Erdogan’s Folly: Conspiracies Bring Turkey to the Brink of Bankruptcy

Erdo─čan’s Folly: Conspiracies Bring Turkey to the Brink of Bankruptcy
(Aykan Erdemir, January 12, 2022)

Transcript available below

About the speaker

Dr. Aykan Erdemir, senior director of FDDÔÇÖs Turkey program, is a former member of the Turkish Parliament (2011 to 2015) who served in the EU-Turkey Joint Parliamentary Committee, EU Harmonization Committee, and the Ad Hoc Parliamentary Committee on the IT Sector and the Internet.

As an outspoken defender of pluralism, minority rights, and religious freedoms in the Middle East, Aykan has been at the forefront of the struggle against religious persecution, hate crimes, and hate speech in Turkey. He is a founding member of the International Panel of Parliamentarians for Freedom of Religion or Belief, and a drafter of and signatory to the Oslo Charter for Freedom of Religion or Belief (2014), as well as a signatory legislator to the London Declaration on Combating Antisemitism.

He has edited seven books, including Rethinking Global Migration: Practices, Policies, and Discourses in the European Neighbourhood (KORA) and Social Dynamics of Global Terrorism: Risk and Prevention Policies (IOS Press). He is co-author of the 2016 book Antagonistic Tolerance: Competitive Sharing of Religious Sites and Spaces (Routledge).

On April 27, 2016, Aykan was awarded the Stefanus Prize for Religious Freedom in recognition of his advocacy for minority rights and religious freedoms. In March 2015, he was awarded a distinguished fellowship at the Oxford Centre for the Study of Law and Public Policy. His work has appeared in The Wall Street Journal, The Washington Post, Foreign Affairs, The Hill, Politico Europe, The Huffington Post, The National Interest, War On The Rocks, The Cipher Brief, Business Insider, Turkish Policy Quarterly, Hurriyet Daily News, Ahram Online, and The Times of Israel.

After completing his BA in International Relations at Bilkent University, Ankara, Aykan received an MA in Middle Eastern Studies and PhD in Anthropology and Middle Eastern Studies from Harvard University, where his doctoral dissertation was entitled, ÔÇťIncorporating Alevis: The Transformation of Governance and Faith-based Collective Action in Turkey.ÔÇŁ He also worked as a doctoral fellow at Hauser Center for Nonprofit Organizations at Harvard’s Kennedy School of Government and a research associate at the University of Oxford’s Center on Migration, Policy and Society.

He previously addressed the Westminster Institute on the subjects of Hagia Sophia: The Latest Target of ErdoganÔÇÖs Supremacist Policies (2020) and How Erdogan Consolidates Power: The Weaponization of Turkish Media and the Scapegoating of Minorities (2018).



Robert R. Reilly:

Hello and welcome to the Westminster Institute. I am Robert Reilly, its director, and today we are extremely pleased to welcome back Dr. Aykan Erdemir, who is the Senior Director of the Turkey program at the Foundation for the Defense of Democracies. He is a former member of the Turkish Parliament from 2011 to 2015, and he served in the EU-Turkey Joint Parliamentary Committee and other EU committees. He is a founding member of the International Panel of Parliamentarians for Freedom of Religion or Belief, and a drafter of and signatory to the Oslo Charter for Freedom of Religion or Belief. That is from 2014.

Dr. Erdemir has edited seven books, including Social Dynamics of Global Terrorism: Risk and Prevention Policies, and he is the co-author of the 2016 book Antagonistic Tolerance: Competitive Sharing of Religious Sites and Spaces.

His work has appeared in The Wall Street Journal, The Washington Post, Foreign Affairs, The National Interest, Turkish Policy Quarterly, and many other publications. After completing his BA in International Relations at Bilkent University, Ankara, Aykan received an MA in Middle Eastern Studies and a PhD in Anthropology and Middle Eastern Studies from Harvard University. He has also worked as a research associate at the University of Oxford’s Center on Migration, Policy and Society. He first spoke to Westminster back in 2018 on, ÔÇťHow Erdo─čan Consolidates Power: The Weaponization of Turkish Media.ÔÇŁ Today he is going to address us on the subject of, ÔÇťErdo─čanÔÇÖs Folly: Conspiracies Bring Turkey to the Brink of Bankruptcy.ÔÇŁ Welcome back.

Aykan Erdemir:

The Bottom Line

Thank you, Bob, for that warm welcome. It is a great pleasure to join the Westminster Institute again. Today, as the title says, we will take a deep dive into Erdo─čan’s policy folly, and the bankruptcy that we will look into is not only a political bankruptcy but an economic bankruptcy that is unfolding in Turkey, and so to begin with, my take home message will be that the conspiratorial mindset of an Islamist leader has succeeded in bankrupting one of the leading emerging market economies, namely, Turkey, and condemned its more than 85 million citizens to poverty and financial hardship in the years if not decades to come, so that is basically the bottom line here.

For those of you who have been watching political Islam in action, this, of course, is not a surprising turn of events because political Islam has a consistent track record of basically pillaging and looting the polities that it takes over, bringing them to the brink of bankruptcy, and in Turkey it took less than twenty years for Erdo─čan to ‘succeed’ at this feat.

Erdo─čan’s Conspiracies

Unorthodox Economic Policy

Now, let us take a look at the set of conspiracies that have driven Erdo─čan’s economic policy and that brought out this financial meltdown. Those of you who watch financial press, the Financial Times, The Wall Street Journal, The Economist, will constantly see a reference to a term called ‘unorthodox economic policy,’ so there will be a lot of references to Erdo─čan’s unorthodox economic policy. What this means is that against the widespread idea, not only within economics as a science but also economic practice, financial practice, that to fight inflation you have to raise interest rates, Erdo─čan takes the exact opposite view, so his unorthodox economic political view is that high interest rates lead to high inflation, hence he claims if he lowers policy rates, interest rates, this will also lower inflation.

