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Turkey has a rough road ahead

The realities of Turkey's economy and politics would alone have killed off the summer revival in the country's stock markets. Russia's invasion of Georgia, on Turkey's back doorstep, made sure.

The benchmark ISE National 100 Index gained as much as 28% from the start of July to August 4 in the run-up to the Constitutional Court decision not to ban the Justice and Development Party of Prime Minister Recep Tayyip Erdogan. The index has since fallen from around the 43,000 mark to under the 41,500 level I identified this month as the lower bound of a band of resistances stretching up to 45,500 and dating from the first half of 2006. (See Turkey ruling spurs (brief) stock revival, 8 August 2008).

Turkey is trying to elaborate a new and autonomous foreign policy in unprecedented conditions. For this to be successful, two things are necessary. These are a settling-down of its international region—the Georgia invasion making that look even less likely than previously—and a settling-down of its domestic politics. That also is not certain.

The government is seeking to deepen its energy ties with Iran in the hope that Europe will decide to decrease its energy dependence on Russia by increasing such dependence on Iran. Yet Iran is conspicuous by its absence from Turkey's recent proposal to establish a Caucasus Stability and Cooperation Platform (CSCP), which would include Turkey, Russia and the three South Caucasus states, and perhaps others such as the US, at least as observers.

Such a forum is not a new idea. The CSCP is the same idea that Turkey's president Suleiman Demirel proposed in 1999-2000, when it was called the Caucasus Stability Pact, only to see it abandoned by the subsequent government in Ankara headed by his longtime rival Bulent Ecevit.

What is clear is that the CSCP initiative was a surprise to many players. This is not a fatal flaw but is surely a sign that it has not been adequately prepared. Especially, it is not clear where it would fit into the alphabet soup of regional and transregional organizations already concerned with the region, or in the current parlance what its "added value" would be.

One Turkish analyst has suggested that Erdogan is looking for political cover to improve relations with eastern neighbor Armenia, to ameliorate the economic situation in eastern Turkey. This would be why he visited Baku to discuss the proposal with Armenia's own eastern neighbor, Azerbaijan, which seems less antagonistic to the idea than earlier in the decade, because it is clear that Turkey's blockade of Armenia only increases the latter's dependence on Russia.

(The blockade was instituted in the early 1990s initially due to a dispute involving the Nagorno Karabagh region.) But Erdogan risks creating the impression that he welcomes Russia's participation in the CSCP to decrease Western influence in the region.

That impression is enhanced by the warmth of his welcome last week to Iran's President Mahmud Ahmadinejad, whom he permitted among other things to avoid paying respects at the Ataturk monument, a visit that is diplomatically de rigueur for all foreign heads of state as a mark of respect to the founder of the Republic of Turkey, and to be filmed at length by television cameras at prayer in a major Turkish mosque. Turkish commentators have remarked that this latter gesture, beyond disrespecting the secularism of Turkish political modernity, violates the intimacy of prayer under Islamic religious tradition.

That meeting did not lead to the conclusion of an energy contract, but one should not think that that failure is the result of pressure from the US, which is hostile to Iran's nuclear program. Rather, as the Turkish energy ministry stated, the problem is with the conditions of Tehran's buy-back contracts. The Iranian oil minister retorted that Turkey was "not informed about the culture of the buy-back contracts". According to him, "the price ceiling of the contract is determined after carrying out tenders". Almost needless to say, this is an unorthodox perspective. Nor is Turkey uninformed after years of experience with problems of Iranian (non)fulfillment of past contracts.

Turkish economic advisors correctly see dangers arising from commodity price increases, financing costs and the absence of production guarantees and insurance costs. Also the present constitution of the Iranian state forbids recognition of jurisdiction of any international court or arbitration procedure. Not just Turkey but every potential foreign investor in the energy sector in Iran faces all these hurdles. Iran has only itself to blame for the absence of Western investment.

The CSCP initiative is Turkey's attempt to provide that Russia's invasion of Georgia does not make additional South Caucasus energy pipelines impossible. That Russian troops did not destroy Azerbaijan-owned energy infrastructure on Georgia's Black Sea coast, but some reports have put that down only to a saving telephone call from Azerbaijan's President Ilham Aliev to his Russian counterpart Dmitry Medvedev. The Baku-Tbilisi-Ceyhan (BTC) pipeline, terminating on the Turkish Mediterranean coast, was closed when Russia launched its invasion because of a Kurdish-claimed sabotage of the pipeline, although it is scheduled to reopen in the near future.

Oil from Kazakhstan, to the east of the Caspian Sea, crosses Georgia by rail for export. Just this week such a train exploded after hitting a mine on the newly restored main east-west railway in the country, a mine that was not there before the Russian invasion. After years of discussion, Kazakhstan agreed just this summer with Azerbaijan on the terms for contributing crude from the Tengiz and Kashagan deposits in Kazakhstan into the BTC.

That is in greater doubt now, as is a trans-Caspian gas pipeline from Kazakhstan's southern neighbor Turkmenistan crossing the South Caucasus into Turkey and from there to Europe. Likewise, Russian energy giant Gazprom's now-repeated offer to buy all of Azerbaijan’s natural gas production, for piping through Russia to foreign markets, acquires a new profile under conditions of continuing Russian occupation of Georgian territory.

Turkey had a rough economic road ahead even before the Russian invasion of Georgia. The country's long-term foreign currency debt is rated several notches below investment grade. No current initiative will contribute to solving the most glaring economic problem facing the government, the current account deficit, which was US$1.5 billion in 2002 (the year that Erdogan's party came to power), rose to $37 billion in 2007 and is estimated to exceed $50 billion by the end of the current year.

These days, especially in the Caspian/Black Sea region, pipelines are not big moneymakers. Rather, they are treated as services to the consortium that owns the gas or oil being transported. The CSCP will not solve Turkey's basic economic problems, which arise from its domestic financial and social evolution over the past six years. The outlook cannot be optimistic in the context of the worldwide economic downturn now beginning.

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URL:  http://www.robertcutler.org/blog/2008/08/turkey_has_a_rough_road_ahead.html
First published in Asia Times Online (28 August 2008).

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