US sanctions on Iran and Turkey, and the state of the economy

US sanctions on Iran and Turkey, and the state of the economy

As the Turkish government tries to find a way out of one of the worst currency crises ever in its history, U.S. President Donald Trump boldly said that any country that trades with Iran will not be able to trade with the U.S. as he put the sanctions into effect on Aug. 6. The sanctions on Iran, with the power to ruin the nuclear deal, were objected by the European Union and Russia. Turkey has already announced that there is no obligation or any decision made to abide by the U.S. economic sanctions on Iran. It would put the Turkish economy under new pressures since Turkey buys almost half of its oil (44 percent in 2017) from its eastern neighbor Iran with a trade volume of more $10.7 billion last year. The secondary effect is likely to hit Turkey with a possible increase in oil (and gas prices). Turkey’s other oil and natural gas source is Russia, its northern neighbor, which is also subjected to U.S. sanctions, and Turkey needs to import oil and gas to sustain its growth in order to be able to put its economy back on track.

And even without the sanctions on Iran, after sanctions on Russia, Turkey has been experiencing serious political problems with its major NATO ally the U.S.

The news on the U.S. getting prepared for more sanctions on Turkey — following the freezing of U.S. assets of two Turkish ministers, which was a symbolic but heavy action — over the weekend caused the Turkish Lira to sink to record lows against the U.S. dollar.

When the stock exchange closed on Friday, Aug. 3, the lira’s value against the dollar was 4.7 (which was already high). It jumped to 5.1 in the opening session on Monday, Aug. 6. The decrease continued by the hour during the day. The intervention of the Central Bank, releasing $2.2 billion for the use of banks in the afternoon, helped for a short time in the late afternoon, but by midnight it hit its historic record of 5.43. Half past midnight, unnamed official sources in Ankara said there was a “preliminary agreement” with the U.S. and a delegation would be flying to Washington DC for talks. Markets read that as an indication that there might be a way for the release of the American evangelical pastor Andrew Brunson, who has been arrested in Turkey, which Trump and Vice President Mike Pence are very keen on especially as they head to mid-term elections in November. With the help of that piece of news the decline was reversed, and in the morning of Aug. 7, it was “down” to 5.24. By lunch, it was reported that the Foreign Ministry could not confirm the news of a delegation going to the U.S. to solve the crisis, causing the rate to go up to 5.34. Then came an official statement saying that a Foreign Ministry delegation, headed by new Deputy Foreign Minister Sedat Önal, would leave for Washington on Aug. 7 evening to have talks on Aug. 8. That pulled down the lira/dollar parity to 5.23 as the stock exchange closed.

According to Central Bank figures, the depreciation of the lira against the U.S. dollar in the last year is nearly 44 percent. With that loss, Turkey’s currency is now the third worst-performing in the world, after Venezuela, whose currency has completely collapsed, and Argentina. Turkey is followed by Iran (35 percent) and Brazil (18 percent). The outlook regarding the interest rates is not bright either. Argentina leads the interest rates list with 40 percent, which is followed by Venezuela (20.8), Iran (18), Turkey (17.75) and Nigeria (14).

Turkey’s new economy captain Berat Albayrak recently said lowering the inflation rate, which is over 15 percent, is the government’s main target and the economy needs a cooling down with lesser public spending.

On Aug. 3, President Tayyip Erdoğan revealed his first 100-day plan after being re-elected. He promised huge spending needing a lot of foreign investments.

Financial markets and industrialists in Turkey hope that the currency crisis stops soon with the necessary political and economic steps.

Turkey sanctions, Politics, diplomacy