bne IntelliNews – ASH: Turkey plays a delicate balancing act between Ukraine, Russia and NATO

The Turks are rightly proud of the success of Bayraktar drones in the conflict in Ukraine. Ukraine also celebrated the success of Bayraktar drones against Russian armor, particularly turning the tide during the first weeks of the Battle of Kyiv – with songs even produced and sung by Ukrainian soldiers to cheer the changing nature of the battlefield of this high-end Turkish. Technology. Turks like to see this as a prime example of the country’s new technological and military prowess, but also of their willingness to show support for Ukraine despite the obvious risks of damaging valuable relations with Russia.

Ukrainians, however, are beginning to doubt Turkey’s commitment to their cause, despite Bayraktar’s undeniable success. Turkey’s stance on peace talks in Antalya in March and again on trying to broker a deal to break the grain blockade of Ukrainian ports has left a strong impression in Kyiv that Ankara is too eager to tow the Russian line and to force a friendly peace accord with Russia. their throat.

In Antalya, the Turkish side was convinced that a deal had to be done, and even sold a deal as expected, but it seemed to be close to the terms offered by Moscow, with little effort to accept or even understand the Ukrainian position. Predictably, the Antalya peace process eventually collapsed. That Ankara seems deaf to Ukraine’s position was also evident in the ongoing talks on lifting the grain blockade, with Ankara negotiating directly with Moscow and apparently little effort being made to involve the Ukrainian side – even though any plan involves decisions on unblocking Ukrainian ports.

On the question of the ports, Turkey seemed unable to understand the Ukrainian position that getting an agreement to clear the ports was worthless unless there were also security guarantees to ensure that the Russian forces did not take advantage of this to launch amphibious landings against Odessa, Mikolaiv, et al.

Turkey appeared naive both in the Antalya talks and in the talks on ending the grain blockade. The Turkish side seemed to adopt a strategy of peace at all costs (for Ukraine), but without any effort to understand the Ukrainian position.

But the key to understanding Turkey’s stance on the war in Ukraine, and its seemingly blind efforts to bring peace at almost any cost (in Ukraine), is that the Erdogan administration sees it all through its very narrow electoral lens. And in there, he faces a tough election next year, with opinion polls not looking good for either Erdogan or his ruling AKP, while the economy is in a desperately weak position. A certain desperation and wishful thinking are therefore evident in Turkey’s approach to the war in Ukraine.

On that last point, over the past decade, under Erdogan’s failed monetary policy mantra that ‘high interest rates cause inflation’, the economy has been in an almost constant state of crisis. of the balance of payments. Erdogan continually prioritizes growth over inflation and exchange rate stability, because in the past credit growth has generated growth in real GDP, jobs and votes. But that means the economy has been too hot, resulting in large current account deficits, large external financing needs and constant pressure on the lira to weaken.

An orthodox response would be to tighten monetary and/or fiscal policy to slow domestic demand, reduce import demand and with it trade and current account deficits, thereby easing pressure on the lira. But Erdogan’s interest rate ideology removed that option for the CBRT, meaning the lira had to bear the pressure, which in turn fueled inflation.

Turks are unhappy with inflation and a constantly weakening lira. They feel poorer, which explains Erdogan’s low popularity. But Erdogan still thinks he can win the election by pulling a few more rabbits out of the hat – including the recent exchange-protected deposit system and, more recently, restrictions on businesses borrowing in lira if they have to. large foreign currency deposits. Erdogan thinks it can buy him time, help slow dollarization, anchor the lira enough so he can push the growth agenda once more to win the next election.

In normal times, it would be unclear whether this strategy could keep things stable enough to make it to the elections by June 2023 and deliver a victory for Erdogan. But the war in Ukraine has just made the calculations here even more difficult – the rising cost of importing energy and food and the threat of the loss of the main Ukrainian and Russian tourist receipts (a quarter of the total) worsen the current account deficit and put even more pressure on the lira. Erdogan needs this war to end and soon or he risks ending up in an extreme balance of payments crisis that would wipe out any remaining popularity.

