Erdogan’s westward tilt will not save his economy

Ceyda Karan, The Cradle, July 27, 2023 —

Quite impossibly, the chameleonic Turkish leader is in a rush to ingratiate himself to western and Gulf leaders in hopes of slowing down the lira’s downfall while also trying not to alienate his relationship with the Kremlin.

Ever the political maestro, Turkiye’s President Recep Tayyip Erdogan has once again demonstrated his adeptness at adjusting his course. Following his resounding victory in the country’s May elections, he wasted no time in solidifying the authority gained from a strengthened political mandate, and launched a whirlwind west/Persian Gulf charm offensive to bolster Turkiye’s soft power and economy.

Erdogan, renowned for his unpredictability in both foreign and domestic policy, faced economic turmoil two years ago when his controversial low-interest-rate approach triggered a currency boom, resulting in a massive devaluation of the Turkish lira.

Despite critics warning of the dangers of this strategy, Erdogan stood firm, asserting his expertise as an “economist.” However, unofficial inflation soared to a staggering 160 percent, prompting urgent action.

Return to rational policies

Before the country’s devastating 6 February earthquake, Turkiye’s alarming foreign debt, artificial exchange rate control, and wasteful electoral policies had already raised significant concerns. But upon his electoral victory, Erdogan made a pivotal move by appointing Mehmet Simsek, known for his close ties to western and Persian Gulf capital, to head the Ministry of Treasury and Finance. This marked a significant shift back to “rational policies.”

Simsek’s first salvo was to raise the policy rate from 8 to 15 percent in June and then to 17.5 percent in July, in violation of the Islamic “nas” principle. But it does not seem to have helped the depreciation of the Turkish lira.

Today, the primary problem for the Turkish people is high inflation. Official figures cited inflation at 4 percent month-on-month and 38.2 percent year-on-year in June, but independent economists suggested the real rate could be as high as 108 percent.

With mounting economic pressures, Erdogan implemented raises for pensioners and the working classes, but its impact was swiftly eroded by subsequent price hikes. Experts warn that even more substantial increases loom, heightening concerns of hyperinflation, especially after the upcoming local elections slated for March 2024.

As the cost of living continues to soar, Turkiye is witnessing striking disparities: Once affordable car brands have increased between 276-440 percent over the past two years, while wealthy contractors evade tax and loan debts. Taxi drivers are shutting down, and small-scale strikes are being organized by workers, highlighting the mounting economic strains felt across the country.

Even within Erdogan’s support base, dissent is rising. Prominent figures who once pledged unwavering loyalty are now taking to the streets to protest against the cost of living hikes.

Relations with NATO 

Erdogan, who had been trying to maintain Ankara’s neutrality in the Ukraine crisis, had not neglected arms sales to Kiev, while making a premium on its Grain Corridor deal with Moscow. On 7 July, three days before the NATO summit, Erdogan hosted President Volodymyr Zelensky in a two and a half hour meeting.

At their joint press conference, the Turkish president said “Ukraine deserves NATO membership” for which he won Zelensky’s appreciation. An agreement was signed with Kiev for the production of Turkiye’s famous Bayraktar drones in Ukraine. And in violation of last year’s agreement with Russia, the commanders of the neo-Nazi Azov battalion captured in Maruipol in May 2022 were released and allowed to return with Zelensky.

Then, on 10 July, at the NATO Summit in Vilnius, Erdogan lifted his veto on Sweden, after having vehemently opposed it for months. Amid much applause, it was announced that the accession protocol would be presented to the Turkish parliament.

From Moscow’s point of view, the approval given to Sweden – already a de facto NATO member -or the Bayraktar drone production deal with Kiev – already a matter of mild contempt – or the possible military installations that will be hit anyway, make no difference. But it is clear that the strong rhetoric about Ukraine’s “NATO membership” and the dispatch of the Azov members have caused great discomfort in Russia.

Soon after, the Turkish Grain Agreement with Moscow was terminated on 18 July, against Erdogan’s wishes and against Turkiye’s efforts to keep it in play. Russian President Vladimir Putin did not even mention Erdogan’s name when announcing the end of the deal. For 15 days, Erdogan has continued to insist that he plans to speak to Putin via phone and host him in August, despite receiving no response from the Kremlin.

Erdogan now faces a bill for billions of dollars of natural gas that Moscow postponed before the elections. This is why the fate of BOTAS, the state energy company in Turkiye’s sovereign wealth fund, is a matter of concern.

Political analyst Aydin Sezer, an expert on Russia, points to the “distrust” Erdogan has created in Moscow, but believes that the situation will be balanced by Ankara’s “expectation of understanding.”

Sezer informs The Cradle that “There is some discomfort, but it seems to be Putin’s classic resentment,” Sezer said, emphasizing that Erdogan’s job will not be easy with the deferred natural gas debts.”