Now, let us take a look at the United States. The Federal Reserve has signaled that to reach its inflation targeting, which is 2 percent in the United States, it will hike interest [rates] multiple times during 2022. And since inflation exceeded 6 percent last year, 4 percent over America’s inflation targeting, it is of no surprise to any economic actor in the United States that [the] Federal Reserve will increase interest rates, and this is as expected likely to bring the inflation [rate] down.

Now, in the Turkish case, the Turkish Central Bank has an inflation target of 5 percent, but when we take a look at the 2021 inflation, it was almost 40 percent, and you can see that the inflation targeting is way off target. It does not work and what really led to this was that while the Federal Reserve was preparing to hike rates, Erdo─čan forced the Turkish Central Bank to bring down the policy rate from 19 percent to 14 percent within the last four months of 2021.

Now, this, of course, is akin to committing suicide.

Devaluation and Dollarization

Guess what happened. There was a dramatic devaluation in the Turkish lira. There was a dollarization of bank accounts as Turkish consumers rushed to the banks to convert their lira accounts into U.S. dollar accounts or euro accounts. Despite Erdo─čan’s efforts at creative accounting through TurkStat, Turkey’s statistical institute, consumer price inflation, the official consumer price inflation, is at 40 percent, but most independent observers claim that the actual consumer inflation is probably double that. And the Turkish lira lost almost half of its value just within 2021, but this is part of an ongoing devaluation since 2018. Your average Turkish worker has experienced a dramatic slashing of his or her earnings, especially in U.S. dollar terms when minimum wage fell below $300 dollars a month for the first time during 2021.

Emerging Markets

Now, you might ask, you know, how about other emerging market economies, meaning is Erdo─čan unique or is he an outlier when it comes to such an unorthodox economic policy? And the answer is a solid yes because we see a systematic decoupling of Turkey’s economy from other emerging markets, especially in 2021. The world’s emerging markets watched very closely what was happening in the United States. They saw the hike in inflation. They read the signals from the Federal Reserve closely, and they realized that in 2022, there will be a haircut when it comes to basically the liquidity available in the world, and hence to the emerging markets.

How did they prepare?

Almost all of them hiked interest rates, their policy rates, through their central banks. They tried to add to their reserves, and basically braced for potential devaluation. And they knew that hiking policy rates was a good bet both against inflation and also against devaluation, which they know then also translates into additional inflation. There is like a pass-through effect.

How Erdo─čan Decoupled Turkey

Now, let us come to Turkey and see what Erdo─čan did, how he decoupled Turkey from all of these other emerging market economies. First of all, he admits to selling $165 billion dollars of the Turkish Central Bank’s reserves in 2019 and 2020 alone, so this is basically a total sell-off of all of Turkey’s foreign currency assets, hard-earned foreign currency assets over the decades.

Second, I mentioned that there is some creative accounting going on in Turkey, so this could either include TurkStat’s let us say ‘creative accounting practices’ or it could also mean various window-dressing attempts by Erdo─čan, so if you asked him today, he would argue that by the end of 2021, Turkey still had $8.6 billion dollars in the Turkish Central Bank’s foreign currency reserves. But this excludes the window-dressing through international swap deals Erdo─čan signed over the last few years with China, Qatar, and South Korea.

Add to that another window-dressing attempt within Turkey whereby the Turkish Central Bank buys U.S. dollars from local banks, and through a swap deal provides them with Turkish liras. Hence, both the international swap deals and the local swap deals through magic increase the Turkish Central Bank’s foreign currency reserves on paper but not in reality.

And according to Goldman Sachs, and this is from a Financial Times piece this week, Turkey’s net international reserves, foreign currency reserves, excluding these swap deals, are now negative $66 billion dollars. Now, that is an unprecedented depletion of Turkey’s foreign currency reserves, and not only depletion but they are now in the red, the reserves are now in the red, and it will take possibly generations to put all of this back in place.

Now, I am sure as you are listening to this horror story, which inevitably will not be contained within Turkey and will gradually spill over into other emerging markets and then possibly to the developed economies, you are asking the question why. What would drive a politician to such a self-destructive path? And now going back to the title, there are a number of peculiar ideas that constitute Erdo─čan’s worldview, Erdo─čan’s ideology, that have brought about this disaster in the making.

Interest Rate Lobby

First of all, one term that can be best used to understand Erdo─čan’s worldview is the so-called ‘interest rate lobby.’ Since Turkey’s nationwide Gezi Park protests in 2013 against the Erdo─čan government, we have seen then-Prime Minister Erdo─čan and today’s President Erdo─čan repeatedly refer to a so-called ‘interest rate lobby’ that targets Turkey and condemns it to paying high interest rates. And anyone who has followed Erdo─čan closely, and anyone who has followed the Turkish parlance closely, would know what this term alludes to, what it refers to. This is a euphemism Erdo─čan uses for the global Jewry, so it is an anti-Semitic comment.

This is all a part of Erdo─čan’s struggle since his teenage days in Turkey’s Islamist movements as what he sees as a crusade against Jews. And hence, Erdo─čan has always approached interest rates not as yet another economic tool central banks use to set monetary policy but as an evil that needs to be fought at all costs, so this is pretty much at the root of Erdo─čan’s unorthodox economic policy, meaning lowering interest rates regardless of [economic conditions]. But at the same time what exacerbates this problem is strong dose of anti-Westernism.

