Turkey – way beyond a country far away of which we know nothing Wednesday 18 May 2016
 

Turkey’s Future Affects Us All

Turkey’s Future Affects Us All

 

Turkey is now a key regional player with a dynamic economy but it sits on intersecting geopolitical fault lines. An ancient rivalry could trigger an earthquake.

Writing in The Spectator recently, Charles Moore, that veteran commentator and author of the magisterial authorised biography of Margaret Thatcher, reflected that it is a long time since decisions made by Turkey’s leaders have been so keenly awaited in Whitehall[i] (and on the Quai d’Orsay and the Werderscher Markt[ii], for that matter).

Perhaps not for one hundred and fifty years. In the 1860s Turkey was still a huge empire ruled by Sultans from the Topkapi Palace in Istanbul, with possessions stretching from the Balkans, through the Levant and Egypt, deep down into the Arabian Peninsula and across the Maghreb of North Africa as far as Morocco. In practice, day-to-day control of the North African territories was vested with local elites and European colonialists were encroaching. The French were already well entrenched in Algeria and the British were poised to move on Egypt. Turkey wasthe sick man of Europe – an empire in decline. That empire finally collapsed in 1923 with the declaration of the Turkish Republic by General Mustapha Kemal, known to history as Atatürk (Father of the Turks). But the new state occupied much reduced boundaries. It still retained about three percent of its remaining territory in the continent of Europe, the rest in Anatolia, called until recently Asia Minor.

For some eighty years or so the Turks virtually withdrew from the world stage. Having been allied to the Central Powers (Germany, Austria-Hungary, Bulgaria et al) in WWI, Turkey remained neutral throughout WWII. (Actually, the Turks finally declared war on Nazi Germany in February 1945.  Symbolism counts.) Thereafter, the Turks joined NATO in 1952 and became loyal allies of the USA with a strategically critical role as one of only two NATO states which bordered the USSR[iii]. This alliance never fully obscured a strong undercurrent of anti-American sentiment; but essentially, the Turks lived the quiet life, albeit with periodic currency crises and IMF bailouts.

But, Turkey is now a player once more. There are three reasons for this. First, it has emerged as a regional power in a geopolitical sense, with extensive interests in Central Asia, and a pivotal role in the Syrian Civil War. Second, Turkey’s economy has finally reached take-off under the steadfast, though increasingly authoritarian, stewardship of strongman Recep Tayyip Erdoğan (correctly pronounced Erdoo-wan). Third, Turkey has Europe by the proverbial extremities because she, and she alone, can turn the tide of refugees from Syria on and off, like a tap. She is now in a position to play with Europe as a cat plays with a mouse. Hence the grotesque charade of Europe laying a red carpet for Turkey’s accession to the EU and Turkey’s pocketing generous cheques and demanding visa-free travel across Europe. When, really, the Europeans have no intention of letting Turkey in; and the Turks, like Grouch Marx, would never join a club that would have them.

But let’s give credit where credit is due. Turkey has come a long way.

The status of Turkey was transformed by the collapse of the Soviet Union in 1991. Suddenly, Turkey became the natural gateway to the vast hinterland of Central Asia which is “Turkic” in culture and language. The term “Turkic” is a broad ethno-linguistic one and refers to a large number of historic tribes – like the Huns (who were not Germans, despite the British epithet) – some of which are now extinct; as well as the five extant Turkic nations of Kazakhstan, Uzbekistan, Turkmenistan, Azerbaijan and Kyrgyzstan. (These nations are now bound together with Turkey in an international body called the Turkic Council). The languages of these countries are sufficiently similar for Turks to make themselves understood and these new nations are avid consumers of Turkish media. Kazakh bankers and Azerbaijani textile merchants regard Istanbul as the navel of the world. Uzbek students dream of studying in Ankara.

(There is even a significant Turkic minority in Moldova – the Gagauz – many of whom have now immigrated to Catalonia. Thus Turks can hail a taxi in Barcelona and instruct the driver in their own language!)

The Turkic-speaking countries of the former Soviet Union such as Azerbaijan and Kazakhstan have become hugely important markets for Turkey, as evidenced by Turkish Airlines’ (IST:THY) unrivalled route network across the region and the visa-free travel regime that Turkey enjoys with its Eastern neighbours. (We Brits have to queue up and pay £20 or €25 – cash only, thanks very much – to get into Turkey.)

