Türkiye, Syria & Macro
I have visited Turkiye several times over the past few weeks meeting with policy makers, journalists, think tankers, bankers, analysts and the like, so I thought I would post a few observations but formatted in a Q&A approach for my own ease of writing.
Q? What’s the Türkiye angle on developments in Syria?
Answer - Türkiye’s interest in Syria are numerous but two issues dominate:
First, the 3 million plus Syrian migrants in Türkiye, and the desire that they relocate back to a safe Syria. While Türkiye was welcoming to Syrian migrants initially, and the Turkish state has done a great job in accommodating them - at a huge cost - as elsewhere in Europe, immigration has become a hot topic and the opposition have exploited the issue as a means to attack the government. The Erdogan administration has hence been trying to ease these domestic social and political pressures by reaching out to the Assad administration to try and find a settlement in Syria which produced a safe environment for returnees from Türkiye. For most of the past year, Assad has spurned these reach outs.
Second, the Kurdish issue, and fears in Türkiye that Syrian Kurdish forces (YPG) would use the weakness of the Assad regime and its allies (Iran and Hezbollah - through Israeli military action in
Lebanon and elsewhere) to carve out greater control in northern Syria, which could be exploited by the PKK to further its own attacks in Türkiye. Ankara worries that it’s strong support for Palestinians in Gaza and criticism of Israel therein risks the Israelis (and their U.S. allies) moving to further support the YPG precisely to hurt Turkish interests.
While Türkiye is eager to stress that it is not allied directly with HTS - designated a terrorist organisation by the US and its allies - Türkiye seems to have at the least given the nod for the HTS to push south to Aleppo and beyond in their latest offensive. Herein Türkiye likely saw this as helping to ease the humanitarian issues in Idlib, a safe zone still for millions of Syrian refugees - which were at risk of fleeing to Türkiye amid increased Assad regime air strikes. The evidence suggests that, as with most observers, Türkiye did not expect the operation by HTS to be so stunningly successful, or that Assad regime forces would collapse so rapidly, as has proven to be the case. I think Türkiye assumed the push by HTS would force Assad to the negotiating table but leaving him in office. But Türkiye now seems to be going with the flow, seeing the potential for the latest HTS assault to either collapse the Assad regime fully or force the Assad regime into talks with Türkiye et al, and the opposition, to engineer an endgame where Syria is stable and secure - allowing the return of refugees and that any settlement can also contain Syrian Kurdish groups in the north. On the latter Türkiye has supported action by Turkish backed military groups in the north to counter the YPG, et al.
For Türkiye the success of the HTS operation brings numerous benefits aside from offering the prospect of refugee returns and boxing in the YPG. On the diplomatic front, the succesful push by the HTS, and recognition that Türkiye has leverage over HTS, has made Türkiye perhaps the dominant external power in Syria - it could be argued therein with Israel (Israel might control the skies, but Türkiye seems to have more influence at this stage on the ground).
With Hezbollah signficantly weakened in Lebanon as a result of its war with Israel, and resupply of Assad with Iraqi Militias and IRGC forces constrained by U.S. and Israeli air strikes, Iran finds itself unable to save Assad - Tehran has been signalling in recent days for Iranian citizens to leave Syria, a striking turnaround. Given future risks from a new Trump administration, Tehran might well now be in personal saving itself mode.
Russia, meanwhile, finds itself all too focused on the war in Ukraine to be able to spare additional military resources to save Assad - the Russo-Iranian deal in Syria was that the Russians provide the air power/cover and Iran and its proxies the ground forces to sustain the Assad range. With Iran no longer able to provide the ground forces, the Russians faced the choice of either doubling down or backing off. They chose to back off. The negotiations now between Turkey, the HTS and Russia is about securing Russia’s naval base at Tartus the nearby and supporting airbase. But without Turkish support, those Russian bases would appear to be unsustainable. Note here that Russia is not even not asking Ankara to call off the HTS and save Assad - I think there is recognition that with such momentum now behind HTS and the Syrian opposition, it is unlikely they would listen even to Türkiye with the goal in sight of total victory against Assad.