The Largest IMF Bailout Ever

Now, Erdo─čan is so staunchly anti-Western, meaning not only against Western culture and civilization but also what he sees as the global institutions of the Western-led liberal world order, that he is also staunchly anti-IMF and World Bank. He has repeatedly voiced his criticism of the IMF and said that he would not turn to the IMF for a bailout. Now, anyone who knows Turkish history knows that Turkey has had multiple economic crises in its history and often turned to the IMF for significant bailout packages and structural reforms, which then put Turkey back on track, but at this point although Turkey is entitled to such a major capital injection from the IMF, Erdo─čan is not willing to turn to the IMF.

Now, of course, there is more than just ideology that prevents him from turning to the IMF, in his view, turning to the West for help, and that also has to do with the strings that come with any IMF bailout package. Now, to begin with let us talk about the size of such a bailout package. Now, when Argentina needed one, it was over $50 billion dollars, and many observers argue that Turkey at this point needs $100 to $150 billion dollars of a bailout package, which would make it the biggest ever bailout package in the history of the IMF.

Now, as you can imagine, no institution, no international financial institution would be willing to extend a big loan without significant strings attached, and as one can imagine, those strings here would be, first of all, guarantees for good governance, which means transparency, accountability, the rule of law, due process, private property rights, and so on and so forth, anti-corruption and anti-money laundering measures.

Now, anyone who knows Erdo─čan would also know that these are big red flags, these are red lines that Erdo─čan will not cross because he will see any of these as impositions, as giving up authority, giving up power from his one-man rule regime. Hence, again, Erdo─čan’s ideological fixations also prevent him from an off-ramp when it comes to Turkey’s financial meltdown.

Crony Corruption Within Construction

But then there is a non-ideological dynamic at work as well, and that is personal interest or crony interest because Erdo─čan works very closely [with], as the Turkish citizens call them, the ÔÇśgang of five,ÔÇÖ so this is Turkey’s top five construction tycoons in Erdo─čanÔÇÖs inner circle, and according to OECD statistics, these five companies are in the top 10 global construction companies that have received the largest public tenders in the world.

Now, you can imagine that there are construction companies in the world much larger than Erdo─čan’s crony construction companies, so how is it that these five companies managed to win all the public tenders to the extent that their record is much better than all the global giants? As you can imagine, this is a typical case of graft, that is almost every single public tender in Turkey of mid or large-sized tender end up going to these crony bosses, and these crony bosses in exchange not only provide kickbacks to Erdo─čan, not only provide Erdo─čan’s other clients some spoils, but they also sustain Erdo─čanÔÇÖs political machine, and fund Erdo─čan’s media empire, Erdo─čanÔÇÖs propaganda machine.

And as you can imagine, these construction bosses, who are also involved in residential and commercial building activity, require low interest rates, low mortgage rates, to stay afloat and to sustain their businesses, so ultimately, Erdo─čan is hooked on low interest rates because his cronies depend on low interest rates, and Turkey’s construction boom, much criticized, unsustainable construction boom, is also dependent on low interest rates, so regardless of the ill effects on the Turkish economy and citizens at large, Erdo─čan cannot really give up his fixation on lowering Turkey’s policy rates.

How Does a Weak Lira Affect Turkey’s Economy?

Now, if you turn to Erdo─čan and asked him why he is doing this, of course he will not confess to any of this. Instead, especially during the second half of 2021, he had to come up with a justification, a pretext to offer to the people, so now his claim is that he is doing all this to make Turkey more competitive. He is arguing that [the] Turkish lira’s devaluation would lower in dollar terms the average wage in Turkey, the average salary in Turkey, and hence would turn Turkey into the country of cheap labor. He argues this would boost investment, this would boost exports, and this would attract foreign capital.

Now, unfortunately, the reality does not necessarily fit Erdo─čanÔÇÖs model. At this point yes, Erdo─čan has succeeded in sinking Turkey’s minimum wages to the lowest in the region, in the Balkans, and even some would argue now below those of China’s minimum wages, but then the question is what is the effect?

Brain Drain and Capital Flight

First of all, let me point out one thing. Turkey’s high-tech exports comprise only 3 percent of its total exports. As you can imagine, if your goal is to be a haven for cheap labor, that often excludes your chance of climbing the high value-added, high-tech export ladder. Actually, when you take a look at Turkey’s exports, they are condemned. More than half of Turkey’s exports are either in the lowest tech category or low-to-mid tech category, which means Turkey has a significant problem in developing high-tech industries, and exporting high-tech goods, and lowering the minimum wage will actually not make any difference. On the contrary, we have seen an exodus, a brain drain of highly skilled workers from Turkey, which will pose a further obstacle in Turkey building a high-tech industry and increasing its high-tech exports.

Now, Turkey’s brain drain – by the way, you might be wondering why [there was] such a dramatic brain drain in 2021 and you know when professors’ monthly wages and medical doctors’ monthly wages are below a thousand dollars, people basically seek their futures elsewhere, so we have seen a systematic exodus of medical doctors, academics, engineers, software programmers from the country.

And to make matters worse, this is accompanied by a capital flight, a capital flight of two different sorts. One is the ongoing Western capital flight from Turkish equities and bonds, so by 2020 this hit rock bottom to such an extent that Western capital in the Turkish stock markets and in Turkish sovereign bonds hit an all-time low, and there was at one point even some debate [about] whether to remove the Turkish equities index from the emerging markets category and relocate it, downgrade it, to the frontier markets category, which is really disastrous in terms of Turkey’s global economic image if you think [about the fact that] that just two decades ago, Turkey was one of the most attractive emerging markets.

