If Vladimir Putin bails out Turkey, he could fracture NATO and end encirclement of Russia. Turkey is already up against the wall, deep in a currency/debt crisis, and all the USA is offering is a doubling of sanctions and more insults.
One has to imagine that Putin can come up with a far more appealing deal for Erdogan, bridging Europe and Asia back again. But, Turkish corporations elevated gross foreign borrowings to the tune of $340 billion, of which more than half is coming due this year.
Turkey is worth less than 0.1% of the global equity markets. But Turkey represents over 10% of NATO personnel – more than the UK and France combined – so the USA establishment will not want to lose Turkey.
So even if Ankara’s banking crisis does not trigger a global financial meltdown in the same manner in which, say, the Thai baht devaluation kicked off the 1997 Asian financial crisis, it may well fracture NATO’s foundations.
At first glance, Turkey’s current problems look very much like a typical emerging-markets crisis: A financial bubble fostered ample global liquidity, which in turn engendered a spike in Turkish borrowing and resultant domestic credit bubble.
For a time, these foreign inflows triggered a consumer boom of illusory economic prosperity as Turks bought foreign goods with the proceeds and gross domestic product boomed.
President Recep Tayyip Erdogan badly needs to keep the Turkish “miracle” afloat, but he’s unlikely get the help he needs from the usual suspects, such as the IMF, which would likely force more painful deflationary measures on the country.
By the same token, Russian President Vladimir Putin would tremendously increase his own domestic stature were he to pull off a pipeline/gas export deal with Turkey, that is a public slap in the face to the obvious US/Big Oil attempt to strangle Russian gas exports to Europe.
This might well motivate Putin to give Erdogan an unusually sweet deal on a loan, on more weapons exports, and on the gas-pipeline transit royalty money that could provide Turkey with valuable foreign exchange.
Appreciating crude-oil prices along with rising US interest rates represent a lethal combination for a dollarized, oil-importing economy like Turkey. They have exacerbated the fragilities within the Turkish banking system, as well exposing scores of corporate borrowers of dollar-denominated debt to the risk of insolvency.
The Financial Times reported, that Spanish banks are due $83.3 billion by Turkish borrowers; French lenders are owed $38.4 billion; and banks in Italy are owed $17 billion.
However, the economic contagion impact is relatively easy to quantify. Less so, the political contagion, particularly the Russia/NATO variable, against a backdrop of deteriorating US-Russia relations.
With the Turkish lira trading at 6.26 to the dollar, the whole of the Istanbul 100 equity index is worth just US$35 billion.
If Chinese investors were to buy every share of every company on the stock index, Turkey would raise enough foreign exchange to cover just seven months of its current account deficit.
As far as the Russians are concerned, Turkey provides an opportunity for payback for 20 years of hostile American foreign-policy actions – the eastward expansion of NATO to Russia’s borders, the US support for the Maidan coup in Ukraine, the destruction of Libya, and the regime-change crusade against Syrian President Bashar al-Assad.
Picking off Turkey would be a major geopolitical win for Moscow, given that the country is viewed by Washington as key to the American strategy of splitting Eurasia and blocking Eurasian integration.
Russia Insider / ABC Flash Point Economic News 2018.