Tension between Turkey and the United States has recently soared, as the US imposed sanctions on two Turkish ministers over the detention of the American Pastor Andrew Brunson. These sanctions will dent the confidence in the Turkish economy, at the very least. If the US authorities decide to ramp up sanctions in line with President Donald Trump pledges to do so in case of not releasing Brunson, Turkey may incur more economic losses. Under US threats, Turkey will probably be forced to cave in to US demands, particularly at a time when its economy is experiencing many difficulties, most notably the downward spiral of the lira against hard currencies.
Numerous Indicators
Tension between Turkey and the US runs high, as evident in several indicators, chiefly the following:
1- New sanctions: The US has recently stepped up its pressure on Turkey to release pastor Andrew Brunson. The US administration imposed on August 1, sanctions against Turkish Justice Minister Abdulhamit Gul and Interior Minister Suleyman Soylu after accusing them of playing roles in Brunson’s arrest.
According to several estimates, the US sanctions are expected to extend to other Turkish entities and companies, following president Trump's pledges to tighten the screws on Turkey if the pastor is not released. The US administration has already followed the same approach in February, after Turkey announced its intention to buy S-400, the Russian missile defense system.
2- Imprisoning Turkish officials: The case of accusing Turkish bank Halkbank of conspiring in breaching US sanctions on Iran in 2012, was one of the factors for tension between Washington and Ankara. To make matter worse, the US judicial authorities, in April 2018, sentenced former bank deputy chief executive Mehmet Hakan Atilla to 32 months after accusing him of violating Washington’s sanctions on Iran, banking fraud and participating in deceiving the US authorities. The US authorities are also likely to fine the Turkish bank a billion dollar if tensions between the two countries continue to soar in the coming period.
3- Opposing US sanctions against Iran: Ankara insists on importing oil and gas from Iran despite the renewed US sanctions on the latter on 7 August. Turkish Foreign Minister Mevlut Cavusoglu said that Turkey opposes the US sanctions against Iran and is not obligated to implement it. Moreover, Turkish Energy Minister Fatih Donmez asserted Turkey’s continued purchase of natural gas from Iran. Turkey has a clear interest in continuing energy imports from Iran, because of the geographical proximity, competitive prices of Iranian oil and gas, and their good quality.
4- Reciprocal trade war: Trade relations between Turkey and the US have played a role in souring their bilateral relations, with the US administration’s move, in March, to increase trade protectionism and impose tariffs of 25% on steel imports and 10% on aluminum imports from several countries, including Turkey. In response to that, Turkey imposed 267 million-dollar tariffs on a list of US goods in June. As a result, the US administration has announced that it will review Turkey’s tariff exemption for certain goods, a move that could damage $1.7 billion of Turkish exports to the US market.
5- Political disagreements over the Kurds: The continued US support for Kurdish military factions in Syria, most notably the People’s Protection Units, remains one of the fundamental differences between the two countries. Turkey fears that such support would bolster the military power of the Kurds in general in the region, including the Kurdistan Workers’ Party (PKK) in north-eastern Turkey, which may threaten, in its view, threaten Ankara's security and political stability.
Dent the confidence
Turkish-US tensions coincided with a marked decline in the Turkish economy, raising the suspicions and fears of investors that President Recep Tayyip Erdogan might fulfill his pledges to put economic institutions, including the central bank, under his authority, amid his continued criticism of the bank’s insistence on raising interest rates.
Consequently, the Turkish lira sustained significant losses of more than a quarter of its value since the beginning of the year, hitting all-time low on 6 August at 5.4 lira per dollar, the largest drop in one session in about 10 years, prompting international institutions to warn that inflation may become higher than the existing 15.8% in July. In addition, the investment bank Goldman Sachs warned that further deterioration would lead to a decline in the capital base of Turkish banks.
The current tension will undermine international confidence in the Turkish economy, at the very least, and its losses are set to increase if Trump fulfills his pledges to tighten sanctions. Perhaps one indication of the US administration seriousness to carry out its threats is that the Senate Foreign Relations Committee agreed on July 26 on a bill that would oblige the US to oppose granting any loans to Turkey by international institutions, such as the International Finance Corporation of the World Bank.
According to several estimates, the US administration may also draw up a list of Turkish personalities and companies to impose sanctions on them, similar to the US sanctions on Russian institutions, companies and personalities. Amid the potential escalation, Turkish economy losses may not be limited to a decline in investment and trade relations with Washington, many Turkish companies may stumble and their ability to borrow internationally may decrease, Turkish financial markets may plunge into turmoil, and the currency may be severely devaluated in the coming period.
Containment Attempts
Traditionally, economic interests between the two parties have continued at a strong pace in the past, despite the tense political relations between them over time, which explains the volume of US investment in the Turkish market over 110 billion dollars over the period (2000-2017), with the bilateral trade reaching up to 20.5 billion dollars. At the political level, the US administration may not be willing to push Turkey closer to Russia.
If the US administration is willing to reduce its partnership with Turkey because of the pastor’s crisis, Turkey does not appear to be willing to lose US support at the economic level at least. This is evident in the Turkish Trade Minister Ruhsar Pekcan recent remarks in which she argued that the two sides should not allow a crisis, which has no economic basis, to hinder economic cooperation between the two countries. Her remarks came on the sidelines of a meeting with representatives of 30 US companies during the consultative meeting of Turkish-US economic relations.
Turkey is well aware that intensifying the US sanctions would inflict significant damage on its economy in the coming period, prompting it to send a Foreign ministry delegation to Washington to discuss the pastor’s case. Eventually, Erdogan may have to reach an agreement with the US to release Brunson in return for an exemption from US sanctions, similar to an implicit deal cut with Germany in the past months to release German journalist Deniz Yücel in exchange for the normalization of economic relations with EU states.