And the second capital flight is actually domestic capital flight. Turkish citizens for all sorts of reasons are taking their assets abroad, taking their companies abroad, taking their bank accounts abroad or investing in cryptocurrencies, so this has a two-fold rationale. On the one hand, they know that Turkish assets will continue to lose value, so they escape [the] Turkish lira, Turkish real estate, Turkish stocks, and at the same time, they are afraid of Erdo─čan’s long arm. Erdo─čan has already confiscated over $10 billion dollars worth of businesses since Turkey’s abortive coup. He has frozen bank accounts, taken over private property, and in a country where there is no rule of law or due process, people fear that Erdo─čan can even extend his long arm to people’s U.S. dollar and euro deposits in banks.

Hence, yesterday in The Wall Street Journal there was a report about record high levels of lira-to-cryptocurrency transactions in December 2021 and in fact the last quarter of 2021. Now, this is not just a fear of devaluation, but this is also a fear of losing deposits in Turkey-based banks, so people in an attempt to secure their savings from Erdo─čan’s confiscation turn to crypto assets, assuming that crypto currencies can present a kind of a safer medium.

What is Actually Happening in Turkey

Now, when you bring all these together, you can pretty much feel the financial panic in Turkey, and the end result is diametrically opposite to what Erdo─čan is claiming about attracting capital, boosting exports, boosting [the] Turkish economy. On the contrary, what we have seen lately is, first of all, a sudden halt to trade, a sudden halt to investments, because the Turkish lira in 2021, according to some studies, was as volatile as cryptocurrencies, for example, such as the bitcoin. This is unheard of, that a sovereign currency, a fiat currency, is as volatile as a crypto asset. And in such a volatile setting, as you can imagine, no entrepreneur would like to invest long term, and no foreign investor would like to invest in a large-scale, greenfield investment from scratch to create employment. Hence, Erdo─čan’s self-defeating steps simply exacerbate Turkey’s economic crisis.


Now, I have already mentioned some of the Turkish public’s response to this, first of all, the dollarization of the economy. People turn their lira assets to dollar assets or crypto assets, or they purchase gold and keep it at home, which is a very traditional Turkish thing. They do not trust the banks, so they basically keep potentially over $200 billion dollars worth of gold at home or in their safes, and ultimately, as I have argued, they also vote with their feet, that is they leave the country all together. Now, this of course is a path to disaster for [the] country, and ultimately this could not end much different than what we have been witnessing in Lebanon or earlier in Argentina, so it is really a sad state of affairs.

Is There a Path Forward?

Now, the question is, is there a path forward? On the one hand, Turkey is a very resilient economy. The Turkish public, the Turkish businesses, have been used to significant ups and downs. They are used to weathering similar crises, so people argue that resilience will work toward Turkey’s favor, but then if and only if there is a path back to orthodox economic policy, if there is a path back to providing trust to the markets.

Now, my quick take-home answer here is as long as Erdo─čan is in power, there is no path forward, that is until he is voted out, it is extremely difficult for Erdo─čan to rebuild trust in markets, to return to orthodox economic policy, or even worse, to restore confidence in Turkey’s economic Institutions. Just to give you an example, Erdo─čan has changed the director, the governor of Turkey’s central bank, four times over the last several years, and increasingly the appointments became more and more nepotistic, and ultimately, individuals who have no central bank experience whatsoever ended up at the helm of the central bank.

Rebuild Trust

Second, he has also reshuffled the monetary policy committee of the central bank and politicized the entire institution, undermining its administrative and financial autonomy. Hence, Erdo─čan also needs to rebuild trust in Turkey’s regulatory agencies and the central bank before the markets respond positively, but as we all know, that is mission impossible, meaning Erdo─čan will never give up his power and authority over the Turkish Central Bank, so again based on these I would argue that Turkey’s path forward would require (hopefully with the 2023 presidential and parliamentary elections) a peaceful transition of power to Turkey’s big tent umbrella opposition bloc.

Re-institutionalizing Meritocracy

Now, if Turkey then returns to an enhanced parliamentary system, to pluralism, to the rule of law, and to due process, then there might be a glimmer of hope ahead because that could then begin a restoration process, a restoration process that would first need to rebuild Turkey’s autonomous regulatory agencies and central bank, then end the era of creative accounting at TurkStat and reinstitutionalize meritocracy at the civil service, and [make] sure that Turkey’s bureaucrats in charge of the economy and finances are individuals with the proper training and experience instead of simply being Erdo─čan’s cronies. And if and when these institutional measures are combined, let us say with a significant IMF bailout package, with a significant cash injection, I think Turkey will then be on a slow path to recovery.

And once that recovery path becomes evident, brain drain could turn into brain gain as Turkish expats begin to return to Turkey, not only with their know-how and connections but also with their capital, and they could play a major role in boosting Turkey’s economy, and that would hopefully be accompanied by yet another wave of Western capital inflows to Turkish equities and bonds, and most importantly, greenfield investments that would create new industries and produce new opportunities for employment, much needed employment given Turkey has the OECD’s highest rate of NEET, meaning youth not in education, employment, or training, which of course is really a formula for disaster.

Turkish Foreign Policy

Now, I mentioned mostly economic and domestic political measures, but let me end by also underlying that this also has to be accompanied by a major reversal of Turkey’s foreign policy adventurism, belligerence, and irredentism because Erdo─čan’s policies, which are basically geared not to maximize Turkey’s national interests but his political Islamist interests, his Muslim Brotherhood allies’ interests around the globe, will need to be replaced by Turkey’s conventional, Western-oriented, rules-based foreign policy.

