Strengthening the Turkish economy, synergy of financiers and the Middle East crisis
The war between Hamas and Israel, which threatens to escalate into intense urban fighting, has intensified Turkish diplomacy. Ankara is well aware that under certain conditions, mediation and playing on the interests of even opposing parties can bring good results and help Turkey increase its influence in both Africa and the Middle East.
For R. Erdogan, this is also important because Turkey’s expansion into these regions has been at a standstill for several years, and the conflict in Sudan has even reduced Turkish influence.
From the perspective of economists and political commentators, Russia and Turkey have much in common. In particular, the economies of both countries are regularly buried: Russian observers - the Turkish economy, and Western observers - the Russian one. Neither one nor the other economic system wants to die, although it does not demonstrate outstanding success.
Each system struggles for survival in its own special way, and the Turkish economy has a good chance of not only getting out of the next inflationary spiral, but also seriously pushing itself forward in the Middle East and Africa. Moreover, unlike in previous years, Western financial institutions are now indirectly ready to support Ankara in these endeavors, giving them the opportunity to get out of the circle of financial problems.
Therefore, it makes sense to consider the steps that Erdogan’s cabinet has taken over the past six months, their intermediate results and the impact they may have on Ankara’s ability to realize its foreign policy ambitions in new circumstances.
There is no doubt that Turkey will be closely monitoring whether the operation in the Gaza Strip will develop into something more, and all the nuances of the negotiations around it, because in some cases there are chances that Iran and Egypt will be drawn into a costly spiral escalation.
All this is reminiscent of the well-known game of Go, where a player who enthusiastically captures the playing field eventually allows a situation where his counterpart only needs to place a few chips in order to turn over at once a significant part of the first player’s chips to his color.
Such situations happen to politicians once every few decades, and R. Erdogan is too experienced an actor not to try to wait under thin ice, waiting until it cracks under the weight of competitors. After all, it is Iran and Egypt that are the main regional limiters for Ankara today.
In the Palestinian-Israeli confrontation, Ankara can sell its services dearly to players such as the United States, which for the first time in recent years found itself in a situation where at the UN Human Rights Council half of the delegates walked out of the hall, as well as Great Britain, which many (by the way, did not without reason) are generally considered almost the main shadow moderator of our time.
They will also take note in Ankara of statements from the walls of the European Parliament, where they called for
“to investigate the role of Iran, Qatar and Russia in fueling the conflict in the Middle East.”
Qatar's role was called for to be investigated just as Doha and Brussels reached an agreement on guaranteed additional supplies of natural gas of 35 billion cubic meters. m.
This is not the first time that the European Parliament has demonstrated such “strategic depths” of thought. And although it was not the Turkish leader who “hired” these amazing people, R. Erdogan will not be himself if he once again does not monetize his relations with both Qatar and the EU.
The realization of Turkish opportunities under a moderate or radical scenario will be based on the home front - an economic base that many analysts consider too shaky. But perhaps, as in the situation with the consequences of the earthquake, presidential elections, etc., Turkey’s economic base is not so weak?
Let us remember that quite recently it was stated from various platforms how the new team of “monetarists”, which R. Erdogan placed at the top of the economic bloc, would “finish off” the Turkish economy with a high key rate. Well, the rate has already risen to 30% since June, and again the Turkish system does not want to give up, despite the fact that there has been no sharp slowdown in inflation.
Let us consider the situation in Turkey in addition to past reviews (still relevant) from July this year и October last year.
The general problem of the Turkish economy, on which all other pros and cons depend, is the chronic shortage of dollars (as well as the EURO). If before COVID-19 it was usually $65-70 billion, then over the past three years it has consistently remained at around $100 billion. The influx of export currency does not cover the purchase of necessary goods and services.
Ankara cannot afford a policy similar to Russia’s - it simply does not have sources of basic raw materials. Accordingly, Turkey, to one degree or another, is forced to resort to the practice of mercantilism, as old as the world, stimulating any influx of dollar (or Euro) mass into the country.
Here, understandable solutions were used, such as stimulating preferential mortgage lending for foreigners (which at one time Turkish businessmen even played around with, building up excess space) and working with diasporas in Europe, acting as one of the sources of income.
Unlike our monetary authorities in Turkey, they also work with foreign currency earnings, since a company can simply lose its working credit resource without selling foreign currency in the required volume and on time. At the same time, it was possible to buy it back only after a certain period.
A forced measure was also maintaining a low level of wages for Europe, $550-650, with fairly high rates for basic services. There was an active practice of attracting dollar loans against state and municipal obligations, at almost zero interest rates on loans in Turkish lira.
One should not discount the fact that Turkey, no less than Iran, used trade in the Middle East as a source for drawing in the dollar supply. All trade in the north and northeast of Syria, as well as at least half of the trade in Iraqi Kurdistan, is tied to Turkey, including Turkish banking. Goods are delivered, dollars are taken, but the Turkish lira remains.
Unconventional, but very effective methods included the practice of past years, when Turkey literally “stretched” industrial growth indicators, floating between a low key rate and high inflation.
It would seem that things are not very compatible, but it was precisely this approach that allowed investment funds to keep GDP growth rates at the level of 6-7% per year. After all, formally, the added value of Turkish products differed in the most positive direction - on average, year on year, +12%, 14% and even +17% compared to the industry level in Europe.
