Turkey is Getting off the U.S. Reservation
Jul. 30, 2018
This year’s BRICS Summit was a big show. No question. The main event was provided by Turkish President cum Dictator Recep Tayyip Erdogan.
Erdogan wants to a a “T” to the acronym, making them the BRICTS.
Erdogan also made it very clear Turkey’s shift away from the West will proceed faster if the bullying and marginalization continue. For months now, Turkey has struggled with a crashing Lira and sovereign bond market.
The poster child for the unfolding sovereign debt crisis.
The Trump Administration knows that Turkey is slipping from its grasp. Do you ever wonder why certain countries’ currencies get trashed when others with worse balance sheets or balance of trade don’t?
You should. Because asking that simple question will lead you to asking “Why X? Why Now?”
And in Turkey’s case it is for many reasons:
- Turkey was key in assisting Iran resist pre-JCPOA sanctions by laundering Iranian oil sales in physical gold through Turkish banks.
- Turkey is highly dependent on foreign energy imports and is one of Iran’s largest customers.
- To alleviate this foreign-energy dependence Turkey, through Russia, are building nuclear power plants and the Turkish Stream pipeline.
- Turkish Stream will provide Russian Gas from Gazprom at an effective discount since most of its capacity is targeted for European destinations and Turkey will likely get transit fees for that gas offsetting some of the costs of the gas they buy from Gazprom.
- Turkey refuses to comply with Trump’s edict to not buy Iranian oil in November.
- Turkey is buying S-400 missile defense systems from Russia
- The U.S. blocked the sale of F-35s to Turkey as a retaliatory measure. Given the F-35’s cost/benefit ratio, I’d say Turkey wins on that front as well.
- Turkey’s occupation of Northern Syria was a blocking move to keep the U.S. from moving West to Afrin and uniting the Kurdish cantons.
I could go on, you get the point.
BRICTS of Trade
In the bigger picture, Turkey is still most important because of its geography. It’s really the only reason anyone puts up with Erdogan’s shiftiness in the first place.
But, Erdogan’s pushing for admittance into the BRICS is about far more than symbolism. it’s about access to development capital through their parallel institutions to the ones controlled by the U.S. — The IMF, The World Bank, Asian Development Bank, Ex-Im banks, etc.
To assist Turkey in its fight to stand firm on U.S. hybrid war tactics, accession into the BRICS gives them access to more sources of Chinese capital. China and Russia were, to no one’s surprise, receptive to the idea.
As I pointed out in an earlier post, China and Russia account for nearly 20% of Turkish imports, with Iran and India making up another 6.4%, larger than the U.S.’s contribution.
Increasing Turkey’s exports to the other BRICS countries should be the priority. But, since net capital inflow into Turkey is and will remain positive, thanks to a much weaker Lira, the slow removal of dollar dependency can commence, thanks to its currency swap arrangements with Russia and China.
Also, don’t discount the large trade turnover between Turkey and Germany, another source of foreign currency and capital.
Watch the Currency
The Bank of Turkey’s response to the lira crisis has been the right one, to buy up dollar-denominated corporate paper and remove liquidity bottlenecks from the banking system. Those liabilities can then be retired over time while freeing the companies to realign their businesses away from the U.S. dollar.
This is Turkey’s Achilles’ heel, it’s large dollar-based corporates liabilities. And those liabilities could explode if Trump escalates the financial and diplomatic war against Turkey.
That’s what the market has been responding to.
Since Turkey has currency swap agreements in place with China any excess buildup of local currency can be mitigated. The next steps here would be for Turkey to sign one with Russia and/or India.
I’m not saying things won’t be difficult for Turkey. They are now.
I’m saying there’s a path out of this problem, just like there was for Russia in late 2014/15. And in some ways just like there is for China’s huge corporate debt problem.
The headlines keep pushing for a further collapse of the Lira and its weakening may not be over. But, Triple Tops like we see here are usually reversal signals, because it says that the sellers (in this case) are lacking conviction to overwhelm the mix of market intervention by the central bank and speculative bulls.
The point of Trump’s full-court pressure campaign is to keep everyone, especially China, fighting more little fires than it can safely put out. That’s the key to understanding his Art of the Deal foreign policy.
The problem with this approach is that if you don’t get capitulation, you get nothing in the end. Because leverage is essentially a bluff. Turkey has friends, just like Iran does and just like Russia did.