Turkey is a key player in the development of Azerbaijan’s extensive oil and gas reserves. In June 2014 Turkey and Azerbaijan agreed to construct a massive oil refinery at Aliaga on Turkey’s Aegean coast. This came shortly after the signing of agreements for TPAO, Turkey’s state oil company, to buy Total’s 10 percent stake in Azerbaijan’s Shah Deniz gas field, and for Botaş, Turkey’s state gas transit company, to take a 30 percent stake in the Turkish Trans Anatolian Gas Pipeline (Tanap) which carries gas from Shah Deniz to Europe[iv].

Turkish construction companies like Enka Insaat (IST:ENKAI) are big in Central Asia, but they are also busy at home. There is a construction boom in Turkey with an estimated US$350 billion of projects currently underway. This is a symptom of a dynamic economy. One of the most high-profile of Turkey’s current construction projects is Istanbul New Airport. Costing US$11 billion for the first phase alone, this project includes the construction of six runways and four terminals, giving it enough capacity to serve 150 million passengers a year – and with the potential to increase this number to 200 million in the future[v].

Turkey is by far the most populous of the Turkic nations and boasts the largest economy. Its population has almost tripled since 1960 to around 77 million now. And it has enjoyed headlong economic growth as well as historically exceptional political stability.

Mr Erdoğan’s ten-year premiership and now presidency have been marked by increasing authoritarianism. But at least the army has been definitively put back in its box thanks to a stern regime of courts martial for uppity officers. Hitherto, the Turkish military considered itself the ultimate guardian of the state. And they took power in numerous putsches since Atatürk’s death (1938) if they thought the civilian politicians lacked moral fibre. During periods of military rule, human rights abuses and arbitrary arrest were notorious. (Mr Erdoğan himself, while Mayor of Istanbul (1994-98), spent four months in prison for reciting a poem which the military authorities considered subversive.) And he has changed the constitution fundamentally. He has instigated a Presidential model, like in France, where the head of state is also head of government. No commentators now foresee a military coup. Despite concessions to the Islamic conservatives, Erdoğan’s party is still committed to the principle of a secular, modern state as ordained by Atatürk. At least in theory.

The violent street protests of 2013-14, mostly centred on Taksim Square, Istanbul, were instigated by younger, middle class urbanites who were warning Erdoğan not to go too far in the conservative direction. The Justice and Development Party (AKP – Mr Erdoğan’s political machine) attracts support from Islamic conservative elements (but not from Islamists – something quite different) who live mostly in the countryside. One trigger was a change in the laws concerning the purchase of alcohol, which can only now be accomplished (outside Western hotels and restaurants), as in India, from surreptitious outlets. Frankly though, compared with much of the Arab world, Iran and Pakistan, this is still Islam-lite.

Back in the noughties, Turkey’s initial enthusiasm to join the EU, a club of the rich – as it then seemed – enabled the Europeans to pressurise Turkey to improve its human rights record. Now the boot is on the other foot. Europe must now pay Turkey for preventing a hundred thousand refugees and migrants or more from crossing the Aegean Sea every month. Of course the Turks claim that, for humanitarian reasons, they have given shelter to possibly two million displaced people in makeshift camps along the Turkish-Syrian border. This is true; but it seems that none of these people are granted “asylum” in the sense that Europeans understand it – and certainly not work permits. In a country with a massive army and police force, it is curious that the people traffickers have been allowed to flourish openly in the streets of Izmir and elsewhere.

During Erdoğan’s tenure of power, Turkey has become less free. The Press Freedom Index for 2016 ranks Turkey at 151 out of 180 countries[vi]. Despite the amnesty for PKK activists in 2011 and the permission granted to the Kurds to use their language in schools, Turkey is still far from being an open society. On 4 March 2016 the Turkish government seized control of Zaman, a dissenting newspaper, using paramilitary police. Zaman’s website was closed with a message that it was being updated. Archived news and content became inaccessible: some claim the data has been wiped. Two days later, the first government-controlled edition appeared. There was no mention of the newspaper’s seizure: the front page carried a series of pro-government articles, and a picture of a smiling, benign President Erdoğan.

Now there is one complex relationship in international affairs which I think is little understood – that between Turkey and Russia. While Turkey’s upside potential is bright, there is a significant downside risk elephant (so to speak) in the room. Namely, that the probability of war between Turkey and Russia over the next two years or so is frighteningly high. They are coming into direct conflict wherever they meet.

