Buoyed by imports from China and exports to Russia, Turkey’s economy grew by 5.3% in 2022, after expanding 11.4% in 2021. Only two years ago, the country’s currency was melting down and government bond yields spiked to 24%.
Now its stock market is the world’s top performer with a year-on-year gain of 70% while the Turkish lira has stabilized.
This is the most remarkable turnaround in the checkered history of emerging markets, and what makes it all the more remarkable is that domestic economic policy had little to do with it. Turkey’s wily president Recep Tayyip Erdogan traded political chips with China, Russia, the Gulf States, Israel and Europe to position Turkey in the middle of a flood tide of trade flows created by American sanctions on Russia.
As the political patron of the Muslim Brotherhood, Erdogan has considerable leverage over the Gulf monarchies, who fear the Brotherhood with good reason. Turkey has close ties to Muslims in Russia’s southern provinces and the capacity to create trouble for the Russian Federation. And it retains close ties to Turkish-speaking Uighurs in China and elsewhere.
Erdogan can’t be bought, but he can be rented. In return for his forbearance in pursuing Turkey’s dream of regional hegemony, Erdogan has obtained the financial resources to stabilize his economy and a central position in the region’s shifting trade flows.
It’s an ill wind that blows nobody good, and the ill wind from the Ukraine war filled Turkey’s sails. Turkey’s imports from China and its reported exports to Russia roughly tripled from 2020 levels, as Turkey provided Russia with an end run around Western sanctions against Russia.
Turkey’s shipments to Russia are running at about US$800 million a month, or $10 billion a year, according to official data. The true total is much higher. For 2022, according to Turkey’s statistical bureau, the country reported a current account deficit of $40 billion or about 4% of its gross domestic product (GDP).
Where did the money come to fill the gap? According to the official Turkish data, some $25 billion fell off the back of a truck. So-called errors and omissions—payments that Turkey’s authorities can’t account for—amounted to more than half of its deficit. Some part of that $25 billion almost certainly came from unreported exports to Russia or unreported sales of Russian oil via Turkish intermediaries.
Russia expert James Davis wrote on January 11 in Asia Times’ “Global Polarity Monitor” newsletter:
With the EU countries now under considerable political pressure to show that they are reducing or eliminating direct imports of Russian energy, the value and importance of the mooted Turkish energy hub for both Russia and the EU are increasing. In the natural gas market, Azerbaijan cannot supply all the new customers it is acquiring, so a gas hub in Turkey will allow [the Azeri gas monopoly] SOCAR to purchase Russian energy for redistribution to third parties.
There are indications that the hub will work on the same principle as the proposed Russian gas exchange of 2021: Turkey will purchase energy from Russia among others, and customers will buy from Turkey, which will provide delivery options with no Russian footprint. Turkey will offer a similar service for oil piped or transported via tanker to Turkish ports. Turkey will buy the oil and re-sell it under Turkish jurisdiction, which would allow for tanker transport. In addition, Turkey is expected to play a greater role in refinery operations.
Washington dispatched Treasury Undersecretary Brian Nelson to Turkey and the United Arab Emirates (UAE) during the last week in January, in a visit first reported by Reuters, with an official warning that “Individuals and institutions operating in permissive jurisdictions risk potentially losing access to G7 markets on account of doing business with sanctioned entities.”
But you can’t sanction what you can’t see, and Turkey will plead ignorance about its unreported capital flows. Alternative payment arrangements in Turkish lira, Indian rupee, UAE dirham and Chinese RMB have bypassed the US dollar zone and the SWIFT system that enables international payments in the West.
Turkey began to use Chinese RMB for import payments in June 2020, just before its trade with China soared. The RMB’s share of Russian trade transactions exceeds the euro’s in 2022 (31% vs 28%), according to a Russian bank study. Turkey also acts as a hub for the re-export of Russian oil and gas.
Turkey’s once-benighted lira has made an impressive comeback. Between February 2017 and November 2021, it had lost 80% of its value against the US dollar, the worst performance by far of any major emerging market currency.
Market-based measures of risk on the Turkish lira reached extreme levels. In early 2022, the implied volatility of options on the lira/dollar exchange rate jumped to 80% (that means the market estimated a 68% probability of an 80% change in the value of the lira over the next 12 months).
By the end of the year, though, the riskiness of the lira had dropped to levels closer to that of China’s RMB than emerging market currencies like the Brazilian real.
How did this happen? President Erdogan was short on monetary assets but had political assets to trade in. Turkey had accused the UAE of backing a military officers’ coup attempt in 2016.
Israeli analyst Ofra Bengio observed February 15 in a report for the Moshe Dayan Center in Tel Aviv:
The first country with which Turkey initiated the reconciliation process was the UAE. It paid quick “dividends.” In November 2021, the UAE decided to grant Turkey $10 billion to help alleviate Turkey’s economic crisis. Erdoğan reciprocated by a visit to that country in February 2022.