Offering Sweden NATO for EU membership 

Since the Madrid summit in 2022, Erdogan has been negotiating with the west over Sweden and Finland’s NATO membership and the expansion of the alliance, and approved Finland’s bid to join last April.

But until the NATO Summit, he held firm on his demands that Sweden must extradite Kurdistan Workers’ Party (PKK) suspects, halt its “support for terrorism,” lift of defense industry sanctions imposed over the Turkish army’s operations in Syria, and stop Quran burnings in Sweden.

Then during his journey to Vilnius on 10 July, Erdogan made a surprising announcement, proposing to revive Turkiye’s EU process in exchange for Sweden’s NATO membership. While Turkiye’s aspiration for EU membership had been reinforced after the elections, this was initially perceived as Erdogan’s routine rhetoric for domestic audiences, and the condition tied to Sweden’s approval was not given serious consideration in the west. Nonetheless, the NATO joint statement reiterated support for Turkiye’s EU membership, updating the customs union agreement, and visa liberalization.

Erdogan is well aware that Turkiye’s EU membership is unlikely to materialize. Visa liberalization remains a distant dream due to the 2016 agreement that turned Turkiye into a buffer zone for refugees heading to Europe. In the context of Sweden’s NATO approval, the one likely tangible development is the lifting of restrictions on the Turkish defense industry by European countries.

Erdogan’s western realignment 

What’s new on the geopolitical scene is the reaffirmation of Ankara’s steadfast position within the Atlanticist bloc, after years of flirting with Washington’s Eurasian adversaries. In his meeting with US President Joe Biden, Erdogan highlighted the issue of “unwavering US support for Turkiye’s EU membership.” Even German Foreign Minister Baerbock acknowledged Turkiye’s significance as a “global strategic actor,” despite excluding it from EU membership considerations.

The Biden-Erdogan meeting became a contest of promises. As a consequence of Turkiye’s purchase of S-400s from Russia, Ankara was ejected from the western F-35 production program in 2019, causing setbacks and financial losses in the Turkish defense industry.

Consequently, although Turkiye has paid for 40 new F-16s and modernization kits for 79 of these, the aircraft and parts were never delivered. But at the NATO summit, Biden pledged to support the F-16s process. While the US Congress imposes restrictions on the use of these planes against allies such as Greece in the Aegean or Kurdish separatists in Syria, Biden has indicated his willingness to tackle those obstacles. Thus, the equation stands as fighter jets that have already been paid for and not yet received – in exchange for Ankara’s approval for Sweden’s NATO bid.

Sezer says Erdogan has once again succeeded in manipulating the west with his pragmatism. Sezer tells The Cradle that by giving a “yellow light” for Sweden’s NATO membership, “it is as if he said yes without saying yes,” and on the other hand, Erdogan’s meeting with Biden will be an incentive for the US financial establishment to reestablish its Turkiye business interests.

According to Dr. Fatih Yasli from Abant Izzet Baysal University, the Erdogan’s main goal is to re-establish Turkiye’s relations with the west on a new level. As he explains to The Cradle:

“Turkiye’s economy has reached the point of bankruptcy as a result of the low interest rate-high exchange rate policies it has pursued in the last two years. There is no money left in the Central Bank reserves. Turkiye is facing a balance of payments crisis…Erdogan has no choice but to turn his face to the west and reopen the country to capital flows from the west.”

Money talks 

It is unclear whether or how much these maneuvers will solve Erdogan’s short-term resource problem. Therefore, his latest and most striking move came with his Persian Gulf tour. Before traveling to Saudi Arabia, Qatar, and the UAE on 17-19 July, he sent his Finance Minister Simsek to oil the path.

Turkiye’s neo-Ottomanist foreign policy’s bankruptcy is widely recognized in West Asia and beyond. Relations with Abu Dhabi and Saudi Crown Prince Mohammed bin Salman have been repaired in the past two years, despite past tensions over issues like the 15 July coup attempt and Jamal Khashoggi’s murder at the Saudi consulate in Istanbul.

During his Persian Gulf tour, Erdogan emphasized Ankara’s commitment to its military presence in northern Syria, but discussions on this matter did not take place. In Jeddah, agreements were signed in various sectors, including a significant deal for the export and cooperation of the Akinci unmanned aerial vehicle.

In Abu Dhabi, deals worth $50.7 billion were announced, sparking a great deal of interest. While the dollar values promised are seen as positive for the Turkish economy, there are doubts about the immediate realization of the investments based on previous pledges that never materialized.

So although Erdogan’s Persian Gulf tour marked a significant effort to strengthen Turkiye’s financial and political ties with regional players, many observers believe that Erdogan’s options may be limited after the 2024 local elections, when he may be compelled to seek financial assistance from restrictive western-led institutions, curtailing Ankara’s full potential in an eastern pivot towards the Eurasianist camp.

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