The dangers of the Turkish Lira collapse

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Чем обвал турецкой лиры опасен для рубля и России

In Turkey broke out a large-scale currency and economic crisis. BRICS countries facing a “Domino effect” and “Gazprom” and the Russian metallurgists – the loss of an important export market.

The monetary unit of Turkey and Russia since the beginning of August has seriously lost in value against the US currency. Thus the weakening of the Russian ruble, partly due to the collapse of the Turkish Lira. Further devaluation would therefore a real threat to Russia and its BRICS partners.

Turkey will go the way of Venezuela and Zimbabwe?

To understand these causal relationships need to understand what and why is happening now in Turkey. And there broke out “the classic economic and monetary crisis.” Such a diagnosis, for example, Clemens Fuest (Clemens Fuest) – the President of the Munich ifo Institute for economic research. He said German business newspaper Handelsblatt that “we should be very concerned”, and Ankara time to ask the International monetary Fund (IMF) emergency financial assistance.

At the same time doubled the import duty on steel and aluminium from Turkey, which the US President Donald trump unexpectedly announced on Friday, August 10, and which came into force on Monday, August 13, Professor Post appreciated just as the “drop that overflowed the barrel”.

In other words, even if Turkish President Recep Tayyip Erdogan will make concessions to Washington and let go of held in Turkey grounded an American pastor Andrew Brunson (Ankara, apparently, would like to exchange it for living in the US of Turkish preacher Fethullah Gulen, accused by Erdogan in a coup attempt), and trump will cancel the doubling of fees, the growing crisis is already unstoppable.

“In the long term Turkey will only radical change of policy,” – says Clemens Fuest. Otherwise, the country will sooner or later face default, said Alexander Kriwoluzky (Alexander Kriwoluzky), who heads the Department of macroeconomics at the German Institute for economic research (DIW) in Berlin. In an interview with spiegel-online he suggested that “Turkey may go the way of Venezuela or Zimbabwe.”

The main problem: inflation is out of control

In an interview with news channel n-tv, chief economist of the investment company DWS Elke Speidel-Walz (Elke Speidel-Walz) called key issues in the Turkish economy: it is “extremely hot”, so “inflation is out of control”, besides in the conditions of trade deficit in Turkey in dire need of constant inflow of foreign capital.

A textbook response to an outbreak of inflation (the level reached in July by nearly 16 percent!) it would be in this experts agree, radical increases in the base interest rate by the Central Bank of Turkey. Such a move would slow down as prices rise and capital flight, moreover, would facilitate the inflow of money from abroad because foreigners would be profitable to keep their money in Turkish bonds or in Bank deposits at very high interest rates.

On the other hand, raising rates would make credit prohibitively expensive, which would cause a sudden cooling of the economy and perhaps for some time even plunged it into recession, a recession. But that’s the usual price of macroeconomic stabilization, and the Russians know this from my own experience (in December 2014 the resolute actions of the Central Bank of the Russian Federation stopped the panic selling of the ruble and a surge in inflation, although he has exacerbated the crisis caused by the collapse in oil prices and Western sanctions).

Under Erdogan , Turkey’s Central Bank lost its independence

But Erdogan, whose popularity among his constituents is largely related to the fact that he has provided Turkey many years of strong recovery, is strongly opposed to the rate hike (after any recession would undermine his image as the “father of the economic miracle”). Moreover, he declares this repeatedly proven worldwide tool purely Western invention, alien to Turkey.

 

The problem (from the point of view of experts and investors) that the Turkish President, greatly expanded in recent times his personal power, began to impose their specific views on the economy and Finance Central Bank of Turkey. The suspicion that the institution, to ensure the stability of the national currency begins to lose its independence, has emerged from international investors in may after a speech of Erdogan in front of the representatives of the international financial community in London.

However, after July 24 the Turkish Central Bank, despite the obvious need to increase rate, did not do anything to curb inflation, the suspicions turned into certainty and began to accelerate capital outflows from Turkey, accompanied by an increasingly rapid devaluation of the Turkish Lira. The conflict with Washington around the pastor and a doubling of trump’s customs duties only accelerated this process. As for those partial measures by the Turkish Central Bank adopted on August 13, they is able to temporarily stop the collapse, but economic recovery not enough of them.