Concurrently, Erdoğan began courting Saudi Arabia by paying an official visit in the same month, but not before going to Canossa and burying the Jamal Khashoggi affair. The next in turn was Israel, the courting of which took time to bear fruits, as only in December 2022 the two countries exchanged ambassadors after four years of vacancy.
Bengio added that Turkey’s “hope to lead the Muslim and Arab world resulted in estrangement with Egypt, Saudi Arabia, and the UAE. Strategic relations with Syria turned into deep enmity. In fact, Turkey retained strong relations with only one Arab Muslim country – Qatar.
Turkey’s support for Hamas and Erdogan’s attacks against Israel triggered severe conflict between the two countries, reaching a climax in the mutual expulsion of ambassadors in 2018.”After Turkey’s near-economic collapse in 2020, “Turkey began reconciling with as many countries in the region.”
But this reconciliation is limited and conditional: Erdogan keeps his leverage against his neighbors in reserve. He is a significant political supporter of the Muslim Brotherhood, a jihadist organization that combines a fanatical version of traditional Islam with the structure of a modern totalitarian vanguard party.
It briefly ascended to power in Egypt under Mohammed Morsi, elected president after the United States helped topple the government of Hosni Mubarak. Turkey enthusiastically backed Morsi, who was expelled after 30 million Egyptians took to the streets in July 2013 as the Egyptian economy disintegrated.
Saudi Arabia views the Brotherhood with the sort of trepidation that Captain Hook reserved for the crocodile that had eaten one of his hands. It is the only political entity in the Middle East capable of replacing the Gulf monarchies.
Turkey has not abandoned its support for the Muslim Brotherhood. Last May 25, Erdogan honored its leadership at a well-publicized meeting in Ankara. But he has tightened the leash. He met and shook hands with Egypt’s President Abdul Fattah al-Sisi during the World Cup in Qatar last year, and Turkish firms recently pledged economic support for Egypt.
An important signal from Ankara came last month after Turkey joined the UAE in condemning the January 27 massacre of seven Israelis at a Jerusalem synagogue. The Gaza-based terrorist organization Hamas, juridically the Palestinian branch of the Muslim Brotherhood, praised the attack as “an appropriate response” to alleged “Israeli crimes.” Hamas in turn denounced Turkey as well as the UAE for referring to the attacker as a “terrorist.”
Diplomatic relations between Turkey and Israel collapsed in 2019 when Turkey withdrew its ambassador following the Trump administration’s decision to move its embassy to Jerusalem. The restoration of diplomatic relations between the two countries represented a de facto concession by Turkey. But Turkey has refused Israeli requests that it expel Hamas representatives.
In both cases, Erdogan uses terrorist organizations as a bargaining chip. He has made a similar deal with China, which uses mass internment and “re-education” to suppress its Turkish-speaking Uighur minority in China’s Xinjiang autonomous region.
Kuzzat Altay wrote in Foreign Policy in 2021, “As Ankara grows more economically dependent on Beijing, the Turkish government is no longer offering a safe haven or defending Uighur rights.” Turkey used to refer to Xinjiang as “East Turkestan” and denounce Chinese “genocide” against the Uighurs. Now, Altay reports,
Most Uighurs have found it much harder to get resident permits or citizenship after 2014. They can’t make a living but risk being interned if they go back to Xinjiang. China also refused to renew their passports. Gradually, a Turkish government that was supposed to offer them freedom is now raiding Uighur homes, arresting hundreds of people and coordinating deportations with Beijing.
Turkey and Russia, meanwhile, have backed opposite sides of the Syrian civil war. Russia is the main sponsor of the Assad regime in Damascus, while Turkey is the patron of the Sunni rebels who have tried to topple it.
As Seth Frantzman reported February 4 in the Jerusalem Post, Russia is trying to convene a “historic” meeting between Turkey, Iran and Syria which would make possible a rapprochement between Turkey and Syria. “for Russia, a shift in Turkey’s policies in Syria would be a major game changer,” Frantzman commented.
Whether Turkey will revert to its grandiose dreams of becoming the geopolitical as well as spiritual leader of the Muslim world remains unclear. As noted, Erdogan has kept his capacity to harry his neighbors in reserve.
But Turkey does have an opportunity to thrive in an enhanced position as the leading military as well as economic power in the region, and a key trade hub among China, Russia, and Europe. Whether the ambitious Erdogan will settle for that remains to be seen.
Turkey’s financial dependence on China and the Gulf States, though, suggests that Turkey’s competitors have as much or more leverage over Turkey as Turkey has over them. In Western Asia, that’s the closest one comes to a formula for regional stability.
Follow David P Goldman on Twitter at @davidpgoldman