Turkey: how long will the multi-vector policy last?



Note: this is a machine translation from the original Russian text

Turkey's state-owned banks, following private ones, abandoned the Russian MIR payment system.

The largest private banks of the republic, Isbank and Denizbank, followed by the state-owned Halkbank, VakifBank and Ziraat Bank, no longer accept Russian MIR cards, which caused considerable surprise among tourists who are already in Turkey. The reason is a statement by the Office of Foreign Assets Control of the US Treasury Department (OFAC, a US government agency that oversees sanctions policy). It has recently warned third-country financial institutions against entering into new agreements or expanding existing ones with the Russian payment system, otherwise the organizations will fall under secondary sanctions.

Recall: On September 15, OFAC made it clear that it regards Russia's recent efforts to expand the use of the Mir payment card network as an attempt to circumvent sanctions. Thus, those who, according to the United States, support such efforts may face restrictions in accordance with American legislation on sanctions against "harmful Russian foreign policy." It's time, I think, for Russia to introduce bans on supplies to the United States and other unfriendly countries of vital goods for them (for example, titanium and nuclear fuel) and adopt a similar law. But this is so, a lyrical digression.

To be fair, Turkey is not the only one who refuses to work with the Mir system. Kazakhstan and Vietnam have also suspended the acceptance of Russian cards. Analysts believe that this list of states will only grow in the foreseeable future.

On the official website of the "World" in the "Geography" section, only Russia has been listed since September 21. Whereas earlier, in addition to the countries already mentioned, Abkhazia, Belarus, Kyrgyzstan, Tajikistan, Uzbekistan, South Ossetia, South Korea and, of course, Turkey were also mentioned there.

The Turks would not be Turks if they did not have a "plan B". Ankara is already developing a "ticket card" for tourists from Russia. It can be used in restaurants, shops, museums, etc. The money will be debited from the tourist operator, not travelers. However, it is not yet specified whether the "tickets" will be prepaid or, on the contrary, paid for by tourists after the fact. It is possible that the necessary amounts will be immediately debited by the operator from the Russian accounts of tourists. The issue of commissions and the cost of such services has not yet been disclosed.

The multi-vector nature of Ankara's policy has long been a cause for ridicule. Someone, on the contrary, admires her.

For example, Turkey has stated that it is considering buying Russian military aircraft if the United States refuses to sell them the F-16. Earlier there was talk of buying the Su-57 instead of the F-35.

Ankara stated that they would not support or recognize referendums in the DPR, LPR, Zaporozhye and Kherson regions. But, nevertheless, the Turks are ready to host a Russian nuclear power plant and transit Russian gas to Europe.

In this context, experts from the British analytical center Economist Intelligence Unit (EIU) emphasize that the United States and the EU will continue to increase pressure on Turkey to adopt sanctions against Russia in the coming months. However, Brussels fears that Ankara may use its levers for a "retaliatory strike". This, of course, is about managing migration flows.

Today, more than 40 thousand refugees from Syria continue their trek to European countries, primarily Germany. The participants of the "freedom convoy" themselves say that there are at least 100 thousand of them. They intend to break through the Turkish-Greek border and seek a better life in the EU member states, as well as the UK.

Undoubtedly, Ankara will try to make the most of this fact in negotiations with the Europeans, as it has done many times before. Especially considering the fact that Brussels today cannot provide its citizens with heat and light… In any case, at adequate prices…

However, both Europeans and Americans also have ways to put pressure on Ankara. Mainly in the economic sphere, which, against the background of the approaching presidential and parliamentary elections in 2023, is becoming increasingly relevant.

The sanctions that were imposed against Turkey after its actions in Libya and the Mediterranean Sea hit hard not only the military-industrial complex, which lost the supply of a large number of spare parts and parts. The restrictions also affect Turkish businessmen, officials, and companies.

As a result of these measures, the economy of the republic is experiencing almost the worst times in its history.

