June 11

By Alex Trainen

In connection with conducting of a special military operation in Ukraine, the Ukrainian authorities turned to Turkey with a request to close the Dardanelles for Russian ships. Turkey, on the basis of the Montreux Convention, closed the passage through the Bosphorus and the Dardanelles for warships of both Russia and Ukraine, thus recognizing them as parties to the military conflict. The Convention stipulates that in times of war, when Turkey is not a belligerent, warships of the belligerents may not pass through the straits, with one exception – only to return to their main anchorage ports.

Despite pressure from NATO allies, Turkey does not join the sanctions against Russia, once again demonstrating the independence of its foreign policy. Russian merchant ships pass through the straits without hindrance. Breaking economic relations with Russia is not beneficial for Turkey. Russian-Turkish cooperation is characterized by a long-term high level of interaction and a significant volume of mutual trade. Russian gas, iron and steel products, copper are Turkey’s main imports from Russia.

Russian tourists provide a significant share of the income of the tourism industry in Turkey. Our countries have developed close and promising trade, economic, industrial, scientific, technical, cultural and humanitarian ties. Last year, Russia supplied Turkey with 13 million tons of agricultural products worth $4.3 billion. Turkey overtook China and came out on top in terms of Russian food imports with a share of 12%.

Against the backdrop of last summer’s drought, the country has significantly increased purchases of almost all its traditional crops – barley, peas, bran. And in order to increase the consumption of Russian wheat for flour production, which is currently hindered by export restrictions (in the form of quotas and duties), Turkish investors are considering the possibility of building flour mills in Russia.

The head of the Union of Turkish Exporters Gülle noted that no problems with the supply of goods are expected in exports to Russia, however, due to the disconnection of banks from the SWIFT system, there may be interruptions in payment. Therefore, the national banks of Russia and Turkey should create a common system for trading in national currencies.
All this is happening against the backdrop of a rather severe economic crisis in Turkey. The national currency, the lira, has been falling since 2017. The crisis in the Turkish economy caused a significant decline in the popularity of President Recep Tayyip Erdogan and the Justice and Development Party, which failed to win the 2019 local elections in the country’s most important cities, including Istanbul and Ankara.

Erdogan’s foreign and domestic policy has seriously affected the economic situation in the country. In particular, in 2018, US Ex-President Donald Trump doubled duties on aluminum and steel from Turkey, mainly for political reasons: due to Turkish military adventures in Syria, as well as the persecution of dissidents in the country. After that, the lira broke through its next minimum.

Erdogan ignored concerns that foreign companies investing in Turkey could be deterred by political instability in the country. Investment inflows have also dwindled as Erdogan’s growing authoritarianism has stifled the free and factual reporting of financial analysts in Turkey. Investment inflows were declining even before the crisis due to the fact that Erdogan provoked political disagreements with the countries that were the main sources of investment. After the 2016 coup attempt, the government confiscated the assets of those, as it claimed, who were involved in the coup, even if their links to the coup were not obvious.

Yet the key obstacle to macro-financial stabilization is Erdogan’s intervention in monetary policy. Erdogan’s commitment to a policy of low rates (at a time when a different policy is required) and his meddling in the affairs of the central bank do not go unnoticed. In 2021, both the number of foreign tourists and exports grew in Turkey. Economic factors were favorable, but the lira collapsed anyway. The actions of the president, who took the monetary authority under personal control, could not but have consequences.

For now, analysts at leading investment firms and banks say the only way to deal with the situation is to raise interest rates. At the same time, President Erdogan himself insists on continuing the soft policy. That is, the development of the situation in the Turkish economy largely depends on the will of the president.

The Turkish currency lost 40% of its value in 2021. The Turkish lira has updated the anti-record, having fallen from 11.37 to 13.21 liras per dollar. It was the largest depreciation of the lira in the last 20 years. At the same time, rates were reduced by 400 basis points in September: from 19% to 15%. And this despite inflation in the composition of 20% on an annualized basis.
Experts and opposition parties have accused President Recep Tayyip Erdogan of political interference, putting pressure on the central bank to cut rates. The consequences of such a decision are a sharp jump in prices, an economic crisis and unemployment. Massive protests took place in Ankara and Istanbul. The demands of the protesters are the resignation of the government and the departure from power of the ruling Justice and Development Party, as well as the holding of new elections.

Thus, the financial and economic crisis may develop into another crisis, but this time a political one, where the fate of President Erdogan will be at stake. Elections are coming up in 2023, and the current situation does not add popularity to him and the ruling party in Turkey.

In this situation, the aggravation of relations with Russia, which is Turkey’s largest trade and economic partner, in the context of the outbreak of the economic and political crisis, can significantly harm the Turkish economy, sharply worsening the already acute political situation in the country.