Wednesday, 27 October 2010

An Awkward Moment for Turkey

Turkey is right now in a spot it had hoped to avoid. It has to make a decision, a decision between its new best friend Iran with all its despotic client states and organizations and its traditional allies in the West. The much vaunted ‘Zero Problem’ initiative of Foreign Minister Ahmet Davutoglu has now generated Turkey’s biggest headache since the ruling Justice and Development Party (AKP) came to power in 2002.

Turkey has been a member of NATO for more than 50 years and has the second largest army in the organization. Now NATO wants to install a missile shield against potential threats from certain countries, namely nuclear wanna-be Iran. One leg of this shield is scheduled to be placed in Turkey. Ouch!

Davutoglu and his boss, Prime Minister Tayyip Erdogan, are frantically trying to reconcile the irreconcilable. Placing the missile shield in Turkey could jeopardize their burgeoning trade and energy relations with Iran. Refusing to place the shield in Turkey would just about kiss good-bye to whatever pretensions they had about joining the European Union as well as calling into question their very presence in NATO. Who needs a partner that bails out when the going gets tough?

One factor in the equation is economic; fast growing energy-starved Turkey needs Iran’s natural gas and Turkish companies need a place to expand their exports. But an equally important factor is that the balance of public sentiment has shifted dramatically away from the West. Turkey was founded in1923 by a military caste that equated modernization with Europe. Everything associated with the collapsed Ottoman Empire; its religion, its imperial status, and its ties to the Arabs, were regarded as anchors that held the country back and consequently suppressed.

Several developments in the last decade have shifted this orientation, and encouraged Turkey to seek a more independent role. If this means closer relations with pariah states like Iran, so be it. This policy plays very well with the Turkish masses who resent the condescension from Europe, the ambivalence over Turkey’s EU membership bid, and the blundering American policy in the Middle East.

AKP has its roots deep in Turkey’s long-neglected Islamic and socially conservative traditions. It has openly championed a resurgence of religious observance in a country whose founding principle is secularism. This move has created a deep fracture with the ruling secular elite that had run the country for 80 years. Suddenly, slavishly following European fashions and culture has been replaced by more conservative social and religious trends. Turkey is re-discovering its deep religious and historical ties to the Arab world. Damascus, Cairo and Dubai are now challenging Paris, London and Rome. Not all the Arabs are thrilled about Turkey’s renewed interest in the Islamic world. To them it comes too close to the Ottoman Empire that ruled much of the Arab world for more than 400 years.

Nonetheless, this shift in Turkey’s domestic priorities has opened the door to a more assertive, independent foreign policy. Turkish leaders no longer feel compelled to check with Washington and Europe before starting a new venture. They have trumpeted the new policy of ‘strategic depth’ and avoiding problems with one’s neighbours. This plays very well with the Turkish masses whose pride has been dented by constant barrage of criticism and unsolicited advice from EU bureaucrats. With the economy growing much faster than Europe’s the Turks don’t think they have to take advice or orders from anyone.

This is all well and good. But this new policy is much better on paper than in reality. It is a worthy goal to have zero problems with one’s neighbours, but what happens when your neighbours are problem areas like Syria, Iraq, Iran or Armenia? What do you do when they have problems with each other? How do you reconcile your policy objectives to Iranian support for Armenian genocide claims?

You can generate favourable headlines and demonstrations by asserting your distance from the West. But are better relations with places like Iran and Sudan going to replace NATO or the EU? More than 50% of Turkey’s exports go to the European Union. There is simply no way that the Middle East can replace the purchasing power of Europe that is so important to Turkish exports.

Turkey wants to be more independent. Fine. How to accomplish this without becoming isolated? If the West tires of Turkish equivocation where is Turkey going to turn? Turkey is big, but not big enough to forge a completely independent foreign policy like India, Brazil or China. Do the Turkish leaders believe that alliances with Iran, Syria, Hamas and Sudan will help them play a larger role in world affairs?

Turkey constantly says it opposes a nuclear-armed Iran. Yet it has done very little to hinder this development. It says sanctions won’t work and negotiations are the only way. What negotiations? With whom? The Iranians have consistently rejected any Turkish overtures to negotiate with the United States. Turkey’s stance on sanctions is just a bit disingenuous. Several of its companies are doing a booming business with Iran, and the government is loathe to see that stopped. The still-born effort with Brazil to shift some of Iran’s uranium to a third country came to nothing when the United Nations Security Council ignored it and passed the sanctions resolution despite a Turkish veto. Brazil later regretted its role and said it was dropping out of any future talks with Iran.

