Erdogan Digs In, Says Turkey Won’t Yield To Sanctions Threats From Trump, Pence

On Thursday, Mike Pence threatened to slap sanctions on Turkey if President Recep Tayyip Erdogan doesn’t agree to release North Carolina evangelical Christian pastor Andrew Craig Brunson, who is facing more than three decades in a Turkish prison if he’s found guilty of having connections to Pennsylvania-based cleric Fethullah Gulen and/or the Kurdistan Workers’ Party (the PKK).

This has an air of absurdity to it befitting of a story about Erdogan. How is it that a Christian pastor from North Carolina is conspiring with a Pennsylvania-based cleric and a militant Kurdish separatist group to undermine Erdogan’s government?

That’s a good question, and Erdogan would be happy to tell you all about it if you can get him to grant you an audience at the 1,150-room palace he built on protected forest land in Ankara back in 2014.

No, but seriously, this exceedingly unfortunate episode is yet another manifestation of Erdogan’s years-long quest to secure the extradition of Gulen from the United States to Turkey where he would doubtlessly be found guilty of engineering the 2016 coup attempt and also of just generally being a fly in Erdogan’s soup. As far as what fate would befall Gulen were he to end up in Erdogan’s clutches, well, you don’t even want to speculate on that.

Erdogan is attempting to use pastor Andrew Craig Brunson as leverage to secure the extradition of Gulen. Simply put, Erdogan wants a Brunson-for-Gulen swap and even this White House isn’t particularly keen on handing Gulen over, despite allegations that disgraced General Michael Flynn discussed literally kidnapping the cleric and throwing him on a plane to Turkey in exchange for $15 million (I know, it’s insane).

The timing of this latest flareup in tensions between Washington and Ankara leaves something to be desired. The Turkish economy is on shaky footing and is now being (mis)managed by Erdogan’s son-in-law, Berat Albayrak, who was installed as head of the “ministry of treasury and finance” earlier this month in one of Erdogan’s first moves following the election.

As a reminder, Berat Albayrak is a competent guy. It’s not so much his CV (which is decent when it comes to someone you might put in an economically sensitive role) that’s the problem. The problem, rather, is that he’s unlikely to do anything that risks enraging his father-in-law. “If we look back and ask who’s stood up to Erdogan and come off better, it’s a short list — in fact, it’s a list with no names”, Nigel Rendell, a senior analyst at Medley Global Advisors, told Bloomberg earlier this month.

When the Turkish central bank failed to raise interest rates on Tuesday, it confirmed everyone’s worst fears: namely that Erdogan is now firmly in control of monetary policy, which means the scope for rate hikes aimed at arresting the beleaguered Turkish lira’s slide is limited.

Earlier this week, Steve Eisman (of “The Big Short” fame), told Bloomberg Television that he’s shorting BBVA and UniCredit based on their “fairly large exposures to Turkey.”

Against this backdrop, the last thing anyone who owns Turkish assets (or who, like BBVA and UniCredit, is exposed to Turkish assets) needed was for Erdogan to end up risking U.S. sanctions. I talked a ton about how important it is for EM asset managers to accept reality a couple of days ago in: “As Trump, Pence Threaten Turkey With Sanctions, It’s Time For Markets To Accept The Reality Of Erdogan“.

Well on Sunday, Erdogan gave Trump a lesson in what it really means to be a belligerent autocrat. Quoted by Haberturk and other Turkish media, Erdogan had this message for Trump and Pence:

If the U.S. does not change its stance, it should not forget that it will lose a strong and sincere partner. You can’t make Turkey take a step back with sanctions.

For good (or bad, whatever the case may be here) measure, Erdogan went on to say that the decision to move Brunson from jail to house arrest was never an indication that this issue was negotiable and was merely out of “respect” for the pastor’s health. “Instead of respecting the ruling they are making this a matter of sanctioning Turkey”, he went on to say.

That doesn’t bode particularly well for the week ahead, especially considering inflation data is on deck. The numbers and the outlook will be heavily scrutinized coming as they do on the heels of last week’s CBT decision not to hike rates.

“In EM, we are focused on Turkish inflation this week in assessing the outlook for TRY as CBT releases its inflation report on Tuesday and July CPI prints on Friday”, Barclays wrote on Sunday, previewing the key data before noting that as far as they’re concerned, there’s “downside risks to TRY and TurkGBs if inflation overshoots, increasing concerns over CBT credibility.”

Why yes, I’d have to agree with that latter assessment.

Although the central bank  deployed an emergency LLW hike, simplified monetary policy, delivered a hike to the one-week repo rate and continued to insist that they retained their independence in the lead up to the June 24 election, the writing has been on the wall for months: Erdogan is going to commandeer monetary policy. Indeed, one of the first things he did after the election was amend the central bank’s articles of association in order to strengthen his own influence.

“Despite monetary tightening, the gap between the average cost of funding by the central bank and consumer price inflation has remained narrow due to runaway inflation”, BNP noted, following the latest CBT meeting, before warning that the decision to hold rates “is likely to generate further inflationary pressure as it does not support the Lira despite the slowdown in the economy.”

Bear in mind that there is zero chance that Donald Trump understands any of this, which means he’s likely to view Erdogan’s belligerence as a direct challenge. That, in turn, increases the risk of sanctions. Additionally, the fact that Brunson is a Christian likely means Pence is going to be keen on taking a hardline approach to this issue in order to appeal to the evangelical base.

Then again, I guess we can all hope that Trump’s affinity for autocrats wins the day…