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The Turkish lira has lost some 40% of its value since the start of this year
Turkish, Russian devaluations are spilling over into Central Asia and the Caucasus
That is bad news for the rest of the region as Turkey’s currency woes are having a spill over effect on its neigh- bours. While the sell off in Turkey has been particularly sharp – the lira has lost some 40% of its value against the dollar YTD – economists 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 pric- es 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 crises, 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 sug- gested,” 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 increasingly important role in the Caucasus 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 blocks.
Turkey has become like Russia, what for- mer EBRD chief economist Erik Berglof and the current holder of the same job Sergei Guriev dubbed an “investment node” for the rest of the Commonwealth
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Currency traders had the weekend off, but on Monday August 27 they were thrown back into the trenches in Istanbul and were selling the lira again. Although nerves have calmed somewhat from the panic that gripped
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currency markets in recent weeks, because there is still no coherent rescue plan, emergency rate hike or convincing statements that Turkey’s central bank will now stick to a more orthodox mon- etary policy, FX traders are still jumpy.