire on Aug. 23, 1920.
Haki Pacha signs the Treaty of Sevres on behalf of the Ottoman Empire on Aug. 23, 1920. The treaty, which would have dismembered much of what is now the Republic of Turkey if not for Turkey's War of Independence against European powers, remains a byword for Turkish nationalists' fears that outside powers are planning to carve up their country.
(BETTMANN/Getty Images)

Making Sense of Turkey's Economic Crisis

Aug. 16, 2018: 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 it's 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.

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