Opinion

1 July, 12:54 PM

Turkey plays a delicate balancing act between Ukraine, Russia and NATO

Timothy Ash

UK Economist, covering Emerging Europe, Middle East and Africa.

Turks are rightly proud of the success of Bayraktar drones in the conflict in Ukraine.

Ukraine has also celebrated the success of Bayraktar drones against Russian armour, particularly in turning the tide in the first few weeks of the Battle of Kyiv – with songs even produced and sung by Ukrainian soldiers to acclaim the battlefield-changing nature of this high-end Turkish technology.

Turks like to view this as a great example of the country’s new-found technological and military prowess, but also their willingness to show support for Ukraine despite obvious risks to damaging valuable relations with Russia.

Ukrainians are though beginning to doubt Turkey’s commitment to their cause, notwithstanding the undoubted success of Bayraktar.

Turkey’s stance on peace talks in Antalya in March and again over trying to broker a deal to break the grain blockade of Ukrainian ports has left a distinct impression in Kyiv that Ankara is too keen to tow the Russian line and force a Russian-friendly peace deal down their throats.

In Antalya, the Turkish side were confident a deal was to be done, and even sold a deal as in the offing, but this seemed to be close to terms being offered by Moscow, with little effort to accept or even understand the Ukrainian position.

Predictably the Antalya peace process eventually collapsed. The fact that Ankara seems tone-deaf to Ukraine’s position was also evident in talks ongoing over breaking the grain blockade, with Ankara negotiating direct with Moscow and seemingly little effort being made to involve the Ukrainian side – even though any plan involves decisions about unblocking Ukrainian ports.

On the ports issue, Turkey seemed unable to comprehend the Ukrainian position that getting an agreement to de-mine ports was worthless unless there were also security guarantees to ensure that Russian forces did not use this as an opportunity to launch amphibious landings against Odesa, Mykolaiv, et al.

Turkey appeared naïve in both the Antalya talks and the talks over ending the grain blockade. The Turkish side appeared to be adopting a peace deal at any (to Ukraine) cost strategy, but with zero effort to understand the Ukrainian position.

But key to understanding the Turkish position on the war in Ukraine, and its seemingly blinkered effort to bring peace at almost any cost (to Ukraine), is that the Erdogan administration views all of this through its very narrow electoral lens.

And therein It faces difficult elections within the next year, with opinion polls not looking good for either for Erdogan or his ruling AKP, while the economy is in a desperately weak position. A degree of desperation and wishful thinking is hence evident in Turkey’s approach to the war in Ukraine.

On the latter, over the past decade, under Erdogan’s failed monetary policy mantra that high-interest rates cause inflation, the economy has been in an almost constant state of balance payments crisis.

Erdogan continually prioritises growth over inflation and exchange rate stability as in the past credit growth has delivered real GDP growth, jobs and votes.

But this has meant the economy has been run too hot, the price of which has been wide current account deficits, large external financing requirements, and constant pressure on the lira to weaken.

An orthodox response would be to tighten monetary and/or fiscal policy to slow domestic demand, lower import demand and with it the trade and current account deficits thereby alleviating pressure on the lira. But Erdogan’s interest rate ideology has removed this option for the CBRT, meaning that the lira has had to take the strain, which has in turn fuelled inflation. Turks are unhappy with inflation and a constantly weakening lira. They feel poorer, which explains Erdogan’s lowly popularity.

But Erdogan still thinks he can win the election by pulling a few more rabbits out of the hat – including the recent exchange rate protected deposit scheme, and more recently restrictions on corporates borrowing in lira if they have large FX deposits.

Erdogan thinks that this can buy him some time, helping slow dollarisation, and anchor the lira enough for him to push the growth agenda just one more time to win the next election. In normal times it would be touch and go whether this strategy could hold things stable enough to get thru to elections by June 2023 and deliver Erdogan a win.

But the war in Ukraine has just made the maths here even more difficult – higher energy and food import costs and the threat of the loss of key Ukrainian and Russian tourism receipts (one-quarter of the total), are pushing the current account deficit wider and putting even more pressure on the lira.

