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Recep Tayyip Erdogan’s Financial and Strategic Dilemmas

Recep Tayyip Erdogan’s Financial and Strategic Dilemmas

Only the IMF can come up with the sorts of sums Turkey desperately needs.

Turkish president Recep Tayyip Erdogan’s deal with his Russian counterpart, Vladimir Putin, which will at least postpone a Moscow-backed offensive on Idlib, the last Syrian rebel enclave, looks superficially like an answer to one of the many colliding questions confronting the Turkish leader. All of them spell crisis.

To start with the most obvious: Turkey is facing a financial emergency.

The essentials of the currency crisis that has sunk the lira were already in place before Mr Erdogan fell out spectacularly last month with US president Donald Trump, hitherto such an admirer of the Turkish strongman that he fist-bumped him at July’s Nato summit. Mr Erdogan’s construction-and-consumption economic model relied for far too long on cheap foreign credit that has kept the economy vulnerably overheated but is now drying up.

Turkey suffers from high inflation (running at 18 per cent); a plummeting currency (which lost a quarter of its value last month but is about 40 per cent down against the dollar this year); and a gaping current account deficit, running at an annualised 7 per cent of gross domestic product, which raises the spectre of a balance of payments crisis.

The lira’s collapse means leading businesses and banks that owe $295bn in foreign loans, half of which mature in the 12 months to next July, risk default. Turkey needs money urgently.

That urgency was made more acute by Mr Trump, who accelerated the freefall of the lira by targeting Turkish ministers with sanctions and doubling tariffs on Turkish steel and aluminium. A cauldron of mutual grievances between Ankara and Washington had started overflowing even before Mr Trump’s election. What tipped it over was the continuing detention of Andrew Brunson, an American evangelical Protestant pastor Turkey is holding on allegations of collusion with the plotters of the abortive July 2016 coup, which Mr Erdogan blames on a shadowy network of Islamist cadres led by Fethullah Gulen, a former ally resident in Pennsylvania.

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By last month it became clear what Mr Erdogan needed to do to prevent the currency crisis turning into a financial disaster. He needed to raise interest rates, mend fences with the US, and solicit a bailout — all very tricky moves, risking loss of face for a leader claiming the crisis is a western plot aimed at bringing down Turkey and the embodiment of its vaulting ambition: himself.

Interest rates — which Mr Erdogan says are the “mother and father of all evils” — were raised sharply last week. This sparked an epic presidential tirade , unstartling to viewers of TV channels that hang on his every outburst. This was decoy spin.

Making up with Mr Trump is the next step. That now requires the release of Mr Brunson. This is tricky given that Mr Erdogan last year suggested he was a hostage against the US extraditing Mr Gulen. But it may be on the cards (the prosecutor in the Brunson case has been transferred).

The possibility of another Erdogan-Trump fist-bump is probably part of the reason for Mr Putin’s pause on Idlib. The Turkish president sought to put the Russian and Iranian-backed Syrian regime offensive on hold at a summit in Tehran this month. Mr Erdogan fears a new refugee crisis, a jihadi backlash against Turkey, and the threat to two Turkish strongholds in north-west Syria he has established in the past two years. His Russian friend rebuffed him, but seems to have reconsidered in light of the promising rift in Turkish-American relations.

After all, Turkey, although a Nato ally and a candidate for membership of the EU, is the wobbly leg of a new power tripod in the Levant that Moscow has built with Iran. It would be geopolitically wasteful for Russia to spurn it in its hour of need.

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That leaves the big debt refinancing Turkish borrowers will need — arguably Mr Erdogan’s biggest challenge. He has boasted of “new friends and allies” who will help Turkey as part of a global anti-Trump alliance, including Russia, China and even the EU. Qatar, Turkey’s last Arab ally, has pledged investment of $15bn. China is promising project finance worth $3.6bn. The EU, reliant on Turkey to curb Syrian refugee flows into Europe, will doubtless increase aid. But only the IMF can come up with the sort of sums Turkey will require — though that would entail conditions that would end the Erdogan government’s credit-fuelled growth-at-any-cost strategy.

“We think there is a hidden or secret organisation that is trying to force us into a deal with the IMF,” says Mustafa Sentop, a parliamentary leader of the ruling Justice and Development party, or AKP. He forecasts that “this will not happen”.

“Going to the IMF would be a big challenge,” says an AKP campaign strategist who underlines the party’s politically successful history of denouncing the tutelage of the fund. But, he adds, tacitly acknowledging it is an option: “Erdogan is good at explaining things to the nation.” And, he adds, “we need the money now”.

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