Tensions escalate between Ankara and Washington amid sanctions, war of words

The falling lira could spell trouble for Turkish companies that have to repay foreign currency debt estimated at more than $200 billion.
Sunday 12/08/2018
Way out. Turkish Deputy Foreign Minister Sedat Onal (C) leaves with his delegation after a meeting with US Deputy Secretary of State John Sullivan in Washington, on August 8.    (Reuters)
Way out. Turkish Deputy Foreign Minister Sedat Onal (C) leaves with his delegation after a meeting with US Deputy Secretary of State John Sullivan in Washington, on August 8. (Reuters)

ISTANBUL - The economic cost of the latest row with the United States is piling up for Turkey and the government in Ankara is looking for a face-saving way out of a crisis described as the consequence of a foreign policy miscalculation by the Turks.

Turkey’s currency, the lira, lost nearly 20% of its value against the US dollar last week and has sunk 40% since the start of the year. The downward trend quickened in August when US President Donald Trump announced additional tariffs on Turkish aluminium and steel imports over a dispute with Ankara triggered by the detention of an American pastor in Turkey.

“Our relations with Turkey are not good at this time!” Trump tweeted.

Ankara announced that Erdogan talked by phone with Russian President Vladimir Putin about economic relations and, writing in the New York Times, Erdogan threatened to “start looking for new friends and allies.”

Analysts warn that the falling lira could spell trouble for Turkish companies that have to repay foreign currency debt estimated at more than $200 billion. Because Turkey must pay in dollars for its energy imports and many consumer products, the dropping value of the lira makes life difficult for small businesses and citizens as prices for gas, electricity and other goods shoot up.

In a small electronics shop in Istanbul, the manager stood in front of half-empty shelves and said he stopped offering imported items because the lira’s fall was so steep that he would have to sell them at a loss. When asked for a computer power cable, he took the one providing power to his cash register and put it on the counter. “I no longer order those cables because I used to sell them for 20 lira ($3.80) but I would have to buy them for much more than that now,” said the man, who did not give his name.

The economic crisis is having a direct effect on consumers. Car sales were down 36% in the year to July. “At the moment, I would not be able to afford the car that I bought one-and-a-half years ago,” a 34-year-old Turk wrote on Eksi Sozluk, a popular Turkish chat website. “I would not be able to buy the telephone bought in February.”

The lira went into a tailspin against the dollar following the decision by the United States on August 1 to impose sanctions against two Turkish cabinet ministers for their role in the detention of US clergyman Andrew Brunson in Turkey. Two days later, the US Trade Representative said Washington was reviewing Turkey’s duty-free access to its markets, in a move that could affect $1.7 billion of Turkish exports.

Turkish President Recep Tayyip Erdogan blamed his country’s increasing economic difficulties on an “economic war” being waged against Turkey by outside forces. He called on Turks to exchange any US dollar savings into lira to strengthen the local currency.

“They may have their dollar but we have our people, our right and our God,” Erdogan said in a speech August 9. “The dollar cannot block our path. Don’t worry,” Erdogan told a crowd in the north-eastern city of Bayburt one day later. Turkey has announced economic sanctions against two US cabinet members.

Simon Waldman, a Mercator-IPC fellow at Istanbul Policy Centre, a think-tank, said there were signs of an overreach in the way Turkey’s government was dealing with the row with Washington. Under Erdogan, Turkey regards itself as a regional power and independent player that follows its own priorities.

In a speech August 4, Turkish Foreign Minister Mevlut Cavusoglu said the days of “a Turkey that accepts everything that is being said” were over. The new Turkey was telling other powers: “I don’t agree, I don’t have to agree with decisions that have been taken,” Cavusoglu said.

However, “it seems that Ankara miscalculated” in the spat with Washington, Waldman said in written response to questions. He pointed to an evaluation, published by WikiLeaks and written by a diplomat from the US Embassy in Ankara in 2010 that described Turkey’s foreign policy approach as having “Rolls-Royce ambitions but Rover resources.”

Despite the mounting difficulties, Turkey has seen no street protests or other signs of public unrest. Many of Turkey’s mainstream media outlets, most of which are controlled by pro-government companies, did not report a record drop of the lira’s value on August 6, when the value of the currency fell 5.5% in one day.

“At the moment the economy and the worsening of relations with the United States have not been detrimental to his popularity,” Waldman said about the Turkish leader. Erdogan’s hint at “conspiratorial international powers” as well as “a co-opted press and divided opposition” meant there was not much momentum against the president’s policies.

“However, we are still in early days of the economic crisis,” Waldman added. “If it continues, things could change.”

Ankara sent a delegation to Washington but the consultations failed to produce immediate results. The United States is calling on Turkey to release Brunson and other US citizens as well. Media reports state that the two sides are trying to reach a deal that would free Brunson and other US citizens held in Turkey as well as a high-ranking official of a Turkish state bank convicted for violating US sanctions against Iran.

“Although Erdogan and his government talk loudly about resisting US sanctions, in reality, they are very nervous,” Waldman said. “They know that this fallout has negative ramifications for both Turkey’s economy and security and Turkish officials will be rushing behind the scenes to patch things up with Washington.”

Ankara’s goal was to “save face at home,” Waldman added.

The row with the United States comes when Turkey is not only fighting a weakening lira but also rising inflation, which stands at almost 16%, a big current account deficit and increasing doubts among investors, who have withdrawn hundreds of billions of dollars from Turkey this year. Markets expected the central bank to raise interest rates at a meeting in July but the bank did not act.

Critics say Erdogan, a self-confessed enemy of interest rates hikes, is pressuring central bankers. Some media reports say Turkey might be forced to seek assistance from the International Monetary Fund.