Turkey desperately needs Russia for money and gas

Turkish President Erdogan benefits greatly from his rapprochement with President Putin. At their final meeting in the Kazakh capital Astana on October 13 – the fourth meeting in four months – Putin proposed moving more natural gas through Turkey and turning the country into a gas hub. Erdogan was only too happy to accept the offer. After returning to the Turkish parliament, he said, “European countries are now looking for gas. Thank God Turkey does not have this problem. We hope to become a gas hub soon.

Russia is the largest supplier of natural gas to Turkey, which imports almost all of its energy. It is used, among others, to heat homes in cities such as Istanbul and Ankara. Erdogan has realized that a gas shortage or sharp rise in prices last winter before the June 2023 election could severely damage his popularity. During their consultations in the Russian resort of Sochi in August, Erdogan agreed with Putin that 25 percent of Russian gas would henceforth be settled in rubles. In Astana, he asked Putin for a discount on gas prices and a postponement of payments.

These benefits should prevent Turkey from defaulting on its gas bills in the future. Because energy is usually settled in euros or dollars. Turkey doesn’t have that. The Turkish central bank’s foreign reserves have dwindled sharply as the bank has already spent about $70 billion (70.9 billion euros) this year to prevent further falls in the troubled Turkish currency, the lira. Officially, the bank still has $110 billion in foreign reserves. But most of these are non-monetary assets like gold.

billion shortfall in payments

That’s a big problem. Because Turkey has a balance of payments deficit (difference between imports and exports) of 50 billion dollars, mostly as a result of increased energy prices. So $50 billion more goes out than comes in. In addition, Turkish banks and companies have $160 billion in foreign debt outstanding that must be refinanced next year. They will pay some of it. For that they will eventually knock on the central bank’s door. Turkey needs more than $50 billion. But the central bank has only $40 billion in foreign reserves that it can quickly mobilize.

“It’s very tight,” says Attila Yesilada, a Turkish economist who works at GlobalSource, a consultancy that counts multinationals and large Turkish companies among its clients. “Only one thing has to happen and the whole house of cards will come tumbling down. I expect a new drop in the lira ahead of the election, leaving Turkey in default. Because the current monetary policy of very low interest rates when inflation is over 80 percent is simply unsustainable. At some point, the system collapses and we end up in a credit crunch.

read more: Turkey defies economic laws with low interest rates

Erdogan realizes he has a serious problem with a $50 billion deficit. That is why he travels the world in search of money. But foreign investors are not interested. After Turkey’s central bank began cutting interest rates last year, some who were still active in Turkey left. This is facilitated by the US Federal Reserve actually raising interest rates. Because higher interest rates in the US mean higher returns for investors. They have already sold $70 billion of government bonds from emerging economies such as Turkey this year.

Turkey is not the only emerging economy in trouble as the US Federal Reserve raises interest rates. But according to Yesilada, the situation in Turkey is particularly dire. “In other countries, the central bank raises interest rates to prevent currency depreciation,” he says. “Higher interest rates mean companies borrow less money. But the opposite is happening in Turkey. Interest rates are actually negative, the lira’s depreciation is suppressed by central bank interventions, and everyone continues to borrow heavily. In this situation, no commercial bank wants to keep money in Turkey.

No money from Gulf countries

Initially, Erdoğan placed his trust in the Arab Gulf states, as he did his best to mend strained relations with them in the recent past. Turkish media reported in the summer that the finance ministry was in talks with Saudi Arabia about investing $20 billion in Turkish government bonds to replenish the central bank’s dwindling foreign reserves. Turkey is reportedly seeking similar deposits from the United Arab Emirates and Qatar. But those investments did not materialize.

For now only Russia is crossing the bridge. Russia’s state-owned company Rosatom in August decided to transfer $15 billion to Turkey for the Akyu nuclear power plant under construction in southern Mersin province. The finance ministry is said to have already received half of this. Hakan Kara, a former chief economist at the Turkish Central Bank, confirmed based on his own calculations that foreign reserves had indeed increased by $7.3 billion. This money will be parked in Turkish accounts or converted into government bonds in the coming years.

The US government is closely watching these developments, fearing that Turkey is acting as a back door for Russia to circumvent Western sanctions. Last month, a senior US Treasury official visited Ankara, where he shared those concerns with Turkish government and financial sector representatives. Under US pressure, Turkish banks have already stopped using the Russian payment system because it could be used to evade sanctions.

Another source of concern is the mysterious flow of money that has played a major role in financing the arrears deficit in recent months. This liquidity is classified by the Turkish Central Bank.Net errors and omissions‘, up from $28 billion in the first eight months of this year. According to Finance Minister Nurdeen Nebati That category accounts for most of the unaccounted income from tourism. The number of Russian tourists vacationing in Turkey has increased from 2.2 million in 2021 to 2.8 million this year.

While many economists and Western governments have their doubts about that explanation, Yesilada thinks Nebadi has a point. “Tourism revenue in Turkey is severely limited. According to official statistics, today a tourist spends less than thirty years. It is not possible. This is because many entrepreneurs do not report their cash income. Additionally, Turkey had its best tourism season since 2018. Also, many Russians went to Turkey with suitcases full of suitcases to buy a house or do business here.

According to Yesilada, this cash flow will dry up in the coming months as the tourist season ends and most wealthy Russians have already spent their money in Turkey. “Winter can be very complicated,” he says. “That’s why Erdogan is begging Putin for a supplier loan so he doesn’t have to pay for gas until 2024. But Putin will undoubtedly want something in return for his generosity. If I look at the situation, Russian companies have no choice but to use Turkey to avoid sanctions. That is why Washington and Brussels are so worried.