US sanctions won’t bite a vulnerable Turkish economy

Updated October 16, 2019

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In this file photo taken on July 10, 2018 US President Donald Trump speaks with Turkey's President Recep Tayyip Erdogan during a working dinner in Brussels, during the North Atlantic Treaty Organization summit. — AFP
In this file photo taken on July 10, 2018 US President Donald Trump speaks with Turkey's President Recep Tayyip Erdogan during a working dinner in Brussels, during the North Atlantic Treaty Organization summit. — AFP

FRANKFURT: The sanctions the US announced against Turkey this week over its offensive in Syria fall well short of doing serious damage to an economy still healing from a recession and currency collapse.

President Donald Trump could take far tougher action that would deter foreign investment and credit that Turkey badly needs but doing so could backfire in a number of ways, and it’s not clear he really wants to.

Trump has said he could “destroy and obliterate” the economy of Turkey, and has called on the country to rein in its offensive in Syria. The statement follows backlash from both Democrats and Republicans over Trump’s decision to give Turkey a green light for its military incursion against Kurdish fighters who had been US allies.

The sanctions announced Monday, however, did not match the rhetoric and were seen as minimal by analysts and financial investors.

The measures were limited to the Turkish defence and energy ministries and three Turkish officials from the same.

They block transactions involving any assets they may have in the US financial system and bar American residents and businesses from dealing with them.

The US also raised tariffs on Turkish steel exports from 25 per cent back to 50pc, where they were in May, and suspended talks over a US-Turkey trade deal.

Given the dominant role that US financial institutions and the dollar play in world commerce, such measures fall far short of what the US could do by targeting Turkey’s banks and their links to the global financial system. Turkey’s currency and stock market both rose Tuesday as investors breathed a sigh of relief that harsher measures were not imposed.

Timothy Ash, emerging market strategist at Bluebay Asset Management, called the sanctions “minimal” and “window dressing,” noting that the trade deal was years off in any case.

The muted initial response from investors “flies in the face of President Trump’s threat,” said Jason Tuvey, senior emerging markets economist at Capital Economics in London.

One risk from the current sanctions, Tuvey said, is that they may be a prelude to tougher ones, given support in Congress for action against Turkey.

And even though the direct impact on the economy may remain slight, the bigger risk could be on investor and financial market confidence in the country. The imposition of sanctions has re-started talk of Turkey possibly putting limits on the flow of money to prevent it from being taken out of the country.

Published in Dawn, October 16th, 2019