Meanwhile, In Turkey…

When last we checked in on Recep Tayyip Erdogan, his son-in-law was busy mocking the extent to which, after multiple rate cuts in the face of political pressure from Donald Trump, the Fed is no more independent than the Turkish central bank. Berat Albayrak made the remarks in Davos, on a panel discussion.

Erdogan himself was pondering some manner of concerted military operation in Syria’s Idlib, the last remaining rebel stronghold, and the site of a horrific humanitarian crisis. The province is under siege by the Assad regime and Russia, which, by some accounts, continue to commit war crimes in what amounts to the final battle of the country’s civil war. Civilians are fleeing, although they have nowhere to go. The Turkish military has observation outposts in the area, and when a convoy on its way to resupply those positions was attacked by Assad, Erdogan responded with airstrikes. Russia let it slide, but tensions have escalated since.

Fast forward two weeks from our last sweeping review of Turkey’s adventures in Erdogan-o-mics and cross-border military operations, and it’s more of the same.

On the monetary policy front, CBT cut rates again, this time by 50bps to 10.75%.

Erdogan of course ousted CBT chief Murat Cetinkaya last year. New governor Murat Uysal swiftly delivered the largest rate cut in history and subsequently lowered the benchmark another five times including today’s cut. The total amount of easing under Uysal is 1,325bp.

Inflation in Turkey rose to 12.2% in January, data out earlier this month showed. That exceeded estimates, and with today’s cut, it means real rates in Turkey are now even more negative.

Erdogan has been lucky over the past year. His offensive against America’s Kurdish allies in October cost him hardly anything (sanctions were swiftly lifted by the Trump administration) and the White House has slow-walked punishment for Ankara’s acquisition of Russian-made S-400 missile systems in violation of NATO norms.

“President Erdogan most recently weighed in on monetary policy last week, asserting that interest rates will continue to decline in a controlled and realistic manner”, SocGen’s Phoenix Kalen wrote Tuesday, noting that while Turkey’s discretionary expansionary fiscal policy “will add to inflation pressures… market interventions continue so that rate cuts can proceed”.

When it comes to Syria, Erdogan said Wednesday he’s “made preparations [for] an operation in Idlib”.

It’s “just a matter of time”, he remarked, in comments from Ankara.

The Kremlin warned him against it. “If we’re talking about an operation against the legitimate authorities and the armed forces of the Syrian Arab Republic, then that of course would be the worst option”, Dmitry Peskov said, in a conference call. “We intend to continue using our working contacts with our Turkish colleagues to prevent further escalation of the situation in Idlib”, he went on to say, adding that although there are currently no plans for a call between Putin and Erdogan, one could be arranged “within hours” if necessary.

In remarks with the Jordanian foreign minister, Sergei Lavrov struck a somewhat more abrasive tone. “We didn’t reach a final result on how to implement agreements of President Putin and Erdogan on Idlib”, he said, before reiterating that Assad is “restoring lawful control over Syrian territory [and] no one ever promised the terrorists we wouldn’t touch them”.

All of that is, of course, a charade. Russia and the Assad regime do not care who they target in the effort to bring the war to an end. Until every last vestige of resistance is wiped out, the indiscriminate bombing of rebel-held areas is considered acceptable regardless of the collateral damage. The New York Times proved, beyond a shadow of a doubt, that Russia deliberately targeted hospitals as part of the campaign, and Assad has used chemical weapons on multiple occasions.

Erdogan, meanwhile, backs the opposition, which in some cases entails supporting jihadists. That isn’t good either, and Turkish-backed militias have themselves committed war crimes in the country on too many occasions to count, with one high-profile example being the roadside execution of Hevrin Khalaf in October.

That is the reality of the situation, and it’s juxtaposed against Putin and Erdogan’s personal relationship, which the two strongmen are generally careful to preserve, especially given the necessity of cooperation in other theaters, including Libya, where Russia and Turkey support opposite sites in the country’s intractable conflict.

We’ll simply reiterate our assessment from February 3. To wit:

Armed conflicts (proxy or direct) may not have any direct impact on the currency or the economy in isolation. But when you throw in a negative catalyst for EMs as a group (e.g., the virus epidemic) and then add increasingly negative real rates, you’re left with a delicate situation.

Of course, serious investors in Turkish assets are no stranger to any of this. As long as you realize it ain’t for the faint of heart, I suppose there’s no harm in taking your chances. Erdogan does, after all, have a penchant for coming out of any and all potentially ruinous situations largely unscathed.


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