Now, such a policy would then entail a return to trade diplomacy instead of adventurism, and that would have a significant boost on Turkey’s exports because since the Arab Spring, Erdo─čan’s Islamist adventurism in Syria, in Libya, and elsewhere have basically pushed Turkish entrepreneurs and exporters out of many of the Middle Eastern markets, including Egypt, Saudi Arabia, the United Arab Emirates, so there has been either a growing skepticism or there was a growing skepticism toward Turkey or Turkish exporters and Turkish goods.

And Erdo─čan has actually within 2021 realized his big mistake and has been trying hard to make amends with Egypt, Saudi Arabia, the United Arab Emirates, and Israel, but as you can imagine, it will take time and possibly another Turkish government before trust can be built and Turkey can once again access these markets, some of which have witnessed [an] over 90 percent decline in [the] import of Turkish goods. So, as you can see from economic policy to domestic policy to foreign policy, Erdo─čan’s political Islam has been one big chain of mistakes, self-serving mistakes both politically and economically, self-serving mistakes that come at the expense of the Turkish republic, at the expense of Turkey’s 85 million citizens, and that often also comes at the expense of the stability and prosperity of Turkey’s immediate region as well as other emerging markets.

So, it is my hope that in 2023, we will see a repeat of the 2019 municipal elections in Turkey through which Turkey’s opposition parties joined forces to defeat Erdo─čan’s candidates, and we will see a slow, long path toward sound economic, domestic, and foreign policy in Turkey. And this will also provide Turkish citizens the hope they need to keep up with this long, hard path back to recovery and prosperity once again.

Robert R. Reilly:

Aykan, thank you very much. Despite the monetary mayhem that the cuts in the interest rates have caused, three since September, Erdo─čan said he is determined to continue cutting interest rates through to the elections next year, so he must think that there is a political constituency inside Turkey that is big enough to cater to in this way. I mean you mentioned these construction magnates who benefit from these artificially low interest rates, but the public at large does not seem to be responding well because recent polls in Turkey show dramatic declines in the support for Erdo─čan.

Aykan Erdemir:

Now, the polls indeed indicate that the support for Erdo─čan is at an all-time low, and also the support for Erdo─čan’s coalition partners, namely the far-right Nationalist Action Party (MHP), are also at an all-time low, so combined they no longer have the necessary majority to re-elect Erdo─čan or to gain [a] parliamentary majority, but at the same time, I would never underestimate the power of Erdo─čan’s propaganda machine to present this financial meltdown as success to Erdo─čan’s core loyalist support base, so when Erdo─čan argues that low interest rates are a result of Islamic teachings, there will be a small but tight-knit core support base that will stay [by] him until the very end even if they have to face personally extreme hardships.

This is not only propagated by the media empire, the pro-Erdo─čan media empire, but [it is] also built into the Islamist way of thinking, that this is basically a fight, a good fight worth fighting even at great personal costs, and actually, Iran observers can possibly detect similar motivations and sentiments among the regime’s most loyal elements. Now in general, Iranian citizens are extremely skeptical of the clerical regime’s economic mismanagement and corruption, and they frequently take [to] the streets, but the regime still has significant hardline loyalists who will buy into and reproduce this rhetoric.

The same is also true for Erdo─čan, that, yes, he will continue to bleed some votes to the opposition, but at the same time he is doing his best to maintain his core support base, so what some could argue to be miraculous is that such a politician, who has destroyed an emerging market economy, still manages to get over 30 percent support in the polls because if we compare today’s Turkey with Turkey of 2001, right before Erdo─čan’s rise to power, a similar economic collapse wiped out the entire center-right and center-left parties, the three-party coalition in Turkey, and they were not able to elect a single representative to the Turkish parliament, so in 2001, the electorate’s wrath was complete. It really pushed all the mainstream parties out of parliament and created a vacuum which Erdo─čan exploited to push his Islamist agenda forward, but today, interestingly, Erdo─čan is not suffering from a similar meltdown. Yes, he has lost significant percentages, up to 20 percent of his support, but I think still the question that begs an answer is why 30 percent of the Turkish public would still see any hope in a leader who has consistently failed to deliver.

Robert R. Reilly:

Maybe the answer, Aykan, is that the full effects of these disastrous economic policies are yet to be felt. In following the financial news about Turkey, [my reading] included an interview with the head of a pharmaceutical company that has been in business for many years, saying that what Erdo─čan does not seem to recognize is that the export industries in Turkey, including the pharmaceutical companies, require imports. Something like 70 percent of Turkish exports require imports of parts that are made into something by Turkish industry, and therefore, this monetary disaster is raising their costs to the point that they are going to be driven out of business, so the full effects of that, the unemployment that will occur, it certainly seems to me it is going to hurt, obviously, the already poorest parts of Turkish society from which Erdo─čan draws a lot of his support if I understand that correctly. And even for Islamists, don’t they at a certain point vote their pocketbooks when the full effects of this mismanagement becomes evident to them and life becomes impossible, breadlines form and that kind of thing?

Aykan Erdemir:

Now, actually, the breadlines have formed for miles and miles now, and it has been widely reported in the Western media, but I think there is also the sense that clientelism is an important force, that is a lot of the individuals in Erdo─čan’s loyal support base know that they have received significant spoils over the years, they have positions in the civil service, in the economy, that they owe not to their qualifications or skills or achievements but to Erdo─čan’s patronage, and they fear that if Erdo─čan is gone, they might lose those advantages, those privileges, those spoils as well, and hence that could lead to some stickiness in support for Erdo─čan.