Q? Where does all this leave the relationship with Russia?
Answer - In recent months there is much to suggest that relations between Türkiye and Russia have soured. This is reflected in much harsher rhetoric from Moscow criticising Türkiye for the military support it is providing to Ukraine. What’s changed? Well there has not been any particular step up in Turkish military support for Ukraine, but the quid pro quo for that had seemed to be Türkiye facilitating trade still with Russia - helpful given the West’s efforts to sanction Russia. But on the sanctions front there is much to suggest that the US, and the West, have tightened the noose around Russia via the secondary piste - since the summer at least making quite strident warnings to Türkiye et al, that they will be held close to account for any signs of helping Russia break sanctions. Western sanction on MOEX and now Gazprombank, have suddenly made it much more difficult for Russia to trade with countries like Türkiye, and Moscow is showing frustrations as it sees trade flows crimp and its own economy is facing more headwinds - weaker rouble, higher inflation, and higher resulting policy rates.
Moscow has also likely seen the improved defence relationship between Turkey, the US and its allies with the recent F16 deal, a deal being close on Eurofighters, and Russia’s own S400 bought by Turkey all but mothballed - even dicussion of it being deployed to a U.S. base in Turkey in exchange for Ankara best brought back into the F35 programme.
Now add in Türkiye’s latest efforts in Syria against the Assad regime, and the Russian ally, and Moscow is unlikely to be best pleased with Ankara. But needs must from the Russian point of view and the Tartus naval base is still a key strategic asset for Russia - a warm water port in the Mediterranean. What is the price Russia is willing to pay to Türkiye to be able to sustain that base now? Perhaps some deal to help Türkiye ensure gas supplies despite the Gazprombank sanction. This could mean either credit from Russia for gas supplied to Turkey or barter style solutions. But Russia will need to ensure the gas supplies continue to flow to Türkiye.
Türkiye might also be able to push Russia to agree to allow Türkiye and its ally Azerbaijan access thru the Zangezur corridor to Nakhichevan, albeit Iranian support would also be required - and after developments now in Syria, Türkiye - Iranian relations are likely to be at a low point.
Q? And what about the relationship with the US?
Answer, well as noted above there has been progress on the F16 front, talks now of Türkiye getting back on the F35 programme; albeit doubts as to whether ultimately the F35 is the best long term solution for Türkiye. And as noted above, Türkiye is playing ball with the application of Western sanctions on Russia. There is though concern in some circles over the future relationship with the Trump administration, given the prior track record (Pastor Brunson et al) Trump’s likely strong support for Israel, and his nomination of a national security team which is replete with Turkey critics and friends of Israel (Rubio, Waltz, et al). The issue of the YPG in northern Syria, which Türkiye sees as being maintained/supported by the US and Israel, is a further potential flashpoint. That said, with Trump expected to push for the 1000-odd US troops in Syria to leave, and Turkey now being the dominant player in Syria, Ankara can offer Trump solutions with respect to its key concerns in Syria - ISIS and other Islamist terror groups using Syria as a base. Notable here that the HTS, likely after Turkish coaching, has been suggesting a more relaxed and inclusive social agenda. But in the end when we think of US - Turkish relations under the new U.S. administration we have to recognise that Erdogan has first term experience of Trump, and is good at all the interpersonal power politics with sociopath-like characters like Trump. Erdogan will play to Trump’s ego - I can imagine the most grandiose of state visits being promised, fit for a king, or Sultan Trump. I have confidence that Erdogan, and his teknocrats with lines into the first bro Musk, can manage the relationship with Trump. And no need there for additional support from family members previously with close ties to the kushners as Jared, et al appear to have their fingers in other pies these days beyond the WH.
Q? And the economy, stupid?
Answer - that’s all quite interesting.
First, zero chance of a policy 180 degrees, back to unorthodoxy - been there, done that, it failed. And I think that Erdogan has a credible cadre now of market/business savvy/friendly teknocrats who are saying truth to power and are ensuring sufficient support for Simsek et al.
