Erdogan looks to Putin to ease currency issues
Turkey’s energy import bill – which stood at $83.5 billion for 12 months in July – is a major factor in its gaping current account deficit. And with Russia being Turkey’s main energy supplier, President Recep Tayyip Erdogan appears to have pinned his hopes on his Russian counterpart Vladimir Putin to help ease Turkey’s currency deficit, fearing the Turkish lira could plummet. again before the elections next year.
Erdogan’s political opponents suspect that his government could strike opaque deals with Moscow to secure new financial means or postpone energy import bills after elections, scheduled for June 2023 at the latest.
Turkey’s current account recorded a deficit of $4 billion in July, bringing the cumulative gap to $36.6 billion in the first seven months of the year, according to central bank data published on September 12. The country’s foreign trade deficit stood at $10.7 billion in July, meaning tourism revenue and other foreign exchange inflows failed to cover the gap, resulting in a current account deficit of $4 billion. A foreign trade deficit of $11.2 billion last month portends a similar current account gap in August, which would bring the eight-month accumulation to more than $40 billion. In light of this trend, the government’s year-end forecast of $47.5 billion appears rather optimistic.
Adding extra pressure to the beaten lira is a $182.5 billion in external debt mature over the next 12 months. The weakening of the lira has been the main inflamer of inflation in Turkey, which topped 80% in August and must give Erdogan sleepless nights as the electorate’s grievances mount.
The current account gap is mainly due to the growing import bill, which rose 43% to $206 billion in the first seven months from the same period last year. Energy alone accounted for 23% of imports. With a share of 15.5%, Russia is Turkey’s leading trading partner in terms of imports, first and foremost energy supplies. Therefore, any Russian gesture on Turkey’s energy bill would be important for Ankara as it strives to support the lira and curb rising foreign currency prices.
Erdogan has sought such favors from Putin since Russia invaded Ukraine, relying on his increased diplomatic profile as a mediator in the conflict. As Bloomberg reported in July, Turkish officials launched a mechanism allowing Turkey to pay in lira for its energy imports from Russia. But when meeting Erdogan in early August, Putin accepted only partial Turkish payments in rubles for Russian gas. Since then, talks have turned to the prospect of Turkey borrowing rubles from Russia to make the payments.
On September 9, Erdogan said that borrow from “friendly countries” was helping to replenish the central bank’s depleted foreign exchange reserves. “Many friendly countries are currently providing the necessary support. Our borrowings from them strengthen our central bank. Hopefully we will get there and overcome the foreign currency challenges,” he said.
Russia’s publicly known support began in late July when its nuclear power company Rosatom began transferring dollars to its subsidiary in Turkey, which is building the country’s first nuclear power plant at Akkuyu, near the Mediterranean coast. After a first transfer of about $5 billionthe sum was to reach 15 billion dollars in the long term.
Gazprom could also intervene. According Bloomberg analysts, Turkey will probably receive a credit line from Gazprombank in rubles and use it to pay for gas. The Russian government would provide the bank with an explicit or implicit guarantee for the loan, meaning Turkey’s cost of borrowing would be lower than current market rates. The program would ease Turkey’s demand for hard currencies such as the dollar, while reducing the risk of asset freezes for Russia, analysts said.
According to some economists, however, such a program could hardly solve Turkey’s hard currency deficit, although it could bring some relief.
Meanwhile, some experts have come to wonder whether Russian money could be involved in the extraordinary increase in capital flows of unknown origin to Turkey. These inflows – recorded under “net errors and omissions” in the balance of payments – totaled more than $24 billion in the first seven months of the year and financed 66% of the current account deficit in July.
Home shopping by the Russians have climbed in Turkey in recent months. Russian nationals bought a fifth of the roughly 25,000 homes sold to foreigners from April to July. A number of arrangements encouraging the flow of Russian tourists to Turkey are also seen as part of Moscow’s support for Ankara.
Give-and-takes between Erdogan and Putin anger Washington over the prospect of sanctions busting, with US officials occasionally waving at Ankara. Turkey’s opposition parties, meanwhile, are wary of any gesture by Putin to Erdogan’s government ahead of the election. While some argue that Russian support could barely bolster Erdogan’s economic credentials, others remain worried about what might be in store.