But now going back to your earlier comment, which is also extremely important, the rampant devaluation of the Turkish lira poses significant risks which we will also begin to see this year. Now, first of all, we have to remember that Turkey imports over 95 percent of its hydrocarbons, and this is all in dollar terms, U.S. dollar terms. Second, as you said, Turkey has a robust export-oriented economy, but there is a significant imported intermediary goods component of almost all Turkish exports. And third, in a country where the banking sector is dollarized, almost all of Turkey’s corporations take loans in foreign currencies either from international banks or from domestic banks, and as you can imagine, the devaluation of the Turkish lira creates significant risks and significant problems for corporations that have taken foreign currency loans.

Now, for the export-oriented companies, they might weather the storm because their revenues are in part in foreign currency, but if your revenue stream is mainly from the domestic economy, that is in liras, then you are in a bind. On the one hand, you have outstanding foreign currency loans that you need to pay back, but your revenue stream in lira is getting smaller in dollar terms each month, so your ability to service these loans, just to pay the interest rate on these loans let alone pay back these loans, becomes impossible.

Hence, in 2022, we might see some of what I have earlier called in one of my articles, ‘Turkey’s zombie companies,’ companies which are solvent on paper but actually are already non-performing, go bankrupt because some of these companies have been kept alive on paper by the Erdo─čan government, which has pressured, first of all, public lenders, Turkey state-owned banks, and then some private lenders to keep them afloat and not to mark them as non-performing loans, non-performing companies.

Robert R. Reilly:

Sounds like China.

Aykan Erdemir:

Yes, it is quite similar to China, but of course the scale is different and the government’s capacity for [a] bailout is different, but ultimately, when you put all these factors together with increased energy costs, with increased raw material costs, and with increased intermediary goods costs, then again this is a recipe for disaster.

Robert R. Reilly:

Well, if Erdo─čan is true to his word and he keeps lowering interest rates through to the election in 2023, certainly he is going to pay a political price if those elections are free. I mean won’t it be as bad as 19 years ago when those parties were destroyed by the economic problems then?

Aykan Erdemir:

Now, here there are two caveats. One is although Erdo─čan continues to lower interest rates, and although he toes the line that he will continue to lower interest rates, he also comes up with a number of financial shenanigans to practically increase interest rates elsewhere or to have that effect. For example, Turkey’s 10-year sovereign bonds in the markets have been climbing when it comes to interest rates or Erdo─čan came up in late December with a new scheme, telling consumers convert your U.S. dollars to Turkish liras in the banks, and at the end of the year you can collect your Turkish lira interest rate and if there is a devaluation of the Turkish lira, I will make up for the difference from the treasury’s funds.

Now, on paper this is, one would argue, another form of interest. You simply do not call it interest, but it is another way of basically paying for money in deposits now with one difference. If Erdo─čan increases interest rates, then the official interest rate is your liability, but if you are giving guarantees against the devaluation, it is basically an open-ended guarantee, meaning at this point, for example, Turkish lira has had years of losing 50 percent of its value. Now, if this scenario is repeated this year, by the end of the year Erdo─čan will have pledged to pay 50 percent interest from the government purses for these guaranteed Turkish lira accounts.

Robert R. Reilly:

Yeah, well, after Erdo─čan announced this policy, the lira rallied for a short period of time until reality reasserted itself and it went down. One risk, I wonder how many Turks are responding to that offer of converting their hard currency to lira in their bank accounts. I read somewhere that 60 percent of the money in all Turkish bank accounts are in foreign currency, so it would be interesting to know how many were lured into the lira by this because isn’t one danger what Erdo─čan would recognize as the inflation figure? As you said or actually Erdo─čan admitted a short time ago that the inflation rate in Turkey was 36 percent. You just mentioned many people think it is much higher. There was an amusing comment by a political opposition leader, Ali Babacan, that TurkStat is the “institute for adjusting numbers.”

And it is like the foreign currency exchange rate. If you go to Turkey and change dollars into lira, you will really take a beating because the official rate is you will lose a lot of the value because you will not get the real rate of exchange, so wouldn’t Turkish depositors be leery of what Erdo─čan would recognize as the inflation rate as against what the real inflation rate is? Do you see what I mean?

Aykan Erdemir:

Yes. Now, there are two different instruments when it comes to inflation indexed bonds, that is indeed the case, that Turkish investors feel they are cheated by the artificially low rates of inflation announced measured by TurkStat. Plus, Turkey’s civil servants and pensioners also feel cheated because the raises they get are also inflation adjusted, which means their purchasing power has been eroding year after year as Erdo─čan is basically lying about the inflation [rate].

Now, with this new product, which is not tied to inflation but pegged to the U.S. dollar, you do not necessarily have the inflation risk, but you have another form of risk. First of all, I think at one point Erdo─čan realized that this could put enormous strain on the budget, meaning he is literally undertaking an obligation of unknown size, right, an open-ended obligation, so he tried to backtrack by saying the difference between the Turkish interest rates and the dollar value might be paid through bonds instead of liras, so this was perceived by investors as, oh, maybe they will not be able to honor these additional payments.

And then there is another problem. Some investors rightfully see this as creeping capital controls and a ban on foreign currency accounts, meaning ultimately, Erdo─čan could decide that he is no longer able to honor all these obligations, and he could say Turkey returns to an earlier era of no foreign currency accounts, and he could simply say I am converting all foreign currency accounts into Turkish lira at today’s official rate, which I announce to be as such and such.

