As a rule, Turks seldom open up about the hardships they encounter in their private lives. I was surprised, then, when a friend from Izmir revealed his personal problems in the context of the financial and economic crisis in Turkey. Some of the examples he mentioned were the products on the local produce market, which reported significant price hikes, up by nearly 90% within the space of just two weeks. The same applies to other goods, the common explanation being that their production and trade involve large quantities of energy. And this small detail becomes a major problem in a country that imports approximately three quarters of its energy input.
Turkey’s dependence on Russia: energy, tourism, agricultural products and trade
Apart from energy, Turkey’s dependence on Russia covers other important sectors. Nearly 65% of the country’s wheat consumption and over 65% of the sunflower and sunflower oil required are imports from Russia. Russian tourists have always represented an important presence in certain Turkish resorts, last year accounting for 4.5 million of the total of 25 million arrivals, with a contribution tantamount to some 10 billion USD to the state budget. Russia is also an important market for Turkish agricultural products, but also for certain investments, particularly in construction.
In terms of energy, Russia’s position of dominance could actually affect the sovereignty of Turkey, which is also true of Chinese investments in large infrastructure projects announced by the current regime in Ankara.
The Akkuyu nuclear power plant is built by the Russian state-owned enterprise Rosatom, which controls all technicalities in the long-term under a build-own-operate contract. Akkuyu is expected to cover 20% of Turkey’s energy consumption. This will further deepen Turkey’s dependence on Russia and, before that happens, there are still a number of issues to overcome, which will eventually consolidate Russia’s monopoly.
On the first day of 2022, electricity prices went up by 50% for home users in Turkey and by 125% for industrial users and businesses. Prices for natural gas also went up 25% for household users and 50% for commercial and industrial users. Due to faulty market regulations, energy distributors were free to increase the real costs of electricity by as much as 168% for companies and by 156% for industrial facilities.
Natural gas imports play a particularly important geostrategic role. Although Ankara went to great lengths to curb its dependency on Russia, especially after 2019, the goal was achieved only in part, whereas Turkey’s weak sports are still glaring. Turkey lacks important self-sustained resources, and the natural gas deposits discovered in the Black Sea might be able to cover consumption for more or less a decade, that is if the authorities are willing to earmark the necessary funds required for exploitation. Economic growth, at times reaching spectacular figures under the AKP-Erdoğan regime, has determined an increase in natural gas input to approximately 50-60 billion cubic meters (bcm) in 2020 and 2021, namely the equivalent of 10% of the European Union’s total consumption.
Considering the good formal relations between Erdoğan and Vladimir Putin, it would have been expected that Turkey should not be as affected as Europe by the natural gas crisis before the outbreak of the war in Ukraine. Yet the aforementioned price hikes rather seem to suggest the opposite. Today, seeing the effects of the crisis in Ukraine, we should also take the collapse of Turkey’s economy as a possible, if not all but likely scenario that might further complicate things.
“Dark clouds approach from Anatolia”: the crises that threaten Turkey
It’s a warning I recently made public in two televised shows on TVR1, the national public broadcaster. It’s the same warning stemming from my previous contributions for Veridica. It’s now time for an update of the most important data, in the unfortunate context of the Russian invasion of Ukraine.
The word “Anatolia” in the subheading above is designed to draw attention to Turkey’s geographic position, one of immense strategic value and which has now put the country at the crossroads of four major crises. Chronologically, the first crisis is the civil war in Syria, where Ankara and Moscow find themselves relatively at odds. The two countries have similar positions in the civil war in Libya, as well as in the conflict between Armenia and Azerbaijan, which has so far been kept in check. And the same applies to Ukraine. Turkey is providing weapons, ammo and other military equipment to this country, although it did not recognize the Russian occupation in Luhansk, Donetsk and Crimea, closing down the Straits to military vessels, as per the provisions of the Montreux Convention of 1936. Overall, however, Erdoğan’s Turkey arguably remains active in all these areas simply because Putin’s Russia allows it. For the time being.
