Streetwise Professor

I don’t believe it is an exaggeration to say that Turkey is ruled by a lunatic–Recep Tayyip Erdogan. His increasingly autocratic rule is putting Turkey at serious risk of an economic and geopolitical crisis.

Erdogan dreams of Turkey becoming the dominant power in the Middle East, a modern day version of the Ottoman Empire, including an explicit Islamic orientation–a decisive break with the founder of the Turkish Republic, Mustafa Kemal Ataturk, who eschewed imperial ambitions, and who was avowedly secularist, and indeed, harshly anti-Islam. (Which is one reason Erdogan despises him.)

These ambitions have led Erdogan into some foreign policy disasters, most notably in Syria. At the outset of the Syrian civil war, Erdogan was supporting the rebels and foursquare behind attempts to overthrow Assad. In this he failed utterly. But in the attempt, he (through his intelligence services) provided support to the most radical Islamist elements in Syria–including ISIS.

The Syrian debacle contributed to a serious breach with Europe which has all but eliminated the prospects for Turkish accession to the EU. In particular, his cynical unleashing of waves of Syrian refugees into Europe, and his threats of sending even more, thereby blackmailing the EU into providing Turkey financial aid, have left Turkey friendless in Europe.

Even worse, from a geopolitical perspective, has been his picking fight after fight with the US. The list is long. The extended standoff over an American minister he had imprisoned. His rapprochement with Iran in Syria (which in effect was a concession of his failure to achieve his objectives there), and generally cooperative relationships with Iran, including most notably helping the Islamic Republic circumvent US sanctions by exchanging Turkish gold for Iranian gas. His strident opposition to Israel. His cooperation with another American pariah–Venezuela–which Turkey is helping evade sanctions by agreeing to refine Venezuelan gold. His burning desire to destroy America’s Kurdish allies who have been the only effective local force in the battles against ISIS, said desire driven by Erdogan’s burning hatred of the Kurds in Turkey. This desire to attack Kurds in Syria has led to standoffs (with the serious risk of escalation) with US troops working with them. And last, but by no means least, an agreement to purchase S-400 surface-to-air missile systems from Russia despite the information this could provide the Russians about US F-35 aircraft–which Turkey wants to purchase.

Some of these things–canoodling with Iran, opposing Israel–were not a problem with the Obama administration. They are a big deal with Trump.

The real lunacy is that Erdogan is risking a confrontation with the US at a time when his economy is teetering–in large part due to his mismanagement. The lira dropped significantly last summer, and although it has recovered (a) it is still substantially below the level of 2017, (b) has been dropping steadily since topping out in December, and (c) is poised for another drop due to Erdogan’s inveterate hostility to higher interest rates–well, to interest rates period, which he calls “the mother and father of all evil.” The Turkish Central Bank has been playing games to conceal how weak its reserve position is. These include borrowing dollars from Turkish banks via swaps, putting the dollars as on-balance sheet assets, but treating the swaps as off-balance sheet.

The Turkish economy is in recession, has heavy external indebtedness (which makes its low reserve position all the more dangerous), and has an economic management team that is universally considered to be greatly out of its depth. Erdogan did not help matters when he declared:

The main issue is interest rates. As interest rates are brought down, inflation will fall. The real problem is interest rates. I’m also an economist.

Not only is he not an economist (as his getting the Fisher effect exactly backwards shows), I don’t even think he’s ever even stayed at a Holiday Inn Express. Combining his economic stupidity with his autocratic behavior is a recipe for disaster.

Given this fraught economic situation, Erdogan courts disaster by continuing to pull Uncle Sam’s beard. He is very likely to need the US’s help to stave off economic crisis, and on the flip side, if sufficiently provoked the US could smash the Turkish economy with a mere flick of its fingers.

Erdogan also has domestic political problems. After prevailing in a surprise national election last summer that cemented his changes to the constitution creating a presidential system, his AKP party suffered some stunning losses in local elections last month, most notably a (narrow) loss in Istanbul. Erdogan is attempting to get a do over in the Istanbul election, claiming systemic voting abuses–in a city his party controlled at the time of the election. It is something akin to the Chicago Democratic machine blaming a loss on nefarious Republican voter fraud.

