The current financial crisis in Turkey demonstrates the rapid devaluation of the Turkish lira. After the second round of presidential elections, the Turkish lira has been falling in value almost daily, breaking new historic lows. Thus, on June 22 it overcame the psychological mark of 24 lira per dollar.
All of this was the result of obvious irregularities in Turkey’s financial management, when the authorities, for populist purposes and pragmatic reasons of increasing the number of their supporters in elections, artificially kept the low credit rate of the Central Bank to encourage small business and support domestic production.
However, the market system of the Turkish economy, one way or another, is integrated into the global economy, where the rules of financial lending and investment are determined not by the Turks, but by their Western allies. Accordingly, the policy of the Central Bank of the Republic of Turkey must take into account the international economic situation and established norms.
The discount rate, as you know, is the interest rate at which the Central Bank of the state lends to commercial banks. Accordingly, changes in the discount rate are one of the instruments of the Central Bank monetary policy, through which inflation is influenced.
By raising the discount rate, the Central Bank raises the lending rate of commercial banks. As a result, credit goes up, the amount of national currency in circulation decreases, money becomes more expensive, and consumer demand decreases. In this way, price increases are slowed down and inflation is reduced.
Before the elections, Erdoğan, by keeping the interest rate low at 8.5%, created the illusion of economic recovery in society, as consumer demand increased. It was in February 2023, that is, shortly before the elections, that the Central Bank of the Republic of Turkey lowered the discount rate from 9 to 8.5%, and before that from 10.5% to 9%.
The elections also required new financial injections and, according to some reports, Turkey’s foreign exchange reserves shrank by 15%. Now is the time of reckoning. The new team of pragmatic technocrats in the government’s financial bloc, Mehmet Şimşek and Hafize Gaye Erkan, are trying to stop catastrophic inflation, which is why they raised the refinancing rate almost twice, bringing it from 8.5 to 15%.
It cannot be said that President Erdoğan, showing concern for low-income citizens, has never before changed the Central Bank lending rates upward. Suffice it to recall in this regard the recent lending history of the Central Bank of the Republic of Turkey. For example, after the presidential elections in 2018, the discount rate of the Central Bank of the Republic of Turkey was raised from 8.2% to 18%, and a month later it was as high as 24%. In March 2019, the Central Bank of the Republic of Turkey raised its key rate from 17% to 19%.
And now some experts are expecting new changes with key rates toward an increase to 21%. Accordingly, President Erdoğan understands the need for forced (or temporary) changes, so as not to completely undermine the financial foundations of the state. That is why he declared freedom and non-interference in the policies of the Central Bank and the Ministry of Finance and Treasury.
This situation will probably continue in Turkey until the Turkish lira stabilizes against world currencies (the dollar and the euro) and Ankara receives favorable loans and investments from its Western allies and international financial institutions. In any case, this is the policy of the new members of the government, who have gone through the school of training and practice of American business and are oriented towards the West.
After the election, Erdoğan began to lose some foreign income as well. In particular, the well-known “grain deal” on the export of Ukrainian wheat to world markets with the goodwill of the Russian leadership, given the loyal policy of the Turkish leader in a situation of military and political crisis between Russia and Ukraine was not charity on the part of Turkey at all. Erdoğan, for his intermediary services in this deal, had considerable discounts for the purchase of the grain and high dividends for its transit. This helped Erdoğan in the last election not so much in terms of money as in terms of increasing his own credibility in the international arena.
However, after more than a year of the “grain deal” functioning, the Russian side has still not received the promised bonuses from the external guarantors of this event (including the UN and Turkey) in the form of: export of Russian agricultural products (including fertilizers); import of foreign agricultural machinery and spare parts; connection of the Russian Agricultural Bank to SWIFT (the international payment system) and finally, restoration of the Togliatti-Odessa ammonia pipeline. That is why Russia can no longer meet its friend Erdoğan’s demands for an extension of the grain deal, as it did on May 18 of this year before the elections for a period of two months. Accordingly, Turkey’s “grain income item” is more likely to end if there is no change in Ukraine’s position.
In 2024, Rosatom plans to launch Turkey’s first-ever nuclear power plant, Akkuyu NPP. The $21 billion construction funding was completely Russian, with the expectation that the debt would be covered under the shared operation model. In meeting the wishes of its Turkish partners, the Russian side also expresses its readiness to build two new nuclear power plants in the foreseeable future, which will allow Turkey to increase its consumption of clean energy and ensure growth in production. Given that the Akkuyu NPP will provide Turkey with an additional 10% of its current energy consumption, the construction of two new nuclear power plants could triple this figure. However, Russia also has its own pressing economic issues in the context of tough sanctions of the Collective West, which can make its own adjustments in the financing of new nuclear power plant projects in Turkey.
Turkey remains an important regional partner of Russia. It is unlikely that the volume of Russian gas exports through the existing energy infrastructure of Azerbaijan and Turkey to the European market could be of strategic importance to Moscow, since the capacity of the southern pipeline system from the coast of Absheron to Southern Europe is not so great. Because of the well-known Western sanctions, Russia is now forced to systematically redirect its energy exports to the Southeast (primarily China and India), that is, from Europe to Asia.
However, Turkey remains relevant to Russia because of its favorable geography at the junction of three continents (Asia, Europe and Africa), the important trade and transit communications passing through it, and President Erdoğan’s loyal policy towards Moscow. Today, Turkey is becoming not just a hub, but also a kind of “window” for Russia to enter Europe (parallel imports). Time will tell how long such a linkage and configuration will last and what changes will occur at the strategic level of Russia-US (Europe) relations.
Thus, the Turkish economy is forced to adjust to new challenges, yet the political plots of these new challenges should not lead Ankara away from the strategy of balancing the key centers of power, where Russia is one of them.
Aleksandr SVARANTS, PhD in political science, professor, exclusively for the online magazine “New Eastern Outlook”.