Erdogan needs this war to end and soon, otherwise, he risks getting rolled over in an extreme balance of payments crisis which would scupper any remaining popularity he has.

So Erdogan has been happy to allow Bayraktar drones to go to Ukraine – they advertise Turkish engineering prowess and generate important export earnings. But beyond that Turkey has done little to help Ukraine’s cause.

And, as noted, if anything the Antalya peace talks and the talks over unblocking grain deliveries from Ukraine have undermined Ukraine’s position.

Turkey has also failed to join Western sanctions on Russia – arguing that it simply cannot afford to given its challenging balance of payments position. If relations with the West were better it might have hoped for financial support to offset losses from sanctions and the war in Ukraine. But this option is constrained by broader Western concern about policy choices made by Erdogan, including monetary policy.

Some close to the Erdogan administration has even argued that Turkey could benefit from sanctions by acting as a middle-man similar to its position on Iranian sanctions. Some think that Turkey could benefit as Russian companies look to reflag to avoid sanctions, as Russian capital and business look to exit and evade sanctions, and also by being a conduit for Russian capital – tourism.

The latter is the scenario where Russians seek to holiday in Turkey but use this as an opportunity to park capital by opening Turkish bank accounts and buying property.

To some extent facilitating capital flight from Russia is a benefit for the West in heaping the economic pressure on Russia, but there is a fine dividing line for Turkey here from being seen to profit from the conflict, and concern that some of the activity might be on the edge of actual sanctions breaking. A recent visit by US Treasury officials to Turkey likely was meant to draw clear lines as to what is and is not acceptable.

And then there is the whole furor around Turkey’s stalling on Finland and Sweden’s bid to join NATO.

As NATO allies have highlighted, Turkey does have understandable security concerns over Scandi support for various Kurdish groups. It has leverage now to force Sweden and Finland to rein these in.

And playing hardball on this issue will play very well with the domestic nationalist constituency in Turkey before the elections.

Its potentially a win-win for Turkey. But the risk is if Erdogan overplays his hand and permanently damages relations with the West. He needs to realise that for the US and the rest of its NATO allies, Russia is the priority and is seen as a clear and present danger, and an existential threat to Ukraine and the West.

Finnish and Swedish NATO entry is a huge win for the West, for Ukraine, and a major snub to Putin. If Erdogan now blocks this at the NATO summit in Madrid later this month, relations with the West will I think be permanently soured. And likely the West will adopt an openly hostile, as opposed to largely neutral, approach to Erdogan’s re-election by June 2023.

Blocking Swedish and Finnish membership would also stall raising hopes of a deal over Turkey’s compensation for leaving the F35 project, through the purchase of additional F16s and upgrade kits.

This would damage Turkey’s defense capability. Now playing hardball to the end on this could turn the next election in Erdogan’s favor, and I think he will have to balance this off against the risk of a major balance of payments crisis if he plays hardball too long.

And with the West angered, he would have few tools to allay any such BOP crisis – he does not want to hike policy rates or go to the IMF, capital controls are counterproductive and will damage business, the CBRT has limited reserves and FX adjustment just leads to more inflation.

If he faces a BOP crisis after vetoing Finnish and Swedish NATO membership I think the West would stand on the sidelines as a full balance of payments crisis washes over Erdogan. And likely Erdogan would lose the next election. Logic would suggest that Erdogan played very hardball at the Madrid summit – getting deals over Kurdish groups in Sweden and Finland, easing of arms sanctions, and new agreements over new arms purchases like the F16.

He can tell electors at home that he played hardball and won concessions. He will hope the West is grateful enough to keep capital markets open to allow him to finance his external borrowing needs.

All this feels pretty binary. But I think in all this Erdogan needs to realize that for the West the crisis in Ukraine is a defining moment, a definitive challenge they face, and it’s a time to ask if allies are with the West or against it.

Erdogan has tried staying on the fence, to some extent trying to play one side off against the other. I think the time for such an approach is fast running out. Madrid will likely be the time when Erdogan has to decide whose side he is on. An important week is in store for NATO and Turkey.

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