There are many reasons for Erdogan’s near panic over Istanbul. It will give his CHP opponents a highly visible platform and power base, in a city that is widely viewed as the launching pad for Turkish national leaders. (Erdogan was mayor there before becoming prime minister, then president.) Perhaps even more importantly to Erdogan, CHP control of Istanbul threatens to undermine his vast patronage system there (which will undercut his power), and also threatens to expose equally vast corruption (of which Erdogan has already been very credibly accused in the past).

Erdogan is not the type of man who will trim his sails in the face of such fierce headwinds. He will more likely redouble his confrontational efforts, both internationally and domestically, despite his extremely weak economic situation. This is not wise, and will not end well. A bad end to Erdogan is hardly something that should be rued, but his bad end will also mean serious and extended misery for the Turkish people, and a serious potential for even more instability in the Middle East.

This last prospect may be the only thing that saves Erdogan. The potential for turmoil may be the only reason why the Trump administration does not give Erdogan the brusin’ he has been cruisin’ for, not just recently, but since 2003.

Ralph Waldo Emerson penned those lines in a letter to Oliver Wendell Holmes more than 150 years ago: in the last 27 months, a latter day sultan, Recep Tayyip Erdogan, has put them into practice.  In the aftermath of the July, 2016 coup that failed to topple him, Erdogan has ruthlessly cracked down on anyone he or his minions even suspected were involved in, or even supported, the coup.  The military and civil service have been purged, and Turkey lives in fear.  Anyone with the even remote ties to the Gulenists whom Erdogan believes were behind the coup is at risk of losing his/her job, and even his/her liberty.  People struck at Erdogan, failed to kill him, and he is taking his revenge.

Today, Erdogan is taking advantage of the Khashoggi killing to strike at a monarch–in this case, an actual monarch, Crown Prince Mohammed bin Salman (and by extension, his father, King Salman).  One wonders if Erdogan is paying proper heed to Emerson’s warning, or whether he is merely an arrogant chancer who is failing to recognize that MBS will respond as ruthlessly to an existential threat as Erdogan did to his own.

Erdogan imagines himself the leader of world Islam, and views this as his chance to strike at his main rival for that distinction.  Indeed, MBS (or his creatures) committed a blunder by killing Khashoggi, and on Turkish soil no less.  But despite this blunder, Erdogan’s success is far from certain.

Turkey is only months past a near collapse of its currency, and its economy: only a climb down in the Brunson conflict with the US bought Erdogan some breathing room. (At the cost of considerable ridicule within Turkey, I might add, given Erdogan’s boasts that he would NEVER let the American pastor go.)  But the fundamentals that led to the crisis over the summer–not merely huge debts, unfavorable foreign balances, and most notably, Erdogan’s impetuosity, arrogance, and economic idiocy–remain.  Turkey is still divided.  Although Erdogan won an election that effectively granted him an imperial presidency, it was by a narrow margin.  Turkey’s position in Syria is problematic.  And crucially, its relationship with the US is still fraught.

If Erdogan truly tries to go so far as to threaten MBS’s and King Salman’s preeminent position in Saudi Arabia, MBS will have no compunction about responding in kind.  And they have weapons at their disposal.  No not military–there is no common frontier, and regardless, the Saudis have proven themselves to be militarily inept (something KSA shares with most Arab militaries).  But economic?–Definitely.  It is well within Saudi capability to launch a speculative attack on the lira.  And the KSA has other financial weapons it can wield.

Indeed, the Khashoggi affair shows how ruthless the Saudis can be when confronted by even a rather trivial challenge.  Think of how they will respond if they really feel threatened.   Turkey’s currency and economy are an Achilles Heel that they could readily strike.

Further, the United States could squash Turkey financially like an overripe grape.  Even modest US measures, like tariffs on Turkish metal imports into the US, greatly exacerbated the swoon in the TRY–think of what would happen if Trump really put his mind to it.  This is not something that the US would want to do, given that Turkey is a Nato member, and has some strategic value to the US.  But KSA has strategic value too, arguably greater than Turkey’s, and if Erdogan overplays his hand with Saudi Arabia, and/or continues to be a pain on issues like the US support for Syrian Kurdish forces, Trump could bring a world of hurt onto Turkey and Erdogan.

