Vague warning of “Play by the rules” from Trump as markets wonder if Turkey’s Syria incursion will invoke US sanctions

Vague warning of “Play by the rules” from Trump as markets wonder if Turkey’s Syria incursion will invoke US sanctions
Donald Trump's Twitter account has become a target for legions of angry cartoonists since the Syria incursion began. Posted by Pat Carman.
By bne IntelliNews October 10, 2019

As October 10 drew to a close, Turkey’s markets were still awaiting clarity from row-saturated Washington as to whether Ankara will be hit with sanctions in response to the Turkish offensive under way in northeast Syria.

US President Donald Trump, accused of “a stab in the back” and shocking betrayal by the Kurdish militia he instructed allied American forces not to protect in the event of an incursion by Turkey’s military, tweeted: "I say hit Turkey very hard financially & with sanctions if they don't play by the rules! I am watching closely." He also said he was "talking to both sides".

Some critics of the US president point out that there are 'Trump Towers' in Istanbul (Artwork posted on Twitter).

Since his weekend phone call with Turkish counterpart Recep Tayyip Erdogan—in which he agreed US forces who fought with the Kurdish fighters to defeat Islamic State in Syria would not respond to any military move by Ankara—Trump has threatened to annihilate Turkey’s economy should the Turks cross the line—a line he has not defined, at least not publicly. On October 10, Gulnur Aybet, one of the Turkish president’s senior advisers, told CNN: “President Trump and President Erdogan have reached an understanding over precisely what this operation is.” He added that Trump “knows what the scope of this operation is”.

At the United Nations late on October 10, the US warned Turkey that it faced “consequences” if its assault against the Kurdish militias did not protect vulnerable populations or contain Islamic State militants, presently detained by the militias. US Ambassador to the United Nations Kelly Craft, speaking after a closed-door meeting of the UN Security Council on Syria, did not specify what those consequences could be, but told reporters: “Failure to play by the rules, to protect vulnerable populations, failure to guarantee that ISIS [Islamic State] cannot exploit these actions to reconstitute, will have consequences.”

Senators push sanctions package

Of course, Trump is by now infamous for being out of tune with what his own top officials are stating, but, meanwhile, an alliance of US Republican and Democrat senators was moving forward with a proposed sanctions package that, should it prove to have teeth and manage to overcome any veto exercised by Trump with a ‘super majority’, could undermine Turkey’s ongoing recovery from a bitter recession triggered by last year’s balance of payments crisis. Republican Senator Lindsey Graham, usually a vocal defender of Trump, is most active in pushing the package which would target the assets of Erdogan and other top officials, impose visa restrictions, and sanction anyone who conducted military transactions with Turkey or supported its energy production. Graham has also been reviving stalled plans to sanction Nato member Turkey over its purchase this year of Russian S-400 advanced missile systems.

“[Broader sanctions] would change the economic picture of Turkey totally and we would have to take into account the possibility of a new recession in a situation where the economy is fragile after the 2018 crisis,” Ulrich Leuchtmann, head of FX research at Commerzbank in Frankfurt, was quoted as saying by Reuters.

“The more political pressure comes, the more Trump might be inclined to state that Turkish action might be off limits,” added Leuchtmann.

The Turkish lira (TRY), which lost nearly 30% of its value against the dollar in the currency crunch last year, had by lunch-time on October 10 shed more than 3% so far this week in volatile trade to approach the TRY5.90 mark—but by around 23:20 Istanbul time it was around 0.8% stronger against the dollar on the day at TRY5.83. Traders were reported as saying it was unclear how much further the lira would have fallen had state banks not stepped in to sell dollars and cushion the blow caused by tensions over the possible repercussions of the incursion.

‘Insufficient’ reserves

Piotr Matys, a strategist at Rabobank in London, was reported by Bloomberg as observing: “The central bank doesn’t have sufficient foreign reserves to intervene on a large scale for a prolonged period.”

Turkey has $35.7bn of foreign reserves, up from $26.1bn in March, according to official data. But Capital Economics this week noted that Turkey’s gross external financing requirements as a share of the cash buffer were among the highest in emerging markets. “Turkey’s poor external position means that the mere threat of more [sanctions] action would weigh on the lira and may force the central bank to reverse its easing cycle,” wrote Jason Tuvey, a senior emerging-markets economist at Capital Economics in London.

