The crash of the Turkish lira is causing the global financial markets to shudder. The lira fell 14% on Friday, extending a loss of nearly a third of its value this year, as relations with the United States have become increasingly strained. Concerns over Turkish President Erdogan’s tight grip on the country's monetary policy, failed plans to release an American citizen held in Turkey, and shifts in global power prompted the continued plunge of the Turkish currency.
To understand how all of these pieces fit together, we’ll start with some basic facts about trade between the United States and Turkey.
In 2017, $19 billion worth of goods were traded between the U.S. and Turkey. The U.S. exported $9.75 billion worth of goods—mostly cotton, scrap iron, steel, civilian aircraft parts, coal, and petroleum gases—to Turkey, and imported $9.42 billion worth of goods from them. In the same year, Turkey was ranked 31st among U.S. trading partners. According to figures from the Turkish Government, for the period of 2002 to October 2017, Turkish direct investments in the United States reached $3.7 billion while U.S. investments in Turkey amounted to $11.1 billion, second only to the Netherlands' $21.6 billion.
Detained Evangelical Leader
While the numbers tell one story, trade relations and politics tell another. Relations between the United States and Turkey have been weakening for several reasons. For one, the 2016 detention of an American evangelical pastor named Andrew Brunson, has aggravated tensions. Brunson was among many foreign nationals detained by Turkish President Erdogan in the wake of a failed 2016 coup attempt. The pastor was accused of supporting terrorism; the pastor denies any involvement.
In response, President Trump tweeted in July, “The United States will impose large sanctions on Turkey for their longtime detainment of Pastor Andrew Brunson, a great Christian, family man and wonderful human being. He is suffering greatly. This innocent man of faith should be released immediately!” Following the tweet, Turkey responded by imposing duties on $1.8 billion in U.S. goods including coal and paper. At the beginning of August, the U.S. Treasury Department sanctioned Turkey’s ministers of Justice and Interior because of Brunson’s detainment.
The prospect of a deal for Brunson’s release appeared high as Turkish officials traveled to Washington this week, but the deal apparently fell apart over last-minute Turkish demands. This prompted yet another tweet from President Trump, this time announcing the actual authorization of the doubling of tariffs on steel and aluminum for Turkey. Turkish aluminum will now be taxed at 50% and steel at 20%, essentially pricing Turkish metals out of the U.S. markets.
These tensions and tariffs indicate a deterioration of the U.S.-Turkish relationship, a deterioration made worse by Turkey’s worsening human rights record and increased cooperation with Russia and Iran in Syria. Much to the opposition of members of Congress on both sides of the aisle and other member nations of NATO, Turkey announced plans to acquire a Russian missile defense system.
On Friday, as the lira plunged and the U.S. imposed its higher sanctions on Turkey, Erdogan and Russian President Vladimir Putin spoke on the phone. According to a source in Erdogan’s office, the two said they were pleased with the positive direction in their economic and trade ties and with the ongoing cooperation in the energy and defense sectors.
President Trump’s discarding of the Iran nuclear deal is a point of contention, as well, as nearly half of Turkey’s oil imports come from Iran, meaning new sanctions against Iran come back and hurt the Turkish economy as well.
The worsening U.S. relationship with Turkey has also been fueled by Congress’s fears of authoritarian leanings by the Turkish President. This concern over Turkey’s president was also another key component of Friday’s lira drop. Erdogan served as mayor of Istanbul from 1994 to 1998, before serving as the prime minister of Turkey from 2003 to 2014. From 2014 until today, he has served as Turkey’s president and in April of 2017, he declared himself the winner of a nationwide referendum that granted him a vast array of new powers. The referendum gave him wide control over the judiciary, broad powers to make law by decree, the abolition of the prime minister’s office and of the parliamentary system. At the time, many argued that he had essentially made himself dictator of Turkey because, under the new rules, he will now be able to run for two additional five-year terms.
Erdogan is a self-described “enemy of interest rates” and has been advocating for lowering rates for years to make it easier for small and mid-size Turkish companies to borrow and grow. In the last decade, the president has muscled more control over the Turkish economy and has made recent statements indicating that he wants more say over the country's monetary policy. But, many experts argue that it is his control of the economy that has prompted a higher exchange rate from foreign banks. The exchange rates get higher as confidence in the management of the Turkish economy disappears.
Foreign investors are looking on with fear at these new economic policies and the growing authoritarianism in Turkey. The drop of the lira on Friday contributed to the decline in stock markets around the world, and were yet another example of how even mid-size economies can threaten the financial stability of the global market.