The Vladimir Putin-Recep Tayyip Erdoğan alliance, following the joint press conference given by the two leaders in Ankara on the 1st of December, was received with joy and concern alike. Russia announced cooperation with Turkey, abandoning the ‘South Stream’ project that would have transported gas to Southeastern Europe through Bulgaria and the Black Sea. Putin also announced a six per cent cut in gas costs to Turkey1.

However, while both leaders and supportive media have celebrated the alliance, both now face serious economic threats. Ironically, Russia and Turkey were hit by concerning financial developments on the same day: the 16th of December.

Halving in value in six months, the Russian rouble hit a new low of 80 roubles per US dollar. The rapid decline of the rouble has led to an inflation rate of 10 per cent. Interest rates were raised from 10.5 per cent to 17 per cent to combat the depreciation as well as further inflation risks.

The slump of the rouble is attributable to two factors: the fall in oil prices and Western sanctions against Russia. Due to sanctions, Russian banks are unable to raise money on Western money markets. Furthermore, the energy and arms sectors are unable to access European and American technology and finance.

However, Russia relies on its oil revenues to finance over half of its state spending. The price of oil must be 100 dollars a barrel to uphold a balanced budget. Currently, it sells at approximately 60 dollars a barrel2.The five-year low oil price is due to Saudi Arabia withholding OPEC from decreasing oil production. One main factor is the Kingdom’s desire to maintain its market share within OPEC. However, a more key factor is Saudi Arabia’s awareness of the importance of oil prices in sustaining the Russian and Iranian economies. Thus, Saudi Arabia is manipulating oil prices as a tool in its foreign policy dispute with the two states3.

With the Russian Central Bank’s drastic increase of interest rates, financial stability has been prioritized over economic growth. The Bank predicts that the economy may shrink between 4.5 and 4.7 per cent next year, given oil prices at under 60 dollars a barrel. Net capital outflows are expected to reach 134 billion dollars, in a more than two-fold increase compared to last year4.

It is important to note that Putin continues to enjoy high levels of popular support in Russia. However, a significant factor behind the support is oil-fuelled prosperity. As Russia is pushed into an economic crisis, living standards are likely to fall. Russia faces a future of capital flight, high unemployment and inflation, and eroded savings. Ordinary Russians are already concerned with hyperinflation, frantically converting their money into dollars and investing in durable goods. Investors are rapidly withdrawing, anticipating capital controls at a near date. We have yet to see how economic hardship will impact Putin’s popularity and assessment of his much-contested policies5.

Meanwhile, the Turkish lira hit a six-month low, valuing at 2.39 per dollar. The fall was perpetuated by a speech given by President Erdoğan regarding arrests of leading names of the popular daily Zaman, as well as Samanyolu TV, both affiliated with the Fethullah Gülen movement which is regarded as a ‘parallel state’ by the AKP establishment. ‘We have no concern about what the EU might say, whether the EU accepts us as members or not, we have no such concern. Please keep your wisdom to yourself’, stated Erdoğan6. The lira, which valued at 2.32 per dollar, had fallen to 2.39 per dollar by the end of the speech7.

Clearly, the situation is not as dramatic as in Russia; the lira has risen back to 2.34 per dollar within the span of a day. Nonetheless, the incident serves as a warning signal of the fragility of Turkey’s economy. Firstly, a main factor behind the December 16th plummet were concerns regarding the future of Turkey’s EU accession process and expectations of further antagonistic behaviour on the part of President Erdoğan and the Justice and Development Party (AKP) government.

In response to the media crisis, the European Council has stated that recent developments in Turkish politics have cast serious doubts over the impartiality of the judiciary, as well as demonstrating a concerning increase in intolerance. The fact that a relatively minor speech by Erdoğan caused great impact on the lira is a warning of the way further problems in the accession process will hurt Turkey’s fragile economy8.

More importantly, however, is that Turkey is an emerging economy and will be highly affected by the FED’s anticipated increase of interest rates. As with all emerging economies, high levels of capital outflows are expected. Countries with stable macroeconomic indicators will have an easier time dealing with these issues, but Turkey is clearly not one of them. Turkey is highly indebted at nearly 50 per cent of national income9, and its current account deficit stands at approximately 8 per cent of gross national product as of the end of 2013. Debt, in foreign currencies, has been rapidly accumulated in order to finance the growing current account deficit, on which Turkey is dependent for continued growth. A significant part of this is short-term external debt, which is problematic given the increased interest rates borrowers are projected to face10.

The AKP was elected as a promising new party in 2002, when Turkey was hard-hit by a financial crisis. It is credited with taming inflation and facilitating a significant degree of growth in real GDP, as well as stable policy making, remaining in power for 12 years and ruling as a single-party government for three consecutive terms. Thus, the likelihood of economic problems unravelling following further depreciation of the lira and higher interest rates, impacting ordinary Turkish consumers, are a great threat to the future of Erdoğan’s newly consolidated Presidency and the reign of the AKP.

Putin and Erdoğan might place their recent encounter as a firm stance against the US and Europe. However, warning signs have been cast by their economies, and both enjoy high levels of popularity derived from perceived economic wellbeing. As those perceptions change, both leaders are likely to be led down paths onto which they do not wish to embark.

 

Sources

  1. http://blogs.ft.com/the-world/2014/12/putin-and-Erdogan-not-quite-kindred-spirits/?catid=146&SID=google
  2. http://www.theguardian.com/business/2014/dec/16/russian-rouble-hits-new-all-time-low
  3. http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/11268611/OPEC-Saudi-Prince-says-Riyadh-wont-cut-oil-unless-others-follow.html
  4. http://www.ft.com/intl/cms/s/0/dc3dcea6-8483-11e4-bae9-00144feabdc0.html
  5. http://www.news.com.au/finance/economy/the-cold-war-is-back-and-colder/story-e6frflo9-1227159436375
  6. http://www.theguardian.com/world/2014/dec/15/turkey-Erdogan-western-ally
  7. http://www.aljazeera.com.tr/haber/dolar-239-tlyi-gecti
  8. http://www.todayszaman.com/anasayfa_eu-council-questions-turkeys-respect-to-media-freedom-with-recent-arrests_367186.html
  9. http://www.hurriyetdailynews.com/turkeys-foreign-debt-surpasses-47-percent-of-national-income.aspx?pageID=238&nID=64603&NewsCatID=344
  10. http://www.forbes.com/sites/jessecolombo/2014/03/05/why-the-worst-is-still-ahead-for-turkeys-bubble-economy/5/