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Turkey’s Woes are Far from Over

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President Erdogan’s vision of a resurgent Turkey plays very well with the domestic audience. However, on the economic front, fiscal concerns remain high over debt situation and inflation continues to run amok.

By ATIM KABRA


One of the most decisive wars in modern warfare ended with Azerbaijan decisively defeating Armenia in a battle marked by heavy reliance on drones, rockets, UAVs, and missiles. The battle over the region of Nagorno-Karabakh saw the destruction of numerous tanks, armored vehicles, artillery units, and air defenses by drone swarms. The end of the 44-day-long war saw Armenia making significant territorial concessions to a Turkey-supported Azerbaijan. 

The ace in the deck for Azerbaijan appeared to be the Turkish-made Bayraktar TB2 drones. They came, they bombed, and they conquered. 

These are the same drones that are troubling Russia as Turkey arms Ukraine while simultaneously thumbing a nose at the USA by purchasing the S400 missile system from Russia despite being the second largest military member in the NATO alliance. With the growing bonhomie between Pakistan and Turkey, it is a safe assumption that Pakistani armed forces too would be looking to effectively deploy such drones in the event of a limited war with India, and this has Indian scrambling for anti-drone systems. Turkish successful military adventures in Iraq, Syria, and Libya are further examples of its ambitions to re-emerge as the eminent regional power. 

President Erdogan: The Voice of Muslims? 

Turkey, under President Erdogan, has been reasserting itself with a goal to reclaim its old glories. The Ottoman Empire held sway for nearly 600 years and extended over much of South Western and Eastern Europe, North Africa, and the Middle East. Erdogan is positioning Turkey as a voice for the Muslim world as other Muslim nations face turmoil of their own and restructure their economies furiously. In a new multipolar world, the alliance being crafted by him has in its fold Iran, Pakistan, and China as prominent powers while he plays the USA and Russia against each other to extract maximum diplomatic and economic leverage for Turkey. The policy shift from the era of Mustafa Kemal Ataturk, the founding father of modern Turkey, who framed Turkey as a modern, secular nation, to the age of Erdogan, who is positioning himself as a spokesperson of the modern Muslim world, cannot be more dramatic. The vision of a resurgent Turkey exerting power over the Eurasian and MENA region under the rule of Erdogan plays very well with the domestic audience which is reeling under the onslaughts of gyrating financial markets. Policy measures to rein in a plunging currency which has had the Turkish Lira test an all-time low recently have led to the equity markets plunging into the bear territory as the Lira stages a smart recovery. Fiscal concerns remain high over debt situation, while inflation continues to run amok. 

Gyrating Financial Markets

Economic woes can often waylay the best laid plans. Turkey, with a population of 84 million and a nominal $700 billion GDP, has been buffeted by a raging inflation that has ravaged the economy. Inflation surged to 21% in November, while the currency is down nearly 35% this year till date, marking the Lira as the worst-performing emerging markets currency in 2021. Bending conventional wisdom, Erdogan has lowered interest rates in line with his firm belief that lowering interest rates will encourage more borrowing and spur the economy in turn. This has caused a collapse in the currency with the Lira plunging to all-time lows recently. In response, a new savings product has been introduced in the financial system which effectively promises to make good on the currency devaluation. This has led to a dramatic recovery in Lira but an equally traumatic collapse in the equity markets. Turkey is venturing into the world of unintended consequences as the professional class sees its earnings and savings decimated significantly in the face of extreme gyrations in the financial markets. Similar situations have led to a mass exodus of professionals from Libya, Venezuela, and Syria seeking stable greener pastures overseas. Whether the slack can be made up by an upsurge in tourism bolstering a significant pillar of Turkish economy remains an open question in times of COVID. Turkish economy remains quite vulnerable to external shocks faced with a consistently high current account deficit and foreign exchange reserves running low at an estimated $85 billion. Significant foreign exchange outflows expected on account of maturing foreign currency borrowings obligations will continue to exert pressure on the currency. It appears that there is still some time before clam and stability return to the financial markets in Turkey.

The Missing Economic Heft

Military adventurism has its best results if there is real economic strength and momentum behind the muscle flexing. A gyrating currency, volatile financial markets, and low foreign currency reserves may very well impede and set back the grand visions of President Erdogan as he envisions the resurrection of the great Ottoman Empire of an era bygone, in this fascinating and strategically important land that shares its borders with eight nations and sits at the confluence of Europe and Asia. The deep waters swirling through the Strait of Bosporus have seen many dynastic ambitions soar, succeed, and collapse over time. 


Atim Kabra is a keen observer of global social, political & economic trends and is based in Singapore. He is also the Founding Director at Frontline Strategy Funds

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