Turkiye - Q&A

I get asked lots of questions about my views on Turkiye - I thought best to respond via a Q&A.

Türkiye Q&A

Q? What do you make of the Turkish political scene at the moment?

Answer: Obviously lots of focus on the Imamoglu arrest, and then the arrest of members of his team at Istanbul city hall, and fears now about potential for the closure of the CHP. In the immediate aftermath of the Imamoglu arrest there were obviously large street demonstrations and there were fears over social and political stability. Erdogan seems to have riden those out - again. Demonstrations have dissipated, and Erdogan seems to have got his way in terms of taking out his main political rival. It’s hard to see Imamoglu getting out of jail anytime soon. Let’s see if the CHP can raise a new contender to replace Imamoglu - perhaps Özel or Yavas. But the focus now on allegations of corruption in the prior CHP leadership contest look set to bog the party down for some time to come. It’s unclear whether all this ends up in the current CHP leadership being ousted, and former CHP leader Kilicdaroglu being reinstated in office. He clearly has plenty of bad blood towards those who previously ousted him, but would he be willing to stab his former colleagues in the back now by taking the CHP’s poisoned chalice? Or could the courts simply impose a trusteeship on the party, re-run elections which might end up seeing Ozel et al reinstated? It’s all messy which is of course what Erdogan wants - the perception of chaos and infighting within the main opposition party, which is still outpolling the AKP.

In the Imamaoglu case AKP supporters would point to the overwhelming body of evidence in the corruption case as reason for his arrest. Opponents would argue that the case is political - there is lots of corruption elsewhere in Türkiye’s municipal government so why would only is Imamoglu and the CHP being targeted? They would argue the case is political and evidence of selective justice.

Erdogan is likely pulling all the strings here in the background, and using all the tools of the state machine to cobble the opposition as, to be fair, they were used against him, to varying degrees of effectiveness in the past. Remember here his own arrest and imprisonment, then the attempted AKP closure case, the e-coup, et al. Erdogan learned his politics from many of the same opposition players now reined against him. Poacher turned gamekeeper, only he must seems to be a lot more effective at it than many of them. Plus I guess he has co-opted many of the players in the old Turkish deep state - the MHP, Bahceli, et al.

The opinion polls are not looking good for Erdogan, or the AKP, but I don’t think Erdogan is planning to go to early elections any time soon. The game plan still is likely to change the constitution - likely with support of the Kurds, and through a Kurdish peace process, and then try and run for another term. But elections are only really likely in 2027, and in Erdogan’s mindset that still gives him time to turn the economy around - with the help of Simsek, et al, and for domestic politics and geopolitics to turn his way. There are still chances for a feel good factor about Syria (return of refugees) and Kurdish and Armenian, and perhaps even Ukrainian peace (the latter though sees unlikely in my view), and improved relations with the US and Europe.

Q? And what about the Kurdish peace process?

Answer - Look, the intervention by nationalist, MHP leader, Bahceli was absolutely extraordinary, to fire the starting gun on peace talks. I think both sides are serious. Remember that Erdogan initiated a Kurdish peace process earlier in his period in office, albeit this then disintegrated around the time of the 2015 election. He understands that any Kurdish peace will require constitutional change (around Article 66, in particular) and this opens the way for a reset also on his current two term limit. Kurdish votes in parliament can secure support for constituional change. For Kurds also, I think there is exhaustion with the armed struggle, and an understanding that Turkiye’s increasing technological advantage (drones, et al) is likely just going to make the fight more difficult to sustain. Developments in Syria, and Trump’s desire to pull US troops out of the region just make their position less sustainable. Their demands don’t appear beyond reach - some language rights, a more pluralistic view of Turkish identity in the constitution, and greater real local government decentralisation (which had been an Erdogan call earlier in his rule, and coming from his own period in local government). A deal is possible, it just needs careful management. But as Simsek (himself a Kurd) points out, it would be a huge win for Türkiye, and the Turkish economy, given the cost of the conflict is estimated to have been huge over the 40-odd years of conflict - $1.8 trillion according to Simsek. It would bring investment, more trade, financing, and improve relations with foreign partners (the U.S., Europe, Iraq and Syria) and help remove one fault line in domestic politics. There would be a huge peace dividend.

Q? How about relations with the West?