Putin did not react on impulse, knowing very well he needs to preserve good relations with Ankara after working so hard to cultivate his influence there. We should not overlook an important detail, especially in the context of Western sanctions against Moscow: Turkey’s airspace, which remains open to the Russians, is the only way Russia can still provide logistic support to its military presence in Syria. Good relations with Turkey represent an investment with long-term effects for Putin, one which, for the time being, he is unwilling to cash in. However, if he wanted to, the Kremlin leader could easily strike a deadly blow, since the policies of the AKP-Erdoğan regime have left the economy weak, particularly after the controversial referendum of 2017, which virtually entrenched presidential authoritarianism.
The Turkish president is determined to believe, at least in official discourse, that large interest rates are the absolute evil, also contrary to religious principles. In the real life of inter-dependent economies, this form of reasoning is not just fallacious, but also deadly. Enjoying unlimited powers now, the president replaced three governors and four senior members of the Central Bank board in the last three years. Erdoğan also dismissed finance ministers and other important officials in state institutions with a key role in analyzing and planning economic development. This enabled him to implement a reduction of the reference interest rate from 19 to 14% starting August 2021. All this time, due to the rise in global inflation rates, all the other governments that modified their reference interest rates were trying to help national currency recover part of the losses incurred due to inflation.
The outcome is what most seasoned analysts have estimated. According to official data, the Turkish lira lost 44% of its value against the USD in the last four months of 2021 alone, whereas the annual inflation rate exceeded 54%. As a country that imports huge amounts of energy, capital, technology and raw materials for domestic manufacturing and exports, economic growth spells huge inflation pressure, so it appears the future won’t get any better. In recent years, Turkey’s National Bank spent over 120 billion USD and made numerous currency swap deals with other countries in order to stop the lira’s free fall.
Efforts have so far remained ineffective, since the authorities have not adjusted the country’s financial policy. The lira continued to lose ground, whereas the Central Bank’s reserves stood at under 60 billion USD in January 2022, according to official reports. People have long lost confidence in the national currency. Over 60% of citizen deposits are in USD or Euro. The US dollar has become the most profitable investment on the Turkish market (with a 23% annual return rate), followed by gold (19.7%) and Euro (14.5%), whereas bank deposits and treasury bonds report annual losses of 22.75% and 32.7% respectively.
Coming back to foreign trade, the external deficit stood at nearly 18.5 billion USD in January-February, 2022, accounting for an annual increase of over 186%. In the context of the Ukrainian crisis, energy imports are now piling up the pressure. And every 10-USD increase in oil prices adds another 5 billion USD to Turkey’s external trade deficit. The profound and swift depreciation of the lira compounds that effect. Coupled with the concurrent increase in the prices for raw materials, technology and capital, it’s no wonder production-related inflation has exceeded 100%, which adds further strain on consumer prices. And this is all reported from official sources, first and foremost the press releases of the Turkish Statistics Institute, which was accused of trying to embellish the ugly reality in the government’s favor. With respect to the example I gave at the beginning of this article, real price hikes exceed official estimates by a lot, and independent analysts claim consumer inflation rates actually exceeded 100% a few months ago.
Is there any substance to Ankara’s change of policy?
The increasingly alarming estimates about the country’s economy and finances, in addition to an apparent drop in the approval ratings of his regime in surveys, have prompted Erdoğan to try out a different approach to Turkey’s relations with traditional Western partners. From acid remarks targeting NATO or the EU just a few weeks ago, launched either by himself or members and allies of his administration, Mr. Erdoğan is now posing as a champion of the West in the crisis in Ukraine. Erdoğan is struggling to mediate talks between Moscow and Kyiv. At the same time, he is trying to convince the United Arab Emirates (UAE), Egypt, Israel or Greece that Turkey is willing to renounce its aggressive regional policies. March was packed with many such diplomatic contacts. The biggest prize are the natural gas deposits in the Eastern Mediterranean, which could potentially curb Turkey’s and even Europe’s dependence on Russian gas imports, at least to some extent.
After earlier this year the EastMed pipeline seemed to have stopped in its tracks, the Ukrainian crisis could very well breathe new life into this project. The European Union and its Member States are mobilizing to support projects designed to boost the transfer of natural gas from the Caspian and African areas, as well as seaborne imports of liquefied natural gas and oil from all global sources other than those under Russia’s control. Ankara knows well that its geostrategic position allows the current authoritarian regime to expect Europe and the United States to accept the “normalization” of relations. The intense exchange of diplomatic contacts in March appears to remove Turkey from the periphery of global relations where it isolated itself, although it still has a long way to go, too long perhaps, before it can be welcomed back by its traditional Western partners with arms wide open, to say nothing of its European integration.