In fact, Turkey and Russia, in their various incarnations, have been in a long drawn-out conflict for more than three centuries. They first came to blows in the First Russo-Turkish War of 1686-1700. Under the Treaty of Constantinople, Peter the Great first secured Russian access to the Black Sea. Later, in 1774, Catherine the Great ejected the Turks from what is now Southern Ukraine and Moldova – and obtained Crimea for Russia. (Crimea is still home to a Turkic tribe, the Crimean Tartars – and Erdoğan has recently appointed himself their champion.)

Vladimir Putin and Recep Tayyip Erdoğan, the tsar and the sultan, although representing very different states and traditions, have lived curiously parallel lives. While Putin became President of the Russian Federation on 01 January 2000, Erdoğan became Prime Minister of Turkey on 14 March 2003; and then he transitioned to a revamped executive presidency on 28 August 2014. Both have dominated their country’s politics ever since first gaining power. Both regret the loss of empire that each country has endured. They are the same age[vii]. Both are legitimised by religion. Both are secretive, choleric, ruthless introverts who are nonetheless the objects of popular adulation.

The similarities continue. Russia and Turkey are home to highly sophisticated intellectual elites and great writers whose intellectual acrobatics have been interrupted by governments which seek to control the media and the internet in order to suppress criticism. Journalists who fail to toe the line may end up in jail. Yet, despite the superficial similarities, Turkey and Russia have radically divergent geopolitical interests. This is most apparent in two arenas. The first is Syria and the second is the Caucuses.

The Syrian Civil War, which erupted in 2011, has proven to be the most intractable, and bitter, conflict of the post-Cold War world. It has had huge geopolitical consequences. All the great regional powers – Turkey, Saudi Arabia and Iran – have irons in this fire; and the great powers, with the possible exception of China (for now, at least) have all deployed materiel. It has been a unique testing ground – it pains me to write this – for new military technology, not least killer drones which have now indeed come of age. The Turks have some of the best of these new toys: they are supplied by Israel. If you want to understand how they have changed the nature of warfare, then I strongly recommend the movie Eye in the Sky[viii], the technology depicted in which is only marginally sexed up.

In years to come historians might regard the Syrian Civil War as they now regard the Spanish Civil War (1936-39) – the forerunner of something worse. But already the conflict in Syria has dragged on longer than the Spanish Civil War, and there may have been more casualties[ix].

From the first the Russians have unwaveringly backed Bashar al-Assad as the legitimate President of Syria who is in a war against “terrorists”. The West, in contrast, vilified Assad as a dictator and plotted his demise. Then they found that Assad’s enemies were so beyond the pale (IS amongst others) that they began to fear what a Syria after Assad might look like. What about Turkey? She has been sucked, unwillingly, into a bitter war in which ordinary Syrians are being forced to choose between “moderate” Sunni Turkey, Wahhabi Sunni Arabia and Shia Iran. There is nothing nice on the menu. But Putin’s Russia has Orthodox Christians, Alawites and warm-water naval bases to defend. As the old pluralist (if despotic) Syria disintegrates, its large neighbours are sucked into the vortex.

What we now call the Refugee Crisis began as a trickle early on in the Syrian Civil War but became a tsunami by the early summer of 2015. The German response – and the reaction of much of the rest of Europe to that response – has engendered a sense of crisis within the European Union which is unprecedented, and which may yet have massive consequences.

And there is currently another slow-burn war underway in which Turkey and Russia are on opposite sides – one which has hardly been reported by the mainstream Western media. It’s the war between Azerbaijan and Armenia over control of the ethnically Armenian enclave of Nagorno-Karabakh which resides well inside the official territory of Azerbaijan.

(By the way, don’t confuse Nagorno-Karabakh with the separate Azerbaijani enclave of Nakhichevan, which is peaceful, though its border with Armenia is firmly closed. Fortunately, it has a border with Turkey from where it gets supplies of food. Politics in the Caucuses makes the Balkans look straightforward.)

The problem in a nutshell: after the two states wrested their independence from the collapsed Soviet Union in 1991, Armenia invaded Nagorno-Karabakh and created a new state there, which, since the cease-fire of 1994, has been de facto in union with Armenia proper. Of course no other country recognised this parallel Armenian mini-state. Azerbaijan has never given up its claim to the territory and sporadic skirmishes over the last quarter century have resulted in occasional loss of life. If you drive into Armenia by car from Georgia, as I did some years ago, the road crosses a valley which is exposed to Azerbaijani[x] gun posts. It is affectionately called the duck run because, occasionally, Azerbaijani militias open fire.