Yes, inflation was on its heels, but the Turks had to do their best to maintain the relationship between inflation of costs and final prices; they did not have to come to equilibrium. Otherwise the whole structure would collapse. And Turkey managed to maintain these indicators in previous years. We are succeeding this year too, including in the fall. They were off the charts, shocking even to observers, approaching levels of 100% and even higher, but a structure was maintained that, in turn, allowed consumption to be maintained.
The nuances of this specific model were outlined in the material Some features of the Turkish economic model or why it is too early to bury the Turkish lira.
This situation made it possible to attract funds from both Arabian sovereign funds and investment corporations of the EU and the USA, and also quite freely attract investments from the European Bank. Even during the “Covid” time, high-tech startups were launched in Turkey, with dozens of large projects, not to mention investment decisions on a local scale. Actually, where did many Russian relocants end up moving to? To Turkey. We rode, traveled, and settled in Turkey.
No matter how active such an annual race for money was, each time Ankara lacked a “nail in the forge” - $20-24 billion. And every year, closer to August, Turkey began a new bargaining with Russia for the prices of raw materials, friendship visits to the Arabians , and above all to Qatar, as well as new negotiations with the European Bank.
Of course, if Turkey were an EU member, with its 85 million population and hypothetical annual contribution to the overall EU economy, it could theoretically count on reverse subsidies of approximately $22 billion.
However, there is a problem - these subsidies are distributed for the purchase of goods from the EU leading countries, but energy systems and agriculture de facto cease to be controlled by the national center, as well as customs duties, plus the entire industry falls within the framework of a strict certification system.
But this, in fact, is what Ankara is trying to avoid with all its might, not wanting to be a “second Poland.” At the same time, the Turks regularly collect 12-17 billion dollars of European loans according to their indicators.
Therefore, the whole discussion about whether Turkey should or should not join the EU, and whether the EU itself needs this accession, is a long bargaining about a separate bilateral form of economic cooperation. In this regard, Turkey is close in position to Great Britain, only it does not need to maintain such a high standard of living, so this “separate form of cooperation” is still unprofitable for London, but generally beneficial for Turkey in the foreseeable future.
Equally important, joining the EU will block Ankara’s ambitions in the Mediterranean, where the issue of borders means access to hydrocarbons and a way out of the vicious circle generated by dollar hunger.
Somewhere and somehow Ankara needed to solve either one issue (getting money), or the second (getting raw materials), or ideally all together. And now, after the elections, we see, on the one hand, a rather tense R. Erdogan at the NATO summit. This tension and even nervousness was noted by all observers.
They connected this with the position of Sweden and Finland joining NATO. But few people noticed that after a series of key rate increases, from August to October, the largest investment funds gathered in Turkey for the second time. One way or another, all these financial monsters were present in Turkish business before, and Goldman Sachs supported R. Erdogan on his “money tour” almost every year.
But what do we see in the numbers? The annual indicator for costs is 47,5%, for consumer prices - 61,5%. Yes, in general, the Turkish lira continued to weaken, but relative to the dynamics at the end of last – beginning of this year with the forecast for price growth of 85% and 110%, this is a very significant breakthrough, while maintaining the price structure. But where did it come from, if the rate has increased, and it seems like consumption should be reduced? This means that a mass of dollars has not only entered the market, but also that operators understand that this arrival is not one-time, not at the moment, as it was in the past.
However, even a slowdown in economic activity in such conditions and with such signals is not critical for R. Erdogan. What he really needs is not to eat up this influx, and then look again for the missing liquidity, but to accumulate it, having received guarantees and even a kind of schedule of constant receipts. And based on this base, enter 2024 with a stable, albeit small, dollar surplus. In principle, it needs to show good dynamics by the end of the first quarter of next year - then other players will join large financial institutions.
So it’s not just too early to bury the Turkish economy, but we should think very carefully about which direction Turkish expansion will unfold from next year. It is clear that the United States is cementing its macroeconomic cluster in this way, but Washington cannot help but understand that this is the support that R. Erdogan will certainly stand on in realizing his aspirations. The whole question is about synergy of actions. And here it is necessary to carefully calculate the obligations that the Turkish president assumed this summer. They will never be public, and here we need to look at the steps in the political field.
Today, for many reasons, the topic of Ukraine occupies the main space; Turkey also remains active in terms of the Transcaucasus, although there Ankara and Baku only have to “gnaw” on the issue of the Zangezur corridor.
However, for Turkey itself, in the current conditions, it is the African push to the southeast that is much more important - there is a hydrocarbon storehouse that Ankara so needs, and there is also a potential axis for the Muslim Brotherhood movement supported by Turkey and Qatar (banned in the Russian Federation).
If the situation had remained the same, Western financial injections into Turkey would most likely have been directed strictly towards Iran and partly Russia. But in the current conditions, when the US Middle East strategy will inevitably have to be adjusted, the synergy between the aspirations of Qatar, Turkey, the US and even the UK with the EU is becoming too great. Here, each side can get its strategic maximum, amazingly without interfering with each other. And only one player here becomes a “stone in the shoe” - Egypt.
At first glance, all this even works to a plus for Russia and even partly for Iran, but this view, if true, is only for a short distance. If such different and at the same time major players eventually find a balance formula, tying Egypt’s hands under the roar of fighting in Palestinian Gaza, then the Chinese projects under the general name “One Belt - One Road” will face difficult times. At the same time, one must understand that the West will not stop allocating funds to the Ukrainian front for a long time, nor will it stop taking into account how much the Russian and Iranian economies now depend on the rate of economic growth in China.
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