The Turkish foreign policy team is clever, and it is going to take every ounce of its skill and cunning to satisfy the seemingly mutually exclusive objectives of pleasing its NATO allies and Iran.

Monday, 18 October 2010

Istanbul a Financial Centre? Not Quite Yet.

After decades of a low to non-existent profile in the region, Turkey is now aggressively asserting its political and economic strength throughout the Middle East. As the country with the largest economy and conventional military force between the European Union and India, Turkey is staking a claim to a leadership role throughout the Islamic world. How many other Islamic countries agree to this claim is another matter altogether.

This claim has now extended to the finance sector. No less than the deputy prime minister for the economy now says Istanbul will become an international financial centre to rival Dubai or eventually even London. For those with memories longer than Twitter such a claim is empty rhetoric, merely an exercise in ‘box ticking’ where the box is, unfortunately, empty. They remember all too well the perilous decades of the 1980s and 1990s when inflation was in the high double digits, currency devaluation was measured by the hour, and banks were no more than hedge funds investing in high yielding government securities. With some regularity the system, such as it was, would crash with the currency devaluing at least 50% overnight and interest rates soaring into triple digits.

Yes, the country’s economy and financial sector have improved dramatically since those dark days in 2001 when the financial system imploded. After years of being looted by politicians the state banks had to be recapitalized by $20 billion. Big money in those days. Several banks failed, and the IMF stepped in with what was one of its largest bailouts at that time. Turkey’s current economic and financial strength are the direct result of rigidly following the IMF program. Greece take notice.

So Istanbul now wants to parlay that improvement into becoming an international financial centre. Ali Babacan, deputy prime minister for the economy certainly believes that Istanbul is well placed to replace Dubai as the region’s financial hub. Clearly the city is large with about 13 million, is increasingly popular with tourists, and is the heart of the country’s booming economy. But does all this make Istanbul ready to replace Dubai? Doubtful. Making the claim is easy. Turning it into reality is much more difficult.

For one thing Dubai, even with its current financial troubles, has already established the required legal, accounting and financial infrastructure and, more important, is surrounded by the enormous wealth of the Gulf region and much of the subcontinent. Reforming Turkey’s antiquated, creaking, and conflicting infrastructure is not yet even a work in progress. In addition, many of Turkey’s immediate neighbours like Bulgaria, Greece and Syria couldn’t afford a good lunch let alone support a regional financial centre.

At least one Turkish market player says that, in addition, no one has yet defined exactly what is meant by ‘financial centre.’ “No official here has a clue exactly what this term means. No one is going to come to Istanbul unless there is something to trade. Right now there is very, very little that you can trade on Turkish markets. What would they do, for example, if someone comes to Istanbul and wants to trade Japanese warrants? The bureaucrats would tie this one up for years. There really has to be much more sophisticated financial regulation and a more benign view of financial products before you can even think about becoming a regional financial centre.”

A senior international banker in Istanbul says the government’s claims for Istanbul as an international financial are ‘AKP (the ruling party) hype’.

“This is a pipe dream. Insufficient language skills, basic infrastructure, and legal system are major detriments to this claim. Moving the national financial institutions to Istanbul makes sense. But using them as the nucleus for a wider regional – or global – centre is a politician’s reach.”

Another former senior government official says the claims for an international financial centre ‘a nice dream, but total exaggeration.’

“Moving the central bank to Istanbul does not make the city a financial centre. Why don’t they (the government) first improve the education, language skills, and infrastructure before embarrassing themselves with these exaggerated claims? This is a real estate gimmick. Guess who owns all the land in the area they’re trying to develop as a financial centre? My strong suspicion is that it is loyal AKP supporters. The idea of Istanbul as an international financial hub has been a dream since (former president) Turgut Ozal’s time back in the 1980s. And we’re no closer to achieving this now then we were back then.”

Turkish officials are in danger of overplaying their hand as the country seeks its larger role on the world stage. It is very easy to confuse rhetoric with reality. It is one thing to claim regional financial leadership. But it is something altogether more difficult to create the reality on the ground that makes such a claim credible. Mr. Babacan might be better advised to restrain his oft-repeated claims of leadership until some