Answer - Well, Erdogan seems to have personal chemistry with Trump. Both are transactional - more about interests than values. The Trump administration was quiet on the arrest of Imamoglu. What Trump cares about is getting US troops out of Syria, and having a point person to keep ISIS in check. Trump also recognises Turkiye’s anchor role in the region, and a useful point ally if Iran unravels. Türkiye also wants to buy US defence equipment - F16 upgrades, to get back on the F35 programme, plus missiles. On the latter remember that Türkiye only ended up buying S400s as the U.S. dragged its feet so long on Patriots. Trump also likes strong leaders, and Erdogan fits into that camp. Erdogan also gets along with Putin, and Zelensky, a factor appreciated by Trump. Note also here the new U.S. Ambassador, Tom Barack, seems to be much appreciated by Türkiye - he seems to have the ear of Trump and has been hands on in problem solving in Syria, and Lebanon, and has been responsive to Turkish concerns. This follows on from Jeff Flake who was also similarly appreciated by Turks, for his clear love of Türkiye and the assignment. There is talk of solutions on the S400 issue, and Türkiye might even get back on the F35 programme, if it still wishes. I am not sure if this ship has sailed though with the focus on Kaan, and unmanned fighter jets by Baykar.

Even on Europe things seem to be moving in the right direction.

UK - Turkish relations have long been in something of a renaissance as both have common interests and perspectives, around trade issues (Turkiye wants a similar trade deal/relationship to the EU, as the UK), Ukraine and European security. Let’s see if the UK can finally get sign off (from Germany) to sell Eurofighters to Türkiye and I would expect Türkiye to be a potential buyer of excess UK naval assets - those big aircraft carriers are surely surplus to U.K. requirements.

Europe - long held prejudices against Türkiye remain in continental Europe, but maybe this is changing with the new geopolitical reality. Europe faces an existential threat from Russia, the U.S. is increasingly MIA (“action” being Iran, and China) and Türkiye’s large military and military industrial complex can provide solutions. Türkiye can also be a large market for European defence technology - note there the Macron - Erdogan meeting at the NATO summit with focus on Türkiye’s desire to buy French air defence systems. Macron and Erdogan have had testy relations perhaps due to the Franco-Turkish rivalry in Africa (Mali, et al) but maybe needs must are putting the greater goal of fending Russia off centre stage. German - Türkiye relations are improving under Merz but their are still plenty of Türkiye hawks within the coalition.

Actually there is a huge opportunity for Türkiye - European defence cooperation. Türkiye has the military industrial complex to quickly scale up defence production for Europe. Türkiye wants the science and innovation - its wants technology exchange. There is a win - win here if European politicians can put their past prejudices behind them - Italy is leading the light here with the recent deal in drone technology. The opportunity for Türkiye - Ukraine - UK/European defence cooperation is enormous. Türkiye and Ukraine have comment interests - keeping

Russia in check and Türkiye and Europe can benefit from Ukraine’s remarkable battlefield experience plus forced innovation. It’s actually the only way to counter the leaps now being made by Russia. Either Europe, and Türkiye, wake up to the threat, or they better start learning Russian.

Q? What about relations with Russia?

Answer - it’s complicated, but transactional. Erdogan has a good personal relationship with Putin, perhaps cemented by Putin’s early support for Erdogan during the 2016 coup attempt when most Western leaders (aside from the Brits) were literally MIA, or perhaps more pertinent AWOL. The two can compartmentalise areas of competition (close to conflict - like Syria) and common interest (economic cooperation, nuclear, energy). Testimony here surely is the fact that Türkiye can still facilitate trade with Russia, despite Western sanctions, host millions of Russian tourists, buy energy, cooperate in nuclear energy with Russia, and yet Türkiye is a NATO member, and has been a strong military backer of Ukraine. Relations have been strained by Türkiye’s recent geopolitical win in Syria, very much at the expense of Russian hegemony, plus also negotiations now to mothball Russian S400s. But it is important to stress that in Ukraine, Türkiye certainly does not want a Russian victory as this would see Russia re-exert its dominance over the Black Sea. Türkiye has succeeded in balancing relations between Russia and Ukraine, so much so that it is perhaps the only player really trusted by both sides, and to be the venue for peace talks - the reality is that Ukraine does not trust the Trump adminstration when it comes to peace talks and its dealings with Russia. And its position as an arbiter in Russia - Ukraine peace talks gives Türkiye global leverage and gravitas. It also means that its interests in the wider region cannot be ignored - in Syria, and the Eastern Mediterranean, and it’s gives Erdogan a freer hand when it comes to talking up about issues such a Gaza.

Q? What about an Armenian deal?