In the summer of 2014 fighting broke out, killing at least nineteen soldiers. Azerbaijan downed an Armenian helicopter in November 2014. There was further loss of life in 2015. During the first week of April this year, the snow in the high passes barely melting, the burning embers of this dispute have erupted into flame[xi]. Clashes between Armenian and Azerbaijani forces claimed an estimated sixty lives last month.

The critical matter is that while Moscow backs Armenia (fellow Orthodox Christians), Ankara backs Azerbaijan (fellow Turks and Muslims). Surprisingly perhaps, Iran, fearful of an oil-rich Azerbaijan on its borders (and with its own significant Azerbaijani minority in the north western provinces), has swung behind Christian Armenia and Russia.

Is a war between Russia and Turkey a real possibility? You might say it’s already started.

On 24 November last year a Russian SU-24 bomber was shot down by a Turkish (American-supplied) F-16 Falcon over Syria. As I wrote at the time, this provocative act was almost certainly pre-meditated. The Russian bomber aircraft had been bombing Turkoman targets. (The Turkoman are yet another Turkic tribe.) One of the Russian pilots who bailed out was slaughtered by Turkoman militias. Turkey claims that the Russian aircraft violated its territory – a sliver of Turkey which digs into Syria – but this is highly questionable. Given that it was travelling at nearly 1,000 kilometres per hour, it could only have been in Turkish airspace for a matter of seconds – if it was in Turkish airspace at all, that is.

You will not find a persuasive explanation of why Turkey raised the stakes in this way in mainstream media. The conspiracy theorists (not all of whom are mad) will tell you that what was really going on was that Turkey had been complicit with IS in the sale of oil out of northern Syria and Iraq, and that the Russians had been disrupting this illicit trade through their aerial bombing campaign.

Or was Turkey punishing Russia for indirectly helping the Kurds? The Kurds, let us recall, a people spread across four nations[xii], have been implacable enemies of IS since its inception. The autonomous Kurdish region of Northern Iraq has given asylum to, amongst others, persecuted Yazidis. For the Turks, however, the nightmare scenario is that the Kurds overrun the territory now held by IS and declare a Kurdish homeland. This would be an open invitation to Kurds in Turkey (of which there are, according to the CIA, 14.5 million) to affiliate themselves. It would mean Turkey effectively losing control of huge swaths of its territory, and a possible civil war. This is why even relatively “moderate” factions within the PKK (Kurdistan Workers’ Party), which have sought to negotiate with Ankara, have been branded as terrorists – a label still endorsed by the US and the UK. A spokesman for the PKK, Tahir Elci[xiii], was assassinated in Turkey just after the shooting down of the Russian jet. And on 25 April Turkey announced that it will never negotiate with the PKK.

In reaction to the shoot-down, President Putin announced sanctions. Russian tourists no longer cavort on Turkey’s beaches, and the sweatshops of Kumkapi[xiv], though still plastered with signage in Russian, have fallen quiet. A huge gas pipeline project linking the two countries is now in doubt.

If anything, since the incident, relations between the two countries have worsened. On 18 December 2015 the Turkish Minister of Foreign Affairs, Mevlüt Cavusoğlu, boasted on Turkish television that Russia should be wary of Turkey. “We call on Russia, which is one of our major trading partners, to stay quiet; but we also say that our patience is limited.” This was not an idle threat. With universal national conscription, Turkey has the second largest army in NATO after the United States with 610,000 soldiers equipped with advanced military technology. Its air force, equipped with largely American planes, is also formidable. But is it really a match for Russia?

Of course, in any war between Turkey and Russia, Turkey would invoke Article V of the Atlantic Treaty. But such a scenario might just be another nail in NATO’s coffin. Why should moderate European democracies come to the defence of a rampant authoritarian Muslim neighbour which only plays hard ball? And why should the USA go to war with Russia to satisfy Turkish machinations in Syria and Central Asia? In any case, if Turkey attacks Russia first (as Putin might trick them into doing) the NATO Charter may be invalidated. There is already a view abroad that Turkey is a strange bed-fellow within the alliance.

And by the way, military analysts think that Russia would probably win, just by pulverising Turkish strategic targets, like the Black Sea naval bases, from the air. They could decide to launch a land invasion through Georgia (just as Germany invaded France through Belgium in 1914) but I think that Putin is too cautious to do that. But if Russia’s friend, Iran, joined in, that could be a game-changer. They might decide that the moment was propitious to take out Saudi Arabia, America’s kind-of-friend.[xv] They could create a Kurdish state, quell Syria, annihilate IS, asphyxiate Wahhabism and wrest control of the global oil supply in one fell swoop – while an isolationist America and a refugee-panicked Europe look on, blinking and gulping.

