Turkey Shoot

Erdogan and Xi: Have I got a deal for you …

We warned in early May Turkey faced an economic crisis as it was running out of foreign reserves. Simply put, reserves pay for imports; if you can’t pay for what you import, your standard of living falls.

At the end of June, reserves including gold, and minus swaps, were US $33 billion; that’s down from $87 billion at the end of 2019, according to Fitch Ratings. However, that’s up from $25 billion at the end of April. So, what’s going on in Turkey?

First and foremost, the falling cost of energy, especially oil, means Turkey’s imports cost less. That’s a welcome, if temporary, reprieve.

But, most foreign investors are still fleeing. Sweden’s Telia — a founding partner in Turkey’s leading mobile phone operator Turkcell — sold its 24% stake for a mere $530 million, a price that observers saw as a sign of the company’s eagerness to leave Turkey. Volkswagen recently dropped a plan to build a major plant in western Turkey despite generous incentives, including a government guarantee to buy 40,000 vehicles per year.

Foreigners have also been withdrawing from stocks and government bonds. The share of foreign-held debt was only 4.3% in May, down from more than 23% in 2012. On the stock exchange, foreign investments accounted for less than 50% in May, down from 65.8% in January. The foreigners’ share had hit a record 72.3% in November 2007.

Which foreigners are not leaving? Chinese. Though, that may be a mixed blessing.

Just last week, the People’s Bank of China extended a badly needed swap of Turkish lira for Chinese renminbi valued at $400 million. Beijing sees this as an opportunity to ensure Turkey becomes a vital part of its Belt and Road Initiative (BRI). One Chinese logistics company recently bought 48 percent of Kumport Terminal for $940 million; located on the northwest coast of the Marmara Sea, Kumport is Turkey’s third largest container terminal and is a strategic link to Europe. In November 2019, Turkey also welcomed the first freight train from Xi’an via the Chinese-built and funded Marmaray Tunnel. Using this tunnel, any train can make a non-stop transit from China to Europe for the first time.

However, as it has in places like Sri Lanka and Malaysia, debt-trap diplomacy dogs Chinese-funded projects. China doesn’t give aid. It makes long-term loans that must be repaid. Negotiations and contract terms are almost never made public. This lack of transparency is central to BRI projects, including inflated costs. Initially, local elites like the big expense because much of the money lines their pockets as bribes. But, when their country can’t repay the high loan, China gets control of the asset to clear the debt.

Yavuz Sultan Selim Bridge — which stretches over the Bosphours near Istanbul — was financed by China to the tune of $2.7 billion. When it became clear the Turkish owner would not be able to pay it back, the bridge was sold to Chinese investors for $688 million.

One of the few economic sectors in Turkey still growing is technology. This includes Turkey’s largest e-commerce platform, Trendyol, with 2 million active shoppers and 25 million members. It was bought for $750 million by China’s e-commerce portal Alibaba — a bargain price reflecting the declining lira.

Despite the badly needed foreign reserves Chinese investment brings, Ankara is caught between a rock and a hard place.