Now, that would effectively be an immediate wealth tax that people would, based on that exchange rate, lose significant purchasing power, and that is also another fear they have, and there is already a sign toward Erdo─čan eyeing these dollars that the consumers and investors have, and that is Erdo─čan introduced a measure recently, which forces all Turkish exporters to turn a quarter of their export revenues to the central bank to receive its Turkish lira equivalent, so basically Turkish exporters are now forced to sell their U.S. dollars, hard-earned U.S. dollars, and as you just mentioned yourself, there are some exporters who depend to a large extent, up to 70 percent, on intermediary goods and raw materials they import.

Now, you can imagine what happens. They will export, but then they will only receive 75 percent of their export proceeds in U.S. dollars, so what we have been witnessing is they are now turning to the markets to once again try to convert the Turkish lira they received from the central bank back into U.S. dollars, which is, of course, leading to further transaction costs and which is also putting additional strain on the Turkish lira in the markets, but ultimately, what The Wall Street Journal warned in its latest piece on Turkey is that if and when the day of reckoning comes and Turkish depositors turn to Turkish banks, private and public banks, and start withdrawing their U.S. dollars and euros, fearing that they are no longer safe, and thereby trigger a run-on banks, these banks will then need to turn to the central bank and ask for their dollars back because right now almost all of the dollar deposits in private and public banks are in the central bank’s coffers on paper in exchange for lira swap deals.

And when these banks turn to the central bank for these dollar assets, to be frank, they are no longer there because I mentioned that according to Goldman Sachs, the central bank reserves are at negative $66 billion dollars, hence that could really be a big shock for the average Turkish depositor, and also probably would be like a variable development that is forcing Erdo─čan to convert all those accounts overnight to Turkish lira accounts because ultimately, you can print as much Turkish lira as you want as long as you accept hyperinflation, and ultimately, you can basically allow any depositor to withdraw their deposits in liras, but you cannot do the same with U.S. dollars since you cannot print dollars or euros, so that is ultimately the disaster path here.

Robert R. Reilly:

This is beginning to sound more and more like the latter years of the Weimar Republic. Let me ask you a political question. Aykan, do you have enough confidence in Turkish political institutions to think that the election in 2023 can be carried out in a fair way? Behind this question is the worry that [given] the level of corruption around Erdo─čan and that certainly has directly touched Erdo─čan’s family, there is speculation that when that gets to a certain level, they cannot afford to leave power. Similar things have been said about Putin in Russia because of what they will be vulnerable to if they give up power, of what is going to happen to them and to the fortunes that they have amassed, so they will find a way by hook or [by] crook to keep that power.

Aykan Erdemir:

I think this is a very much open-ended process. Now, what we know for certain is that there will not be fair elections, but the question is whether there will be free elections or at least semi-free elections. Now, if [the] 2019 municipal elections are any guide, Erdo─čan is prone to foul play. When he lost, when his candidate lost [the] Istanbul metropolitan mayoral elections, he annulled the election through extra-legal ways, and only when he lost again with a much greater margin, he conceded defeat.

Now, that is both good news and bad news. [It is] bad news because it shows Erdo─čan is willing to [engage in] foul play, but at the same time I think that the key question here is, is a municipal election a good enough analogy to the general elections because as you said with the municipal elections you only lose the municipal office, but with the presidential and parliamentary office you basically lose everything. You and your family members and your inner circle of cronies can literally lose all their assets, can be brought before Turkish courts, and can end up in prison. So, for Erdo─čan the ultimate choice could be do I concede defeat and face all the consequences, or do I concede defeat and end up in Qatar in exile, or do I steal the elections once again and do it better this time around?

So, again, I really do not have an answer to that. Now, the optimists argue that Turkey has had at least 72 years of relatively free and fair multi-party elections and 150 years of parliamentary experience, so they argue that this is very much in the Turkish DNA, that people are expecting to go to the polls and elect their next leaders, but Erdo─čan has eroded [a] significant amount of Turkey’s institutions, rule of law, and democratic culture that he might get away with it.

In fact, in the question you already gave me a hint as to one disastrous path forward, and that is you mentioned the Weimar Republic. And Erdo─čan I think has a strong incentive, first of all, to demonize, vilify ethnic and religious minorities at home to divert the voters’ attention away from the economic collapse, and he also has a strong incentive for irredentist war abroad to again to create a rally around the flag effect, and in fact, possibly enter elections during a state of emergency or even postpone elections by using war as pretext. Hence, I think at this point we are entering terra incognita of Turkish political life, and past experience can guide us but can no longer really inform us as to what to expect because I fear that Erdo─čan has been preparing for this day to completely revise the rules of the game as he has significantly revised the rules of the game.

I know some of what I am arguing now sounds unbelievable, incomprehensible to the skeptics. They would argue no, he cannot really get away with that much, but I would like to ask them this question: if two decades ago I told you that Erdo─čan would one day have executive, judicial, and legislative powers, and can overnight issue decrees, turning his will into law without any parliamentary oversight, you probably would not have believed me. You would have said no, that is impossible. Turkey will never have that much centralization of power in one individual, in one office, but this is where Turkey is as of 2022, so who knows where Erdo─čan might take Turkey to in 2023, so that is where my, let us say, pessimism comes from.

But at the same time, the optimist in me says Turkey has a very resilient opposition bloc. It succeeded in 2019. It is poised to succeed again in 2023, and the Turkish people have really had enough. And if I again need to end with a policy suggestion here, I would argue the difference between Erdo─čan’s prolonged one-man rule and Turkey’s return to democracy and the rule of law could rest actually not just with the Turkish voters but also with the European Union and the United States because if the transatlantic alliance today starts signaling to Erdo─čan and his inner circle that no foul play will be accepted, and any foul play will be met with the harshest pushback such as Global Magnitsky Sanctions for the inner circle of cronies and kleptocrats, you can be sure that the Erdo─čan regime’s elite will think twice before stealing Turkey’s elections.

