The West needs to provide financial support to Turkey
- to ensure sanctions compliance
It is pretty clear that Russia will, and indeed is, using Turkey, and particularly its financial sector, to get around Western sanctions on Russia for the war in Ukraine. Dubai is the other obvious vulnerability for Western sanctions enforcers.
The West needs a clear eyed approach to Turkey if it is going to succeed in cutting off Russia from financial flows, markets and trade.
The West should make it clear to Turkey that:
a) Sanctions breaking will be called out and acted upon;
b) Those breaking sanctions will suffer damaging secondary sanctions;
c) Turkey should expect financial support from the West for ensuring sanction adherence.
Irrespective of Turkish government action, I think most Turkish financial institutions will take Western sanctions warnings seriously. At least the private banks. They are highly professional, have strong risk management and understand the consequences of getting caught breaking Western sanctions.
But at the margin, some will try and get around sanctions. They need to be encouraged to adhere to sanctions.
On Western support for Turkey at this difficult time it is clear that Turkey is set to bear the biggest impact amongst third party countries for the war. Higher energy and food prices and the loss in tourism revenues will make already critical balance of payments and inflation problems much worse and in fact unsustainable. It is indeed hard to see Turkey avoiding a balance of payments crisis now without outside help.
I would advise the West to provide financial assistance to Turkey. The US can provide loan guarantees to the Turkish Treasury and DM central banks should provide swap facilities to the CBRT.
However, such support should not further the continuation of bad policy, particularly at the CBRT. Current unorthodox policy settings are hugely damaging and need to be put back to default orthodox settings. Policy rates need to be hiked and management changes also perhaps made to affirm the independence of the CBRT.
If all this is put in place then I can see the lira rally, inflation fall, capital flows return, leading the way eventually for much lower rates and more sustainable growth. There is a win win here but Erdogan and the West need to think outside their own boxes. The future of Ukraine, Turkey, and indeed Western Liberal Market Democracy are at stake.