In short, every official statement and step Ankara has made are indicative of the fact that Turkey’s reintegration in EastMed is possible as long as Ankara is willing to normalize relations with countries that are involved in this project. And each country demands concrete actions (not just promises) regarding the occupation of Syria’s sovereign northern territory (Syria, Egypt, Saudi Arabia, UAE), withdrawing its support for the Muslim Brotherhood and all affiliated governments (Egypt, Saudi Arabia, UAE), withdrawing its support for Hamas (Israel), renouncing its hardline policy in the Aegean Sea (Greece) and around Cyprus (Cyprus, Greece, Israel), backing out from the civil war in Libya and renouncing the exclusive economic zones agreement with Tripoli, which in turn is a byproduct of the Muslim Brotherhood (all the aforementioned countries). The list of concessions is long, and if it does meet these demands, the current regime in Ankara would virtually admit that all the years of aggressive policy-making in the region were nothing but one huge mistake, merely designed to keep Turkish nationalists satisfied at huge financial costs and ultimately for no reason. The political cost would be tremendous, dealing a heavy blow to the regime. It’s hard to believe such a radical change would be possible any time sooner than a change of regime in Ankara.
The same goes for Turkey’s relations with the West, the European Union and Member States in particular. On March 17, Brussels hosted the first Joint Parliamentary Committee meeting in over three years (!), which merely allowed dialogue to resume after the EU accession process de facto reached a deadlock. Resuming accession negotiations would also mean the European Commission would reprise its role as a watchdog, overseeing Turkey’s progress in fulfilling such criteria as safeguarding the independence of the judiciary, observing the rule of law or the rights of individuals and minority groups. The list of criteria would also include good vicinity and cooperation relations with Turkey’s neighbors. The AKP-Erdoğan regime has gone too far ignoring all these aspects during the last decade, and it will take great efforts to meet the criteria, again entailing huge political and existential costs for the regime. And that’s just to reopen accession negotiations, which comprise 35 chapters, of which only 1 has been opened so far and 14 remain closed, basically because Turkey refuses to officially recognize Cyprus, an EU member state.
Turkey remains a major actor, but...
All the aspects discussed so far suggest, first of all, that Turkey will remain an important player in the medium term for Europe’s energy security, at least during the period of transition towards the full decarbonization of the European single market, a target to be achieved by 2050. The natural gas from the Caspian area and from the Eastern Mediterranean can reach the EU much easier through pipelines that can cross Turkey’s sovereign territory and waters. The policies taken in the last ten years by Ankara have however seriously weakened the country.
The economy is already facing a crisis which many analysts have started describing as possibly more serious than the one in 2000. Much like then, the solution would be for Turkey to access international markets and call on the IMF and the World Bank for financial support. However, the assistance of international lenders requires liberal and democratic reforms, as well as regional cooperation, which would irreversibly undermine the AKP-Erdoğan regime. Personal authoritarianism, nationalist and conservative hardline policies and the appeal to religion are the very elements underlying the regime’s domestic and foreign policy-making. They have led to the unprecedented deterioration of the rule of law and the independence of the judiciary in this country, also infringing on fundamental rights and liberties. Turkey has turned hostile to all foreign capital, and the de facto suspension of EU accession talks further complicates its predicament. Also worth noting are Turkey’s relations with its neighbors and traditional Western allies, which have reached an all-time low.
A radical repositioning would come at a huge political cost. After two decades in power, of which the latter was openly devoted to pursuing a conservative, religious and nationalist agenda, the AKP-Erdoğan administration has fundamentally altered Turkey’s traditional priorities. As a result, the economy, the state apparatus and the population have become extremely vulnerable. A casual analysis of the lira’s daily or weekly’s fluctuations against the dollar or the Euro can demonstrate the true extent of Turkey’s vulnerabilities. The US Federal Reserve’s decision to increase the reference rate will certainly cause significant ripples as well. Much like other countries, Turkey will be seriously impacted, also factoring in its fragile economy, its weakened national currency, its rampant inflation rate and its fast-growing external deficit. The risk of instability is high, with serious potential effects on the entire region, adding to the already troubling developments in Eastern Europe and the Black Sea region. So there’s no doubt - dark clouds approach from Anatolia.