Turkey’s currency falls to an all-time low on Russia’s missile defense tensions with the US.

DUBAI, United Arab Emirates – Turkey’s currency fell to a record low on Thursday, with the US dollar buying 7,942 lira late in the afternoon in Istanbul.

The move is the latest in more than two years of steady depreciation of the Turkish currency, most recently intensified by Ankara’s involvement in a series of geopolitical conflicts including Libya and Nagorno-Karabakh, disputes over eastern Mediterranean resources and its purchase of the S-400 missile from Russia. defense system.

Washington issued a stern reprimand on Wednesday in response to reports that Turkey was preparing to test the S-400 system, bought from Russia despite vocal opposition from the United States and the rest of Ankara’s NATO allies. Turkey’s Defense Ministry has not commented on the reports, but the State Department’s condemnation was swift.

“We are … deeply concerned by reports that Turkey is continuing its efforts to put the S-400 into operation,” the State Department said. “We continue to emphasize at the highest levels that the S-400 transaction remains a major obstacle in the bilateral relationship and in NATO, as well as a risk of possible… sanctions.”

Sanctions become a ‘different possibility’

Tensions with the United States and the threat of sanctions have contributed to the lira’s slide in the past, including during Turkey’s recession in 2018. Fast-forward to 2020 and the country of 82 million is embroiled in new conflicts as it battles a pandemic that has paralyzed its vital tourism industry, in addition to facing a growing current account deficit, double-digit inflation and rising unemployment.

A Russian S-400 surface-to-air missile system.

Sergei Malgavko | TASS through Getty Images

“Ankara is between a rock and a hard place, and it has no easy way out of any of the conflicts in which it is embroiled for fear of appearing weak at the national or international level,” said Agathe Demarais, Economist director of global forecasting. Intelligence Unit.

“Therefore, there is little chance that Turkey will seek to ease tensions in any of the conflicts in which it is a major player. In turn, this means that there is more volatility of the lira at stake ”.

US sanctions against Turkey “are becoming a clear possibility,” Demarais warned, pointing to the possible headwinds Turkey will face if Democrat Joe Biden wins the US presidential election. “Under the Biden administration, the United States would also be expected to take a tougher stance against Turkey. If the United States goes ahead with sanctions, a repeat of Turkey’s financial crisis in 2018 seems possible and would derail the post-coronavirus economic recovery. “

Geopolitical tensions are only part of the story

But geopolitics is only part of the story, said Erik Meyersson, a senior economist at Handelsbanken Macro Research in Stockholm.

“Turkey’s financial problems run deeper and are related to changes in political institutions, in other words, the degree to which the country has become more authoritarian,” he told CNBC. This has manifested itself in the form of greater intervention in central bank policy-making by President Recep Tayyip Erdogan and less independence of financial institutions as a whole, which has weighed heavily on investor confidence.

Turkish President Recep Tayyip Erdogan (left) and Russian President Vladimir Putin shake hands at a joint press conference on Syria after their meeting in Sochi, Russia.

Mikhail Metzel | TASS | fake images

Turkey’s central bank surprised investors by raising its main interest rate at the end of September from 8.25% to 10.25%, a move against the president’s calls to keep them low.

“Economic agencies are not autonomous when it comes to establishing broader economic policies. As such, one focuses too much on short-term credit-driven growth rather than making more structural efforts to increase long-term growth, ”Meyersson said.

Turkey’s Communications Directorate and the Office of the President did not respond to a request for comment from CNBC.

Turkey’s consumer inflation was revealed at 11.75% yoy in September, slightly lower than analyst estimates “but hardly encouraging” as “core (inflation) rises,” Timothy Ash commented on Monday, Senior Strategist at Bluebay Asset Management. Slower-than-expected commodity price increases over the past month helped offset the hit from the ever-weakening lira.

But with a central bank under pressure from Erdogan not to raise interest rates that would help curb inflation, and with no end to geopolitical tensions on the horizon, the impact of the falling lira is likely to become more pronounced, analysts said.

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