World Economy

Trump Threatens Turkey With “Large Sanctions”

Turkey Faces New Risks
Turkey Faces New Risks

Already hit by a run on the currency and a surge in inflation, Turkey’s economy faces a new risk after President Donald Trump threatened to impose “large sanctions” over the detention of an American pastor, Bloomberg reported.

Trump’s declaration on Twitter appeared to be more of a muscular threat than an official statement of policy; the administration made no announcement of specific punitive measures against the Turkish government, and the White House declined to provide any details about the steps it was ready to take.

Brunson is one of 20 Americans charged after the failed coup against President Recep Tayyip Erdogan of Turkey. His case has elevated tensions between the United States and Turkey even as Trump has sought warmer relations with Erdogan.

"The United States will impose large sanctions on Turkey for their long time detainment of Pastor Andrew Brunson, a great Christian, family man and wonderful human being," tweeted Trump.

Trump’s warning followed criticism of Turkey by his vice president and secretary of state, and caused the lira to extend losses in late trading. The US diplomatic offensive was aimed at securing the release of Andrew Brunson, an evangelical minister detained on charges of involvement in a failed 2016 coup in Turkey. 

He was moved from jail to house arrest earlier this week. But that didn’t satisfy Trump, who demanded on Twitter that “this innocent man of faith should be released immediately”. 

Turkish officials insisted that the matter was one for national courts. Ibrahim Kalin, a spokesman for Erdogan, said America’s use of “threatening language” against an allied nation was unacceptable.

The latest in a series of crises between the NATO allies comes at a fragile moment for Turkey’s economy, which depends for financing on short-term flows of international capital, or “hot money”, that are typically sensitive to disputes with the US.

It’s a Target

Before his re-election last month, Erdogan alarmed investors by promising to increase his control over the central bank, which he’s repeatedly attacked for keeping interest rates too high. When the bank unexpectedly decided not to raise rates this week, it exacerbated those concerns. And Trump’s sanction threats were the latest blow to the lira, which has fallen more than 20% this year, making it the second-worst major currency after Argentina’s peso. It dropped another 1.9% on Thursday to 4.87 per dollar, near a record low.

Broader US sanctions against the Turkish financial system “would be devastating, catastrophic,” and even measures that targeted a few individuals would have an impact, according to Jonathan Schanzer, senior vice president at the Foundation for Defense of Democracies in Washington, who previously worked on sanctions-related issues at the US Treasury.

“Banks will know that Turkey is susceptible to US sanctions, that it’s a target,” Schanzer said in an interview. “That’s why you saw the response of the lira that you saw today. Even the threat of sanctions prompts capital flight.”

Other arguments are raging between the two NATO allies. The US has slammed Turkey for negotiating to buy missile defense systems from Russia, an issue that is likely to incur separate financial penalties. 

Erdogan blames the US for backing Kurdish militants in Syria, and harboring the alleged mastermind behind the coup attempt against his government.

Neither Trump nor the White House offered any immediate details about economic measures that the US may take, or how soon they may be imposed.

Some analysts have raised the prospect that Trump or the US Congress could impose measures targeting business leaders close to Erdogan’s government, along the lines of American sanctions against Russia.

Lira Sliding

Like many Turkish business executives, Albert Saydam is used to a challenging environment. Turbulent politics and bouts of economic turmoil mean that companies have a high tolerance for flux.

But the sliding lira is causing fresh headaches for Saydam, who runs a car parts manufacturer and others in a sector that relies on imported materials. “This is definitely new for many companies—to deal with high inflation and the fluctuating currency,” said Saydam. “It’s a big challenge for all of us.”

That challenge deepened this week as the lira plunged by as much as 4.2% after the central bank shocked markets by keeping interest rates on hold.

It was the first monetary policy meeting since President Recep Tayyip Erdogan—a self-declared “enemy” of high rates—named his son-in-law, Berat Albayrak, as his economic chief. Albayrak had sought to soothe anxiety about his appointment with promises of tackling soaring inflation and assurances that Turkey would not “fight the markets”.

“A weaker lira will put huge pressure on corporate and bank balance sheets,” said Inan Demir, an emerging markets economist at Nomura. “Foreign creditors’ concerns about the balance sheet health of Turkey’s private sector are likely to lead to a contraction in capital flows. That would put further pressure on the currency. So Turkey risks being locked in a vicious circle.”

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