In the second half of the 19th century Britain and France sought to prop up Turkey against Russian encroachment. Eventually, they dropped her and fought alongside Russia. History always repeats itself – first as tragedy and then as farce. Mind you, I don’t think we (nor Frau Merkel) would miss Mr Erdoğan too much.

Action: There are huge opportunities in Turkey but downside risks (threats) are severe. That means, in old-fashioned terms, that investors should require a significant risk premium. Given that returns in the zero-interest world are threadbare, investors cannot ignore the high-yield potential of the Turkish market. Turkish banks, unlike their European counterparts, enjoy excellent returns on capital. I like Türkiye Garanti Bankasi (IST:GARAN). There is huge potential upside in the Turkish stock market[xvi]. The JP Morgan Turkey Equity Fund (A) was up 18.5% in the first three months of this year. I am particularly excited by Turkish-financed projects in Turkic countries: the “Turkic” world will not go away even if a Kurdish state emerges, with all the convulsions that that would bring. Check out the IFC-sponsored Aureos Central Asia Fund LLC[xvii].

Current equity markets have not been discounted for the inexorable rise in geopolitical risk over the last eight years or so, which (though, correlation is not causation) has accompanied the presidency of Barack Obama. One day, soon I think, those discount factors will kick in. Big time. What is certain is that we shall all be surprised.


[i] The Spectator’s Notes, by Charles Moore, The Spectator, 19 March 2016.

[ii] The locations of the French and German foreign ministries respectively.

[iii] The other was Norway which of course retains its border with the Russian Federation.  With the independence of Armenia, Georgia and Azerbaijan, Turkey has frontiers with those states, but not directly with Russia.

[iv] See http://blogs.ft.com/beyond-brics/2014/06/09/azerbaijans-star-rising-in-turkey/posted 09 June 2014.

[v] See: https://www.buildingshows.com/market-insights/turkey/turkey-active-construction-projects-valued-at-350bn/801794509 posted 17 July 2015.

[vi] See: http://rsf.org/en/ranking For comparison, the UK is ranked at 38, the USA at 41 and France at 45.

[vii] Putin was born October 1952 and Erdogan in February 1954.

[viii] Directed by Gavin Hood, it was premiered in Toronto on 11 September 2015 and released in the US in March and in the UK in April 2016.

[ix] Approximately 500,000 people died in the Spanish Civil War and at least 450,000 Spaniards fled to France.  See Antony Beevor, The Battle for Spain.  The Syrian Centre for Policy Research reckons that 470,000 people have been killed in Syria between March 2011 and February 2016, though the UN puts the figure at 250,000.  (See:https://en.wikipedia.org/wiki/Casualties_of_the_Syrian_Civil_War ).  Probably more than one million people have been displaced, of which about 300,000 have made their way to Europe.

[x] The adjectival form preferred by academics is Azeri, but I like to keep things simple, henceAzerbaijani.

[xi] See Vladimir Putin’s Next European Front by Svante Cornell in the Wall Street Journal, 07 April 2016.  Mr Cornell is the director of the Central Asia-Caucasus Institute at Johns Hopkins University.

[xii] Principally Turkey, Syria, Iraq and Iran although there are also Kurdish enclaves in Georgia, Armenia and Azerbaijan.

[xiii] Tahir Elci was the President of the Bar Association for Diyarbakir province (which has a largely Kurdish population) and is hailed by supporters as a human rights lawyer.  Supposedly, he was shot just after making a speech advocating that Turkey recognise the PKK as a legitimate political party and enter into negotiations with it.  British readers should understand that any discussion of the Turkish-Kurdish issue is at least as loaded as a discussion of the Troubles in Northern Ireland – perhaps more so.

[xiv] A district in old Istanbul with a thriving garment trade much patronised by Russian retailers.

[xv] See my article on Saudi-Iranian relations at: http://masterinvestor.co.uk/economics/war-on-terror-ii-kingdom-and-republic-on-the-brink/

[xvi] See: http://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F0GBR05VWU

[xvii] See:http://ifcext.ifc.org/ifcext/spiwebsite1.nsf/2bc34f011b50ff6e85256a550073ff1c/384ed4ac42835318852576ba000e2a7c?OpenDocument