But it’s does feel as though a softer, perhaps 45 degree or so turn is underway.
Just to backtrack, the message from the MOF/CBRT team only a few months back, and at the IMF meetings in D.C. in December, was that ‘it’s all about the fight against inflation’. On rates the message was that given stickiness in inflation - and a track record already of disappointing inflation prints - that policy rates would need to be held higher for longer. My read then was that this meant the first rate cut would only come in late Q125, so March. The message was also that fiscal policy and incomes policies would have to come to the party to help the CBRT drive inflation lower. The sense was the easy low base fall in inflation had been achieved with relatively little growth give up, but the next stage to get ahead of expectations and really address entrenched inflationary inertia would need a growth give up. Talk was about setting a relatively tough line on the minimal wage increase for 2025 (given the 2024 49% hike, plus early retirement pre-election give away did much damage to the disinflation path - added to earthquake related spends), to be announced later this month - in the 25-30% range, but no way greater than 30%, and the budget deficit being cut from 4.9% expected in 2024 to 3% or lower in 2025. Investors lapped that message up.
Then, the Q4 inflation report presentation in November seemed to change the tone, and the market read that as rate cut being brought forward to December - despite the fact that the inflation prints continue to surprise to the upside, and expectations of a big MOM print still in January (reflecting administered price increases and the mininimum wage hike). Messaging also now on the minimum wage hike is that a 30% hike would be a positive result - but the range has now moved more to 30-35%, perhaps as the CBRT has missed its own inflation forecasts., or been on the top of the range. Less talk also of real FX appreciation as being a key anchor for disinflation, more concern expressed around export sectors struggling against a strong lira, and difficult export markets in Europe.
It feels as though the administration has succumbed to lobbying from the industrial sector - pushing for a softer landing, and accepting a slower trajectory of inflation reduction for less growth sacrifice. That said, with unemployment at 8.5% (low by Turkish standards and perhaps lower when informality and part time work are accounted for), and labour markets still deemed very tight, while consumer demand remains strong, not sure there has been much growth give up. True Q324 national accounts produced a second quarter of QOQ decline, so a technical recession, but this was very shallow and hardly the kind of slowdown likely still to make much of a dent in 2-3% still MOM inflation. And all told the ecomomy is still on track to post 2-3% real GDP growth this year, and perhaps something around that level or higher next year - again, unlikely to begin to make a meaningful impact on inflation expectations or actual outturns.
The hope is that, while the CBRT might cut early in December, that this might still be a hawkish cut, say more like 100-150bps, rather than the 250bps expected by the market, and then the easing cycle in 2025 will be slower and shallower than expected, while tightness will be maintained through macro prodential channels, and hopefully somewhat prudent incomes and fiscal policy.
But in the end CB policy rates are critical in terms of signalling, and in therein shaping expectations. An early cut does suggest political pressure to deliver a turn in rates to the palace, and that will inevitably weigh down on hard won credibility of the CBRT. I still think that if you look where actual inflation and inflationary expectations are, you consider still the track record going back a decade, and the modest growth slowdown, I don’t think any truly independent central banker would opt for an early rate cut at this stage. But politics inevitably weighs on policy in every country. Perhaps an early cut is the best defence for a more hawkish overall rates trajectory - it ensures backing in the palace, and helps sustain the orthodox policy team in place. It’s a trade off. That said, on the inflation trajectory thus far, the teams at the CBRT and the MOF need to do more to help further the disinflation process - if policy rates are going to be doing less, then incomes, fiscal and structural policies need to do more.
And ending here, experience with succesful disinflation programmes suggest the more near term pain, the more longer term gain. If a decision has been made for a slower path of disinflation, then that is not cost free, and I would argue that the resulting growth give up/sacrifice/loss will ultimately be higher. Best get the required pain out of the way early in a poltical/election cycle, as the best way to see growth recovery with lower inflation towards the end of any election cycle. But Erdogan has a better track record of winning elections than I do.