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September 7, 2018 www.intellinews.com I Page 5
Turkish, Russian devaluations are spilling over into Central Asia and the Caucuses
That is bad news for the rest of the region as Tur- key’s currency woes are having a spillover effect on its neighbours. While the sell off in Turkey has been particularly sharp – the lira has lost some 40% of its value against the dollar YTD – econo- mists believe that its economy is simply not big enough to cause “contagion” and start a broad sell off in emerging markets, similar to the 1997 Asian crisis that triggered crises in other markets – especially Russia, which collapsed a year later.
“The sell-offs in Turkey and Argentina this time round have been particularly sharp. The falls in their currencies and rise in their bond yields (both dollar and local currency) have only been matched in scale by the declines in Russian asset prices during the ruble crisis of late 2014,” William Jackson, the chief emerging markets economist at Capital Economics said, adding that the size of the currency falls were in line with previous cri- ses, and the rise in local currency bond yields was larger, but the widening of spreads to US T bills was smaller. “Overall, then, it has been a large sell-off, but perhaps not as dramatic as some headlines have suggested,” Jackson concluded.
However, the effect of Turkey’s problem on its neighbours is more noticeable simply because it is bigger than them and these countries are much more closely tied together by trade and invest- ment bonds. Turkey has been playing an increas- ingly important role in the Caucuses in the last decade and that is costing its partners now.
Hopes that following the collapse of the Soviet Union the west would come to the aid of the newly independent states with massive investments to bring their economies up to western standards
have largely fallen on stony ground. But more recently regional blocks have formed where like- minded neighbours have been investing into each other and building up regional trade blocs.
Turkey has become like Russia, what former Eu- ropean Bank for Reconstruction and Development (EBRD) chief economist Erik Berglof and the cur- rent holder of the same job Sergei Guriev dubbed an “investment node” for the rest of the Common- wealth of Independent States (CIS). Turkey is the financial and economic centre of a patch centring on southern Europe and Turkic speaking Eurasia thanks to its proximity and the shared language and cultural heritage with the other countries.
A “golden triangle” of co-investment and trade has appeared in particular between Turkey, Geor- gia and Azerbaijan, manifest in the new Baku-Tbi- lisi-Kars (BTK) railway link opened last November. Turkey’s trade with the entire region has flour- ished, exposing the participating countries to An- kara’s current problems. Kyrgyz and Kazakh trade with Turkey has been growing steadily, despite some hiccups caused by the creation of external tariff barriers under the Moscow-led Eurasia Eco- nomic Union (EEU). Ankara’s business ties with Tajikistan, which does not share a Turkic language like the other Central Asian states, have also developed and more recently the one-time hermit state Uzbekistan has opened up after the death
of former president Islam Karimov, and Turkish business has rushed in.
On the other hand, Turkmenistan is insulated from the lira’s fall as it is maintaining its dollar peg policy for the currency for the meantime. And Armenia’s lack of meaningful contact with Turkey has isolated it from the meltdown, as there is little trade or investment between the two countries.
Russia
Countries in the region Europe are being hit on both sides at the moment. While Turkey is grab- bing the headlines, the Russian devaluation is just as painful, if not more so, due to the big role Russia’s economy still plays across the whole ter-