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Erdogan Is Threatening Israel With Sanctions – While Turkish Economy Tanks

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Turkish President Recep Tayyip Erdogan speaking during an iftar dinner in Ankara, Turkey, May 21, 2018.
Turkish President Recep Tayyip Erdogan speaking during an iftar dinner in Ankara, Turkey, May 21, 2018. Credit: \ HANDOUT/ REUTERS

The Turkish economy is going through a very tough time, and many of the reasons stem from the behavior of its leader, President Recep Tayyip Erdogan.

He has been president since 2014, following 11 years as prime minister. This makes him one of the longest-serving elected leaders of any major country. Russian President Vladimir Putin, for example, surpasses him by just three years.

To be clear, Turkey’s economy has grown rapidly since the end of the global financial crisis a decade ago. Its annual growth rate ranged from 4.8 to 11 percent, before slowing to 3.2 percent in 2016, then rebounding to 7 percent in 2017. It has benefited from a surge of construction fueled by generous credit.

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Nevertheless, this relative boom is being threatened by the policies of the president, who is seeking to centralize power. This distances Turkey’s system of government from democracy, and its economy from the free market.

Erdogan exploited the failed coup of July 2016 to declare a state of emergency. Last month, the Turkish parliament extended the state of emergency, and Erdogan called snap elections that will take place on June 24 – some 18 months earlier than planned. Given his emergency powers, his control of the media and state institutions, and his rising popularity among conservative voters, he is expected to breeze through this election, which no one expects to be fair.

Even so, his desire for centralization is rattling both local and foreign investors. The Turkish lira fell 14 percent between March 14 and May 21, and it has fallen by 52 percent since Erdogan was inaugurated as president in August 2014. Moreover, inflation has soared during Erdogan’s presidency: From about 7 percent when he took office to 13 percent at the end of 2017 (though it moderated slightly, to 10.9 percent, last month).

Traders working at their desks on the floor of the Borsa Istanbul, May 22, 2018.Credit: OZAN KOSE/AFP

Turkish bonds are also collapsing. According to Bloomberg, yields on 10-year, lira-denominated government bonds are higher than yields on bonds issued by the governments of Nigeria, Pakistan and Lebanon. Turkish bonds have fallen more sharply than those of any other of the world’s 27 emerging economies.

Turkey’s trade deficit has been steadily widening as well, as has its current account deficit (which includes both the balance of trade and the balance of capital transfers). And all of these will weigh on its economy over time.

The fall of the lira and the high inflation rate are two of Erdogan’s biggest weak points – and the reason is his vigorous crackdown on monetary policy. Erdogan previously claimed that the central bank’s high interest rates are the reason for high inflation, and he repeated this claim in an interview in mid-May that rattled the markets.

Rumor has it that the governor of Turkey’s central bank plans to resign, and market players joke that after the June election, Erdogan himself will take over as the bank’s governor.

Meanwhile, Erdogan is investing in grandiose infrastructure projects such as bridges, dams and roads, which contribute both to growth and employment, and to his own glorification.

The Turkish government’s threats to sever trade ties with Israel appear to be disconnected from the Turkish economy. Erdogan cites Israel’s treatment of the Palestinians as the reason for his proposed boycott, and his rhetoric is reminiscent of those Iranian leaders who, beyond the talking, also finance terrorist activity against Israel.

During recent demonstrations against the Tehran regime, Iranians protested that their government invests money and energy in the Palestinian issue and in promoting anti-Israel terror, instead of improving its citizens’ day-to-day economic situation.

But for now, the Turks’ situation in general, and their economic situation in particular, is much better than that of the Iranians. So, the chances of demonstrators demanding that the government forget Israel and focus on the Turkish economy seem slim.

Turkey and Israel have a fairly close trading relationship. In 2016, Turkey’s exports to Israel totaled $2.96 billion, out of total exports of $142.5 billion. In other words, 2.1 percent of Turkey’s total exports go to Israel.

But Turkey has a trade deficit with most of its trading partners, and Israel is exceptional in this regard: Turkey exports more to Israel than it imports from it. Last year, the gap stood at $1.9 billion. In theory, therefore, halting trade with Israel would expand Turkey’s trade deficit by $1.9 billion.

Erdogan appears to want to entrench his rule and amend the Turkish constitution before the country’s financial woes infect the broader economy and cause it to collapse. His anti-Israel rhetoric won’t hurt him in the election.

He has also been campaigning beyond Turkey’s borders, using his familiar rhetoric of intimidation. On Sunday, he spoke to 15,000 Turkish migrant workers from throughout Europe in Sarajevo. He told them the European Union is sabotaging Turkey and that European democracy has failed.

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