Overall, there were few signs of real distress on Turkey’s markets but the cost of insuring exposure to the country’s sovereign debt climbed to its highest in a month on October 10, with the five-year credit default swaps (CDS) climbing to 396 bp, up from 388 bps at the end of trading on the day before, according to IHS Markit data.

October 10 also saw Turkish dollar bonds fall for a fourth straight day, with the 2045 issue dropping 0.86 cents to its lowest in three weeks, Tradeweb data reported by Reuters showed.

This week has additionally seen a moderate roiling of the Istanbul stock exchange with a more than 5% drop in Turkey’s main share index, the BIST-100. On October 10, it ended the day 0.87% down at 98.780.

Money market traders were anticipating that the central bank, which in the past three months has been rapidly cutting rates, would cut its key rate to 15% by year-end, from 16.5% now. At the end of last week they were predicting an end-year 13.5%.

On the battlefield, there have already been unconfirmed reports of dozens of civilian deaths, including those of a handful of children, but the UK-based Syrian Observatory for Human Rights, a war monitor that has activists throughout Syria, said Turkish troops had tried to push ahead on several fronts under the cover of airstrikes and artillery shelling but had made no tangible progress. Other reports spoke of Turkish armed forces seizing villages and surrounding towns. At least tens of thousands of people have fled their homes, fearing the advance.

Trump comes under more 'conflict of interests' and 'betrayal' fire on Twitter.

Plan for economic lift

If all goes to plan, Erdogan, who says he wants to create an extensive buffer zone and “safety zone” in northeast Syria to give Turkey more protection from insurgent and “terrorist” Kurds, expects his country to get an economic lift from “Operation Peace Spring”. He envisages placing some two million returnee refugees in the “safe zone”, where Ankara plans to build dozens of new settlements at a cost of $27bn, a figure equivalent to 3.5% of Turkey’s 2018 GDP.

That would be a much-needed shot in the arm for the Turkish construction sector, which represented 7% of 2018’s economic output—but October 9 brought bad news as the European Commission, angry at the Syria operation, said Erdogan should not expect to get any capital from the EU for his grand housing plan.

Erdogan may be counting on resorting to funding his own fiscal stimulus. He may also be hoping that the fuss over the incursion will die down and sanctions talk will end up as just that—talk. Penalties drawn up in the US in response to the S-400s acquisition, arranged under the Countering America’s Adversaries Through Sanctions Act, are yet to come through months after the weapons were delivered.

Beating the nationalist drum

Meanwhile, the Turkish president—who has suffered humiliating local poll defeats this year given the anger over the parlous state of Turkey’s economy and human rights infringements that are widely seen as having gone much too far—beats the nationalist drum. 

Turkish police on October 10 launched criminal investigations into Kurdish lawmakers and detained scores of people, accused of criticising the incursion into Syria on social media, state media reported. Police also fired water cannon and detained dozens of activists in the mainly Kurdish southeastern city of Diyarbakir at a demonstration against the cross-border assault.

The rally was called in front of the pro-Kurdish People’s Democratic Party (HDP) headquarters in Diyarbakir, southeastern Turkey.The provincial leader was reportedly among those detained.

HDP co-leader Sezai Temelli said on October 9 the Syria operation was an attempt by the government to drum up support amid declining backing from the electorate. Prosecutors launched an investigation against him and HDP’s other co-leader, Pervin Buldan, over their remarks about the offensive, state news service Anadolu Agency said. It added that Temelli and Buldan were accused of “carrying out propaganda for a terrorist organisation” and “openly insulting Turkey’s government”.

Hours after the incursion began on October 9, investigations were launched against 78 individuals who criticised the offensive on social media, Anadolu added.

Addressing MPs of his Justice and Development Party (AKP), Erdogan on October 10 further inflamed the mood of Turks convinced their country has every right to march into Syria to form a security zone by warning European countries that if they describe the military incursion as an occupation he will send the 3.6mn Syrian refugees currently hosted by Turkey to Europe.

“We will open the gates and send 3.6 million refugees your way,” Erdogan said.