Turkey Launches Regional Diplomatic Bid

Turkey

Economic News

22 Jul 2010
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Turkey’s government launched a major diplomatic initiative during this week aimed at its southern, Middle Eastern neighbours ahead of a possible US-led invasion of Iraq.



Yet, while Prime Minister Abdullah Gul toured Middle Eastern capitals, back home his administration came under increasing pressure to take a firm stance on a future US operation, with uncertainty also affecting Turkey’s markets badly, driving down share prices and weakening the Turkish Lira.



Gul’s initiative began with a trip to Syria on January 4th, meeting Syrian Prime Minister Mustafa Miro and President Bashar al-Assad. In Damascus, the Turkish premier said, "Every effort needs to be made to avoid war", a view reiterated the following day when he arrived in Cairo for talks with Egyptian President Hosni Mubarak.



Gul’s third stop was Jordan, where he told reporters that his talks with King Abdullah II and Prime Minister Ali Abu al-Ragheb had also produced a consensus in favour of a diplomatic solution.



"Currently we are all in a very delicate position," the Turkish premier said. "All our efforts are being made to achieve peace and prevent a war from erupting in the region, the repercussions of which would be very dramatic."



Turkey fears that such a conflict would have a variety of negative impacts on its fragile economy, still in recovery from the February 2001 financial crisis, and on the aspirations for autonomy amongst some of its own ethnic Kurdish population.



Ankara fears a US-led invasion might see Iraqi Kurdish groups make a bid for power in Northern Iraq, which borders Turkey. Such a move might then encourage Kurdish separatists inside Turkey to also resume fighting, ending the current lull in a 20 year war between them and the Turkish army.



The financial implications of the conflict are also worrisome for Ankara. The government calculates a $50bn loss of revenue as a result of the UN sanctions imposed on Iraq after the last Gulf War, fearing that this time the price tag could be even higher.



Similarly, other Middle Eastern states foresee financial difficulties if a conflict breaks out. Jordan - like Turkey, a key US ally in the region -- has close business ties with Baghdad. Its trade with Iraq reached $700m last year, while the kingdom also receives its daily oil needs from Iraq at preferential prices.



King Abdullah II called for the "current crisis [to be resolved] through the United Nations" and warned of the "dangers of dividing Iraq" in a brief statement following Gul’s visit issued by the official Petra news agency.



Yet Gul’s efforts, and the consensus amongst Syria, Turkey, Jordan and Egypt that diplomatic efforts must be pursued in order to resolve the Iraq crisis, have done little to ward off the government’s troubles.



Turkey’s media were full of reports during the week of major Turkish troop movements into Northern Iraq, though these were denied by the two main Iraqi Kurdish factions, the Kurdish Democratic Party (KDP) and Patriotic Union of Kurdistan (PUK).



Reportedly, the US was also losing patience with Turkey over the government’s reluctance to make a solid commitment of support for any US-led action. Public opinion in Turkey continues to be massively opposed to any conflict, while Ankara also fears that being seen to be too close to the US will damage its relations with Middle Eastern countries in the event of war.



Reports of requests by the US for the use of Turkish military bases -- and even the deployment of up to 80 000 US and British troops in the country -- were also widely broadcast. However, Ankara is still maintaining the official position that it will only decide on any US troop deployment after UN weapons inspectors have released their report, due out in late January.



In addition, January 6th saw Turkish Foreign Minister Yasar Yakis say that Turkey’s parliament was unlikely to approve "massive deployments" of American troops in the event of war, while he seemed careful to leave the door open for smaller numbers.



With such talk common currency, it was little surprise that the economy continued to take a slide, losing much of the ground gained following the election victory of the Justice and Development Party (AKP) back on November 3rd.



On January 7th, the Turkish Treasury’s bond auction saw domestic debt interest rates rise back up to 60%, while share prices on the Istanbul Stock Exchange (ISE) fell 5.84 percent. Meanwhile, the US dollar, which had been in impressive decline against the Turkish Lira (TL) since November, went back up to brush 1 700 000 before falling again to TL1 682 000 by January 8th.



That day, Gul intervened to try and reassure the markets by reaffirming Turkey’s commitment to the IMF programme and to achieving the 6.5% primary surplus target for 2003. Planned tax hikes on cigarettes and alcohol - expected to lift retail prices by up to 20 percent - along with a partial tax pardon were, Gul stated, expected to bring in some $2.14bn extra over the next 18 months.



Gul is set to continue his Middle East initiative in the coming days - arriving in Saudi Arabia on January 11th before heading for Tehran the following day.



In Cairo, Gul had said that there was "still a chance for a peaceful solution". Many investors in Istanbul are hoping so too.

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