Answer - all sides want it (perhaps with exception of Russia). Note Armenian prime minster, Pashinyan’s recent trip to Istanbul and his strong personal relations with Erdogan. A Armenia - Azerbaijan peace deal is there for signing, albeit it has been for a year, and I guess the domestic politics in both countries are still stalling things. In particular, the election cycle in Armenia is an issue when Azerbaijan likely still wants constitutional changes in Armenia in to provide longer term assurance on key issues. But I think a deal will be done, and for all three countries this is a huge win, facilitating more trade, investment and financing and boosting a transit route through to Central Asia and China. And for Türkiye coming on the back of a possible Kurdish deal, and greater stability in Syria, this just builds on the idea of a big looming peace dividend.

Q? On the economy is the biggest risk still Simsek being fired?

Answer - I know people keep going on about that - the Agbal factor - but I think it is very unlikely. The same factors are still at play which persuaded Erdogan to bring Simsek in after the general elections as the economic policy head. Herein I would identify the realisation that inflation is the number one economic policy threat, and bane of most Turks lives, hence a major political risk factor for Erdogan. Local elections last year just underlined that the population cares about inflation. I would also add that the advisers around Erdogan have changed over the past few years, to a much more orthodox crew - and they are more willing to tell truth to power that unorthodox policies don’t work. I would also argue that just after the general elections in 2023 there was a real risk of a systemic economic crisis in Türkiye, and the message was given to Erdogan that the time for economic policy experiments was long gone. I would also argue that Simsek has proven himself to Erdogan in rebuilding FX reserve buffers that enabled the economy to ride thru the period of intense political instability and stress that came around the jailing of Imamoglu and the demonstrations that followed. If anything, this period has enhanced the position, and political capital of Simsek and the team at the CBRT. They were, after all, able to hike policy rates this year again, in response to the selling pressure which followed the arrest of Imamoglu.

Famous last works but I think Erdogan holds with Simsek at least through until nearer the next elections (2027). He might then be tempted to move to a looser policy, but the hope is that will be when inflation is much lower, imbalances in check and reserve buffers at much better levels.

Q? What about all the rumours about Simsek resigning, or being fired?

Answer - generally I think this is just from people who are just not in the know. And rumours may well be spread for market manipulation purposes. Türkiye is pretty polarised and often these rumours play to a particular section’s narrative, wanting to believe in divisions or that crisis is just around the corner. Likely the truth is much duller.

But I would say that I think this economic team - Simsek,

Karahan, Akcay, et al, see their mission as delivering adjustment and low inflation. It’s kind of their time to make a mark in history. I think they will hang around until inflation is much lower, albeit they cannot account for political developments, as we saw in March.

Q? So what is your outlook for the economy?

It’s probably worth having a read of the FT piece from earlier today as background. It does highlight some of the challenges, albeit I think it’s too bearish.

https://www.ft.com/content/5999e52b-e706-42d4-b4ef-ec39a229c0db

The Turkish economy has remarkable durability, something I have seen over the 25 odd years covering it, and often when you think it is on the brink of a systemic crisis, either policy makers pull a rabbit out of the hat, or some global event provides relief, or else Turks are just great at managing thru crisis. The strong lira, used as an anchor for the disinflation is hurting sectors of the economy (textiles, et al), but the current account deficit is modest by historical standards so I think Türkiye is not at near risk of a BOP crisis. Simsek et al have also built and then rebuilt FX reserve buffers - gross reserves are again approaching record highs.

One of the problems before March was that there had not been much of a growth give up which suggested less progress in disinflation, but post March, and the policy tightening I think we have seen the economy slow and that will give an additional leg to disinflation. I think inflation prints will begin to surprise on the downside now, as was seen in the May print. This should leave scope for the CBRT to further cut rates - given global risks, and domestic political risks. I actually think the prudent thing for the CBRT would be still to await the first cut in this new cycle to September, but they might opt to cut in July. Obviously if they wait until September, I would be much more confident as to the path of stronger disinflation. Fiscal policy is still too lose, and this might just weigh on the CBRT to hold rates a little longer, and thru to September.

I guess my message here is that, after years on unorthodox policy excess, there is need to sacrifice, and fighting inflation is painful - and we are now seeing that with businesses suffering from high policy rates and a strong lira. But there is little alternative to the current adjustment, and the reward will be lower inflation, to the benefit for all. There is light at the end of the tunnel, and actually when we think about the CBRT’s success in rebuilding reserve buffers, stabilising the lira, and winding down the KKM, Simsek et al have been far more succesful then anyone could have imagined.