So Erdogan must tread very carefully indeed, and keep Emerson’s injunction in mind.  And what are his odds of knocking off MBS, or even damaging him all that severely?  Not great, given the nature of the Saudi regime, MBS’s obvious willingness to use all measures necessary against internal opponents (who can disappear with far less attention than Khashoggi did in Istanbul), and its economic and geopolitical leverage.

But one should never underestimate Erdogan’s arrogance.  Given this arrogance, it is quite possible that he will ignore Emerson, overplay his hand, and be the ultimate loser in this Game of Thrones.

 

Turkish president Recep Tayyip Erdoğan is clearly insane, by the doing/saying-the-same-thing-repeatedly-and-expecting-different-results standard.

Apparently not content with the mere 22 percent drop in the TRY on Thursday and Friday which was attributable completely to his overheated, boneheaded economic rhetoric and his egging on a confrontation with the US, today he gave not one, not two, but three speeches that put his economic idiocy and bullheadedness on display.  And the markets reacted immediately, with the lira breaching 7 to the USD in early Asian trading.

Among the howlers:

Speaking in the northeastern city of Trabzon on Sunday, Erdogan warned business executives to not “rush to banks to withdraw foreign currency.”

He added that businesses should “know that keeping this nation alive and standing isn’t just our job, but also the job of industrialists, of merchants.”

“We are working day and night for alternative markets.”

Just what alternative markets is he talking about? Presumably steel and aluminum, which Trump imposed higher tariffs on on Friday.  But those aren’t the markets that matter now: it’s the currency and capital markets that matter, and every word out of Erdoğan’s mouth freaks out those markets even more.  Not least because talking about metals indicates a complete failure to grasp the true nature of the situation.

Importuning “industrialists and merchants” to take one for the team is futile.  They have already conceded, after taking brutal losses for heeding his earlier call.  The fact that Erdoğan seems oblivious to the fact that his previous nostrums have been disasters only convinces further those at home with money and those in the financial markets that he is utterly clueless–as do his continued imprecations against evil interest rates.

His chucklehead finance minister (whose main attributes appear to be that a) he is Erdoğan’s son-in-law, and b) he is less of a chucklehead than Erdoğan’s son) gave a don’t worry-be happy-everything will work out great talk to a group of assembled business leaders.  A Turkish friend said that Berat (not Borat!) Albayrak’s clownish performance was met by long faces from the assembled bankers and industrialists.

Erdoğan’s other stock response is that Turkey’s economic fundamentals are sound, but the country is being subjected to an economic attack from the US, and that he will fight back.  Arguendo, assume it is true that the US has targeted Turkey.  What is the best response, especially when someone like Trump is doing the targeting? Defiance is foolhardy, though perhaps emotionally gratifying in the short run, both to Erdoğan and his fervent followers.  A prudent leader would execute a tactical withdrawal in the face of overwhelming odds, and live again to fight another day.  You don’t fight battles you can’t win.  And again, Erdoğan’s apparent willingness to do so just stokes the panic.

Erdoğan says that he will find other allies.  Like who, exactly?  Speculation is that Russia, Qatar, and/or China might contribute financial support.

The first name makes me laugh.  Russia has its own issues right now, to put it mildly.  Its access to capital markets is extremely limited, and its currency is also under pressure.  Qatar is still battling an economic embargo with its Arab neighbors.  China’s own financial situation is somewhat tenuous now, and although it has shown a willingness to throw money down ratholes (cf. Venezuela) it is doubtful that it will stump up the tens of billions of dollars necessary to rescue Turkey from the brink, especially in the very limited time–maybe even hours–available.

And all of these candidates will no doubt think twice, and then think again, based on uncertainty of how Trump would react to their riding to the rescue of his current target.

Nope.  Erdo is on his own here.  And that’s the irony of all this.  Erdoğan asked for supreme power in Turkey.  He got it.  Now he owns all of it: the bad as well as the good.  As the old adage says, Erdo: Be careful what you ask for.  You might get it.