So Erdogan was happy to allow Bayraktar drones into Ukraine – they herald Turkish engineering prowess and generate significant export revenue. But beyond that, Turkey has done little to help Ukraine’s cause. And, as noted, the Antalya peace talks and the talks on unblocking grain deliveries from Ukraine have undermined Ukraine’s position.

Turkey has also not bought into Western sanctions against Russia – arguing that it simply cannot afford it, given its dire balance of payments situation. If relations with the West were better, he could have hoped for financial support to compensate for the losses due to sanctions and the war in Ukraine. But that option is limited by broader Western concerns about the policy choices Erdogan is making, including on monetary policy.

Some close to the Erdogan administration have even argued that Turkey could benefit from sanctions by acting as an intermediary similar to its stance on Iranian sanctions. Some believe that Turkey could benefit as Russian companies seek to reflag out to avoid sanctions, while Russian capital and companies seek to exit and evade sanctions, and also by being a conduit for Russian capital – tourism. The latter being the scenario where Russians are looking to vacation in Turkey, but using this as an opportunity to park capital by opening Turkish bank accounts and buying property. To some extent, facilitating capital flight from Russia is a benefit to the West by increasing economic pressure on Russia, but there is a fine line here between Turkey and the fear that part of activity could be about to break the actual penalties. A recent visit by US Treasury officials to Turkey was likely aimed at drawing clear lines on what is acceptable and what is not.

And then there’s all the fury around Turkey’s blocking of Finland and Sweden’s candidacy to join NATO. As NATO allies have pointed out, Turkey has understandable security concerns about Scandi’s support for various Kurdish groups. He now has leverage to force Sweden and Finland to contain them. And playing hard on this issue will play very well with the national nationalist constituency in Turkey ahead of the election. This is potentially a win-win for Turkey. But the risk is that Erdogan overdoes his hand and permanently damages relations with the West. He must realize that for the United States and the rest of its NATO allies, Russia is the priority and is seen as a clear and present danger, and an existential threat to Ukraine and the West. The accession of Finland and Sweden to NATO is a huge victory for the West, for Ukraine, and a major snub for Putin. If Erdogan blocks this now at the NATO summit in Madrid later this month, relations with the West will, I think, be permanently soured. And the West is likely to take an openly hostile, as opposed to largely neutral, approach to Erdogan’s re-election by June 2023. Blocking Swedish and Finnish membership would also dampen growing hopes of a deal. on Turkey’s compensation for leaving the F35 project, by purchase. additional F16s and upgrade kits. This would harm Turkey’s defense capability. Now, playing hard to the end could turn the next election in Erdogan’s favor, and I think he will have to balance that with the risk of a major balance of payments crisis if he plays hard for too long. And with the wrath of the West, it would have few tools to quell such a balance of payments crisis – it doesn’t want to raise policy rates or go to the IMF, capital controls are counterproductive and will harm business, the CBRT has limited reserves and a fair currency adjustment leads to more inflation. If it faces a balance of payments crisis after vetoing Finland and Sweden’s NATO membership, I think the West would stand on the sidelines as a crisis total balance of payments surges on Erdogan. And Erdogan would probably lose the next election. Logic would suggest that Erdogan would play very hard at the Madrid summit – getting deals on Kurdish groups in Sweden and Finland, easing of sanctions on weapons and new deals on new purchases of weapons like the F16. He can tell voters back home that he played hard and won concessions. He hopes the West will be grateful enough to keep capital markets open to allow it to fund its external borrowing needs.

It all seems pretty binary. But I think in all of this, Erdogan needs to realize that for the West, the crisis in Ukraine is a watershed moment, a definitive challenge they face, and it’s a time to ask whether the allies are with the West or against it. Erdogan tried to stay on the fence, trying to some extent to play one side against the other. I think the time for such an approach is running out fast. Madrid will probably be where Erdogan has to decide which side he is on. An important week is coming for NATO and Turkey.

Sharon P. Juarez