Russia and other emerging markets are facing capital outflows

But and here Russia? And despite the fact that Turkey along with Russia or, for example, India and South Africa, ranked among the international investors to developing markets (Emerging Markets). If one of these markets start problems, which ultimately can result in a large-scale crisis and/or restrictions on the free movement of capital, investors often just in case begin to withdraw money from other countries like to invest their money in a safe currency, US dollar, Swiss franc, Japanese yen. Classic example: Asian crisis of 1998, became one of the causes of the Russian default.

So this time we can see in the background of the collapse of the Turkish Lira, the rise of the dollar and the devaluation of the South African Rand by 10 percent to the lowest level since mid-2016, the fall of the Indian rupee on 14 August to a record low, the weakening of the Brazilian real, if we talk only about the currencies of the countries – partners of Russia in the BRICS (by the way, at the end of July Turkey just proposed the idea to join this group). Also weaken the monetary unit of Argentina, Colombia and Mexico.

So the outflow of foreign capital from Russia in August is partly due to the collapse of the Turkish Lira, although a key role in the weakening of the ruble, of course, played the threat of new us sanctions, under which, in particular, can get OFZ bonds Russian Federal loan bonds. The specification of U.S. sanctions in the coming weeks may increase pressure on the ruble and the crisis in Turkey will be an additional incentive for foreigners to withdraw their money from the Russian market.

Which Russian exporters will suffer from a weak Lira

In this exchange the “Domino effect” is the main danger of the Turkish crisis in Russia, although it is “only” about further weakening of the ruble, but not on the repetition of 1998.

Another risk, macroeconomic, is that the deep recession of the Turkish economy is now inevitable: it will happen anyway – either because of the collapse of the Lira and the panic of capital flight, either due to a radical tightening of monetary policy by the Turkish Central Bank. The decline in Turkey will be an additional factor contributing to the cooling of the global market – the US war against China and some other countries, as well as “Broksita”. And slowing global GDP growth, in turn, is fraught with reduction of prices on raw materials, especially oil and metals – the main article of Russian export.

Moreover, in conditions of deep recession and the decline in the purchasing power of the Turkish firms due to the devaluation of the Lira will suffer, those Russian companies that deliver to this country their products. After all, Turkey is one of the largest trade partners of Russia. By the end of 2017, it has become for Russian exporters is the fifth most important export market, accounted for about 5 percent of all supplies to foreign markets. For comparison: in Germany, the largest buyer of gas, oil and coal from Russia, who took third place, had a little more than 7 percent of total Russian exports.

So, Turkey is the second largest after Germany, the market for “Gazprom”. The deep recession in the country may lead to a reduction of purchases of Russian gas to the demand of the Turkish side to reduce the price of it, and in Ankara there is such a means of pressure on Moscow, as the still unresolved question about the route of the second leg of the “Turkish stream”.

Besides, no country in the world buys so many Russian metals and products from them, like Turkey. In 2017, the Russian metallurgists have helped this market to almost $ 5 billion, sending him approximately 13 percent of its exports. The recession in Turkey will certainly stop or delay the implementation of numerous major infrastructure projects (including, perhaps, Russia constructed the first Turkish NPP “Akkuyu”), and this will lead to a drop in demand for iron and steel. At the same time worsen the competition with the Turkish steel mills, which now, after doubling American duties will be in whatever was the aim to increase sales on its home market.

And Turkey is the second after Egypt buyer of wheat in Russia that the devaluation of the Lira and a deficit of $ in Turkey with high probability will also affect Russian farmers. Of course, Ankara and Moscow for political reasons to reach an agreement on fostering the use of national currencies in bilateral trade, but it will mean that Russian exporters will be forced to charge for their products toxic Bank notes, which at any moment threatens to further depreciation.

Another option is Recep Tayyip Erdogan will ask President Vladimir Putin a foreign currency loan to pay for the purchase of Russian gas, bread or weapons. In this case, Russia nominally will avoid a precipitous drop in exports to the Turkish market, but to pay for the maintenance of the volume of supply will actually be Russian taxpayers out of pocket, while not having much hope that Turkey would return the money.

Generous lending by ailing Moscow friendly regime of Erdogan, who does not want to accept international financial assistance on the conditions of the IMF, can be considered another danger looming right now over Russia in connection with the collapse of the Lira and worsening economic crisis in Turkey.

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