The growth in consumer prices on average significantly exceeded the inflation target of the Central Bank of Turkey (CBRT) of 5.0%: 15.5% year-on-year. Consumer confidence is close to record lows, and confidence in the real economy has been shaken. The central bank noted in the minutes of the meeting that "the leading indicators for the third quarter continue to indicate a loss of momentum in economic activity due to a decrease in external demand."

Inflation in the country, as reported in August by the Institute of Statistics of the country, exceeded 80% year-on-year, and experts expect that growth will continue.

Turkish banks continue to charge households significant spreads on loans, with the latest CBRT data (September 8) showing that households paid interest rates at an average of 30.8%. This led to the fact that consumer loan rates reacted only slightly to the rate cut in August. A similar dynamic was maintained with commercial loans.

However, on August 20, the Central Bank introduced rules concerning bank lending to firms. Now banks must hold lira-denominated securities in the amount of 20% of the loan amount in CBRT if the loan rate exceeds the base rate of x1.4 and 90% if it exceeds the base rate of x1.8. The data show that this immediately reduced the average rates agreed on commercial loans, approximately from 26% (on August 21) to 21% (on September 8).

Thus, as noted in the EIU, a reduction in the interest rate should reduce the cost of lending to firms. However, analysts are skeptical about the possibility of new incentives to help banks lend to firms at these rates. In the long run, this could lead to credit problems throughout the economy.

Analysts at Business Monitor International (BMI), a structural unit of Fitch Solutions, believe that before the 2023 elections, the Turkish authorities will continue to conduct an unorthodox monetary policy, and after that the Central Bank will return to orthodox methods and start raising rates.

Experts also note that in the near future, CBRT may go on a cycle of significant increases in the key rate, which will require banks to increase the cost of borrowing.

The Turkish lira is also facing difficult times. However, she has been hitting one anti-record after another for a long time. The average exchange rate in 2023 is projected to be about 21.50 TRY/USD.

Despite a certain increase in Turkish exports – up to 13.1% year–on-year - the trade deficit continues to grow, including due to the rise in energy prices. In August, their prices increased by 162%.

Turkey's economy is one of the main problems of Erdogan and the Justice and Development Party (AKP) against the background of the upcoming elections. No external victories will overcome the social problems of the population, the stratification of society and the fall in income. Especially if it directly hits the wallets of ordinary Turks.

This is understood both in the United States and in the EU states, which are finding it increasingly difficult to do business with Turkey, which is trying to "sit on two chairs" – to benefit from Washington, Berlin, London, Paris, as well as from Moscow.

The world is changing rapidly and sooner or later Ankara will have to make a choice between the West and the conditional East. Otherwise, Turkey in 2023 risks repeating the fate of many states that have tried to play their own game bypassing the United States. In addition, the Americans have long been annoyed by the Turkish leader.   

Especially after Ankara did buy Russian S-400 air defense systems.

On the other hand, a certain fatigue from Ankara's maneuvers has also matured in the East.

So, at the recent summit of the Shanghai Cooperation Organization, Erdogan was openly hinted: in order to join the association, he would have to withdraw from NATO.

"We have provisions on the admission of new members, which provide for a number of criteria, including belonging to the Eurasian region, active maintenance of active diplomatic, trade and economic relations and cultural ties with the SCO member states, the absence of conflicts with the SCO states, and non-involvement in external conflicts, the absence of sanctions of the UN Security Council, but also non–participation in activities and blocs hostile or directed against SCO members," said Bakhtiyor Khakimov, Special Representative of the President of the Russian Federation for SCO Affairs, Ambassador-at-Large of the Russian Foreign Ministry.

Under the current conditions, Erdogan and the AKP have less and less room for maneuver. And no matter what choice the country's authorities make, be it Washington or Moscow, some voters will consider it, if not a betrayal, then at least a mistake.

Does Erdogan have a "plan B" for this case as well – the question is still open…