Page 71 - BNE_magazine_12_2019 dec19

bne December 2019
Opinion 71
But in terms of economic policy I think what is important
is that Erdogan is facing a challenging domestic political outlook – early elections are possible in a scenario where
the coalition with the MHP breaks, and at this stage AKP popularity is flagging. Thus even though formal elections are not slated to take place until 2023, Erdogan is likely to be very mindful of his poll ratings; the temptation still will be to run more populist and pro-growth policies. Indeed, I think this is already evident from the CBRT’s breakneck and front-loading pace of policy rate cuts.
Geopolitics – binary outcomes dependent on
the Supreme Leader (Trump, that is)
Turkey’s relations with the West are strained, and remain at
a low point. With the US, issues are outstanding around the S400 Russian missiles/US F-35 fighter planes, Halkbank and Iran sanctions compliance, detained US state department employees, [self-exiled cleric and Erdogan adversary Fethullah] Gulen, Turkey’s pivot to Russia, Syria and US support for the Kurdish YPG [militia]. With the EU, there are outstanding issues around Turkey’s energy exploration in the Eastern Med, Syria, migrants, and Turkey’s stalled EU accession bid. Both the US and EU are concerned about trends in Turkey in democracy, human rights, rule of law, media freedoms, et al. The “to be worked on” list is very long from both sides.
But in the case of US-Turkey relations, there is this extraordinary relationship between Presidents Trump and Erdogan. A personal chemistry which seems capable of punching through established and entrenched views in both countries. This was amply seen with the Syrian ceasefire deal agreed, out of the blue and against expectations, during the recent visit of VP Mike Pence to Turkey. Trump has shown the ability to give Erdogan a hall pass when it comes to potential US sanctions whether CAATSA [Countering America’s Adversaries Through Sanctions Act] or for Syria. And therein Trump’s willingness to use political capital in support of Erdogan, against the D.C. establishment, and for seemingly very little reciprocity, is extraordinary. Therein I don’t think the Turks could believe their luck with the deal signed by VP Pence – they got literally all their demands from the US for next to nothing in return.
So herein the slated November 13 meeting between Trump and Erdogan in D.C., has the potential again to move the relationship forward in a positive way. Likely Erdogan will want assurance of no further sanctions from the US on Turkey, and the dropping of the Halkbank case, which is a huge political embarrassment to the Erdogan administration. Erdogan will likely mention Gulen [who is living in exile in the US] albeit given all the high-level exposure therein with respect to the Rudy Giuliani/Mike Flynn axis, it’s hard to see any wiggle room from Trump. Both sides will focus on easy wins, for example, plans for a USD100bn trade deal. But I am not sure what Erdogan can deliver to Trump – big new orders for Patriots [missile defence systems], and recommitment
to the F-35 programme, albeit the latter would still require mothballing the S-400 programme.
On the S-400 issue I think the Turkish side thinks they have called the US bluff, again, and will try and play for time with both the US and Russia. Obviously going back on commitments to Russia, would risk escalation and big refugee flows from Idlib in Syria, which would risk further undermining domestic political support for Erdogan given the rising sensitivity of the Syrian refugee problem in Turkey. Maybe placing a big order for Patriots, while stalling the activation of S-400s will be enough to secure Erdogan a happy photo shot with Trump.
Congress though still remains unpredictable in all this.
Mitch McConnell still seems set on trying to guard Trump from having to make difficult decisions on Turkey relations, by stalling a Senate sanctions bill on Turkey. But Trump’s problems around impeachment could yet generate surprises, and McConnell might be unable to hold the line. A US Senate sanctions bill could still make the floor in early December, and this might just dovetail with EU sanctions related to Turkey’s exploration for energy in the Eastern Med.
The Halkbank issue is a further complication and Trump
now seems unable to stall the judicial process which has now begun. Indeed, with the recent SDNY [Southern District of New York] indictment against Halkbank, Trump signalled that this was now beyond his control. The Turkish side does not appear to be helping its own case by seemingly refusing to accept US jurisdiction – the appointment of the indicted felon, Atilla Hakan, as Borsa Istanbul CEO also does not help the mood music around this case.
“Some of the swagger of the ruling party has been restored by Turkey’s successful intervention in northern Syria, and by Erdogan’s apparent out-witting of President Trump”
Continuation on this path looks set to risk fines for contempt of court, which could well escalate, even before any formal judgement is made, or even eventual penalty from OFAC [Office of Foreign Assets Control]. Now while Halkbank might have no assets in the US, Halkbank’s failure to accept US jurisdiction might have broader implications for other Turkish state-owned banks, and also the Turkish banking sector in general. Turkish state ownership of Halkbank suggests any decisions being made as to how to defend against the SDNY court case very likely are being made by the bank’s political masters. And this would raise the broader question as to whether the Halkbank owners, in this case the state, accept US regulatory oversight on Turkish financial institutions in general.
Can Turkish financial institutions be expected now to accept US jurisdiction? How will international banks view their
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