ANALYSIS: Twin threats from EU to Turkish economy

Turkey’s trade deficit soared past $10 bn per month in September, turning the spotlight on the inadequate FX reserves of Central Bank of Turkey (CBRT) to defend the currency  against speculative attacks. Monthly current account deficits (CAD)  in the range of $6-8 bn per month have most likely become the norm for the Turkish economy, as the Erdogan administration began pork barreling for 2023 elections early.

In as much as Erdogan and his team of economic policy advisors hold very heterodox and damaging ideas about the management the economy, the comprehension that another bout of currency volatility could sink his re-election chances appears to have dawned on the Palace. In essence, Erdogan is set on a policy path to keep the exchange rate stable while pumping income into the pockets of the voters. The minimum prior condition for success is to find new sources to finance the CAD.  This is why allegations of natural gas importer and national gird owner BOTAS pleading with Gazprom to delay payments for natural gas to 2024 ought be taken seriously.  Putin has a vested interest in keeping Erdogan in power, because his relations with the opposition is nonexistent, and the said opposition is most likely to pursue a pro-Western foreign policy. I humbly calculate that Putin may order Gazprom to sell $10 bn worth of natural gas to Turkey on credit.

Can such a generous donation to Erdogan’s election campaign avert another currency shock?  Probably not, because there are other threats to economy hailing from the EU.   Two developments at the EU front have received very little attention in the debate about the fate of the Turkish economy en route to 2023 elections, to be held in May or mid-June.  First, a new German law to protect the environment could hamper Turkish exports, worth $40 bn per annum from 2023 onwards.  Secondly,  there is rising pressure on Brussels to slap Turkey with substantive sanctions for her aid to Russia and  alleged war-mongering in the Aegean.


According to Deutsche Welle,  A German law holding companies accountable for human rights and environmental violations in their supply chains that will enter into force on Jan. 1, 2023 will determine the future of Turkish exports to Germany and will be a turning point in Turkey’s economy”


“Compliance with these new rules will be “a tough test” for industrialists and manufacturers in Turkey, DW said, since they are already experiencing great difficulties due to the controversial economic policies of President Recep Tayyip Erdoğan, the increasing political tension in the country before the elections and the turmoil in the global economy”.


How much of Turkey’s $40 bn per year exports to Turkey will be affected?  Initially, the law will apply to companies that have their administrative headquarters and at least 3,000 employees in Germany. As of January 2024, it will also apply to companies with at least 1,000 employees in Germany.  Thus, the initial impact is certain to be minimal, because few German companies fall into scope of the Law. Yet,  it is certain to deter  new FDI from Europe with a view on exporting to Turkey, which could have served as the new supply hub for  companies shortening their supply chains from Asia to the “neighborhood”.  On the negative side, the German Law comes on top of EU-wide regulations to carbon tax  imports at the border, which may cost Turkey up to Euro 2 billion when these become full effective. Finally, 45% of Turkey’s exports go to EU, the economy of which is certain to sink into a deep depression in the first half of 2023, as a result of Putin’s energy squeeze.


In this sense, the blow to Turkey’s Current account from EU is hard to quantify, but certain to increase in importance over time.


The bigger threat from EU  is the specter of economic sanctions. “The reflection on whether Europe should continue to have open financing channels with Turkey at various levels is intense. This is being discussed with particular intensity, notes the Vice President of the European Commission, bringing to the discussion table not only the rallying cries of Turkish officials against Greece, but also the Turkish government’s stance on Russia’s war against Ukraine. “In 2020 and 2021, Europe used an approach to Turkey that is a mixture of sanctions and incentives, carrot and stick, which worked. It turned out that that mixture was more effective, very effective, than unambiguous sanctions or unqualified incentives. Now there is a reflection on the limits of Europe in the face of a Turkey that does not apply the sanctions of Europe and the West to Russia, but at the same time benefits from the customs union and all the community programs that it has with Europe, as a candidate country for accession”.


His warnings are not idle threats. “EU should very seriously consider adopting economic measures and sanctions against Turkey, Jürgen Trittin, a representative of the German Green Party told Khatimerini”.


Turkey is already under an excruciating financing squeeze, caused by Erdogan’s antics raising CDS premiums, and the global retrenchment of credit from Emerging Markets. S&P recently warned creditors that Turku’s commercial lenders are constantly being weakened by these two factors.  Any restriction by EU on financing Turkish trade could trigger a currency crisis, which would set back economic  growth for at least a year. Is the possibility of sanctions real?  Yes, not only Brussels, but the  Biden administration, too, suspects Erdogan has cut a deal with Putin to swap cheap natural gas for turning a benign eye on Russian entities skirting sanctions through Turkey. Hundreds of Russian companies are being set up in the country to  trade with EU without the encumbrance of sanctions, one banker told the author. Data is hard to come by on the true extent of Russian business migrating to Turkey, and even less can be ascertained about the objectives.

However, given how desperate Erdogan is to keep growth at top speed without letting the currency depreciate,  EU and US sanctions are a strong possibility,  in particular if  Putin doubles up the ante in Ukraine by turning to nuclear escalation  or economic sabotage of the West.


Atilla Yesilada, Creator, Real Turkey Channel


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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and and has contributed to the financial daily Referans and the liberal daily Radikal.