Never underestimate the extent to which kleptocrats need the West because that is where their overseas assets are parked, that is where their real estate has been purchased, that is where their kids are studying, and that is where they would like to take refuge once things collapse back at home, so if the European Union and the United States signal to the Erdo─čan regimeÔÇÖs kleptocrats, to the plutocrats, to the oligarchs that there will be serious consequences, material consequences for complicity in stealing elections, in refusing to concede defeat, then I think we might be a step closer to peaceful democratic transition.

Robert R. Reilly:

Well, let me just ask a question sort of from the past but brought up to date. Is the Turkish military no longer a factor? Is that fair to say, that Erdo─čan has neutered the military or at least brought it under his control through the purge of senior officers and so forth, that the Turkish military would not under any condition as it did in past years step in when things get politically out of control?

Aykan Erdemir:

I would argue that Erdo─čan has been doing his best to bring the military under his full control, and we have seen the Turkish military serve Erdo─čan’s cause of political Islam in northern Syria and in Libya. For example, again, two decades ago, if I told anyone that one day we would see Turkish officers fighting alongside jihadists, mercenaries, Syrian mercenaries in northern Syria, in Libya, in Nagorno-Karabakh, this would have sounded like science fiction, it would be unthinkable. But today that is where the Turkish military is, so I would argue if the Turkish military [exerts] any influence in Turkish politics, it [will] be to strengthen Erdo─čan’s hand. For example, if Erdo─čan needs war, if he needs adventurism abroad, the Turkish military will probably play along.

We have already seen this in northern Syria.

Every time Erdo─čan had a referendum or an election, we [saw] a cross-border operation, three back-to-back cross-border operations into northern Syria, and they had [a] significant rally around the flag effect, so if Turkey has a fourth cross-border operation into Syria, or there is yet another cross-border operation into northern Iraq, or if there is further adventurism in Nagorno-Karabakh, or in eastern Mediterranean, or in Libya, then I would argue that that is Erdo─čan using the military to create a rally around the flag effect and have some advantage in the elections.

But ultimately, I would argue that it is a good thing that the Turkish military has been defanged to some extent because although the mainstream thinking has always been that the Turkish military has been a staunch supporter of Turkey’s secularism, I think the reality on the ground has been quite different. The military has had very complicated impacts and impeded the development of Turkey’s economy, and in more than one way contributed to the ascent of Islamists in Turkey, during the Cold War willingly.

They believed Islamists would offer an antidote against left-wing movements in Turkey, and later on during their anti-Islamist years, inevitably by pursuing and unreasonably hardline policies that not only targeted Islamists but that also targeted a lot of the pious Sunni Muslims in Turkey, and hence gave Erdo─čan a strong support base, so I think in the long run it is in the best interest of Turkey’s democracy, secularism, minority rights, and religious freedoms that the Turkish military is under full and complete civilian control, and they no longer have a role to play in domestic politics.

Robert R. Reilly:

Can I close with the question, Aykan, on how any of this may impact Turkey’s relationship to NATO as a NATO member itself?

Aykan Erdemir:

Again, that is a very important question, and one of the reasons why I have been calling on the transatlantic alliance to be involved proactively, beginning today, is that the elections and Turkey’s next government and Turkey’s economic trajectory will have a significant impact on NATO, not just on the alliance’s southeast flank where NATO basically attempts to thwart threats from Russia and Iran, but also, again, against the creeping Chinese influence in the eastern Mediterranean and the Middle East. And it is one thing to have a Turkey in good standing in NATO, cooperating actively with other NATO allies in pushing back, and it is another thing to have Erdo─čan’s Turkey playing a spoiler role, playing Putin’s Trojan horse role within NATO.

And, again, for the skeptics in the audience let me just list what Erdo─čan did last year when NATO wanted to issue a strong condemnation of Russian hackers for hacking into U.S. and other European systems, it was the Erdo─čan government that watered down the statement. When NATO wanted to issue a strong protest against Russian intel’s sabotage targeting Czech ammunition depots, it was again Erdo─čan’s Turkey that derailed it. When NATO wanted punitive action and rhetoric against Belarus for forcing down a Ryanair jet flying from Greece to Lithuania, it was, again, the Erdo─čan government that blocked some of those punitive actions and watered down some of that rhetoric, so although some people refuse to see this dynamic, Erdo─čan does play a significant spoiler role, to the delight of Putin, within NATO.

And if that is to be reversed, if Turkey is to return to the significant role it used to play during the Cold War in NATO’s southeast flank, I think Turkey also needs to return to democracy and rule of law at home, and also some economic sanity because ultimately, as we have seen with the Weimar Republic, abject poverty and the scapegoating accompanying it, promoted by some of the worst brokers of hate, are a path to disaster in dismantling institutions, dismantling cordial relations at home, and dismantling cordial relations abroad. And such a Turkey would, instead of being an asset for NATO, would become a major liability, again, to the delight of Russia, China, and Iran.


Robert R. Reilly:

Well, I am afraid we are out of time, and I would like to thank Aykan Erdemir from the Foundation for the Defense of Democracies for joining us today to discuss, “Erdo─čan’s Folly: Conspiracies Bring Turkey to the Brink of Bankruptcy.” I invite our audience to go to the Westminster Institute website and see Aykan’s other videos with us, one discussing the transformation of Hagia Sophia back into a mosque and the other one, “How Erdo─čan Consolidates Power: The Weaponization of Turkish Media,” as well as other video presentations on subjects such as Ukraine, Russia, China, and so forth. Thank you for joining us today. I am Robert Reilly.