August 11 - 17, 2008

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Political Developments:

A trip wasted? Iran’s President Ahmadinejad was in Istanbul for two days during which the traffic on the European side of Istanbul was pretty much paralyzed because of road closures. Even Ahmadinejad apologized for the inconvenience that zealous Turkish officials have caused for the Istanbulians . The Guardian reported that “Turkey delivered a humiliating snub to Iran's visiting president by backing out of a lucrative energy deal under pressure from the US government, which feared it would enhance Iranian nuclear ambitions.” Ahmadinejad’s trip, branded as a “working visit” for him to avoid visiting Ataturk’s mausoleum in Ankara, was intended to sign a major gas deal that would allow Turkey to invest in and purchase gas from South Pars fields. It was reported that Turkish officials had to agree not sign any gas deals under heavy US pressure. "Such a deal by Turkey with Iran would send the wrong message at a time when the Iranian regime has repeatedly failed to comply with its UN Security Council and IAEA obligations," said the state department. At a time when Russian intentions on the Caspian oil and gas are unmistakably clear and how Gazprom has been toying with gas prices for Ukraine is not a joking matter, it is difficult to understand why Turkey could be left overly dependent (close to 70 percent) on Russian gas supplies for at least another winter. W will be cutting wood in Crawford, TX if Gazprom decides to turn the tap off in a cold January in Turkey. On a separate note, at a press conference which was interrupted by a visit to Blue Mosque for Friday noon prayer, Ahmadinejad said that he supported Turkey’s EU bid and did not understand EU imposing conditions in an unacceptable manner. That may have sounded like music to his hosts’ ears who have had similar problems in understanding the accession process.

Ban Ki-Hu? Secretary-General Ban Ki-moon has so far been unable to contact Russian President Dmitry Medvedev by telephone to discuss the crisis in Georgia, a U.N. spokesman said on Friday. Ban has spoken to Georgian President Mikheil Saakashvili, who called him on Thursday.
He wasn’t alone. It turns out that the Secretary General was not the only one whose calls were not returned. Erdogan ended up flying to Moscow where he met Putin and Medvedev before flying off to Tblisi to comfort Saakashvili. It is not clear how the Russians took Erdogan’s offer to mediate. Russian press reported that Turkey was supporting Russia and the fact that US ships were not allowed thru the Bosphorus was and example of it without mentioning the fact that the Montreux Convention severely restricts the passage of warships from the non-Black Sea states and imposes advance notification requirements. EPA hopes that the administration understands that influencing territorial borders in the Caucauses is more complicated than changing the master plan for Silivri. The Caucauses Stability Pact, an idea that has been around for a number of years, that Erdogan was peddling in Moscow

As messy as it can get. UK’s Tesco supermarket chain got entangled in messy real estate deal where Saban Disli, one of the deputy chairpersons of AKP – the ruling party- is being accused of taking a $1 m kickback for facilitating the amendments to Silivri’s master plan that allowed changing zoning to a commercial property, and tripling its market value to $13 m. Disli denied any wrongdoing as did Tesco.

Economic Developments:

Turkish financial markets muddled through last week, on one hand, trying to gauge the global markets, on the other hand, attempted profit taking when they can. YTL appreciated against the Euro by about 2 percent while the dollar floundered between 1.179- 1.1850 range.


Taking a break! The Central Bank left its benchmark interest rate unchanged, taking a break from three months of increases despite the signals of slowing down in industry and the construction sector. Turkey has the highest key rate, among 59 countries tracked by Bloomberg, so far making it possible run up an unsustainable current account deficit.

Must be Ergenekon. Last week, Turkstat published the index of industrial of production for the month of June. It registered a meager 0.8 percent growth y-o-y and a decline of 2.3 percent over the previous month. While no minister so far blamed it on Ergenekon – a semi-science fiction court case against would-be coup plotters-, it would not be surprising to hear soon that slowdown in industrial growth was also an Ergenekon plot. On a more serious note, textiles suffered a major decline in June, registering a 21.4 percent decline y-o-y, production of electronic appliances (tvs, radios) declined by 20 percent. Even the automotive industry that has been propelling exports declined by 5 percent over May 2008. EPA estimates that July industrial production index will register a decline in the 4 to 6 percent range. Given the serious concerns about a eurozone recession, Turkey’s major trading partner, a slowdown in exports would lead the drop in industrial production. Disruptions in Georgia, particularly in Gori that is a transit point for Turkish trucks heading to Nothern Caucauses are also likely to slowdown in production and exports.

More unemployed but same unemployment rate. Turksat published May 2008 unemployment numbers that remained at 8.9 percent, the same level as in May 2007. Non-agricultural unemployment that EPA tracks as a more reliable indicator also remained unchanged at 11.5 percent. While 442 thousand new jobs were created in the non-agricultural economy during the last 12 months, the rate of unemployed rose by 41 thousand during the same period. If those at the working age but not actively seeking employment are included, a more realistic estimate of the unemployment rate would be 16.4 percent.

The debate goes on. Whether Turkey should have an agreement with the IMF or not has been going on for more than four months now. It looks like that the Fund is not happy with some of election spending items that were put into the budget (e.g. block transfers to local governments) and urges the government either to drop them or find financing(e,g. more taxes). With the economy slowing down and six months before critical local elections, it is unlikely that the Government can stomach either option. The fact that there are disagreements on a program is bad signal itself, a lesson that Simsek seems to learn by trial and error.

Global Developments:

Vlad the Impaler? Russian invasion of Georgia took up much of the last week's global events, The top item on the list that BBC’s Paul Reynolds drew up as early lessons from the conflict is that “Do not punch a bear on the nose unless it is tied down”. That aside, there are couple of important conclusions that can be drawn. First, Putin is in charge, playing the bad cop while Medvedev is playing the confused good cop. Second, Russia is very and determined to deal with thorns this time. It wouldn’t be surprising to see clashes in Ukraine sparked by the Black See fleet hosted in Odessa or events that would accelerate the annexation of the Transdniestr breakaway region in Moldova. Third, it is a matter of months before westbound land access – road and rail transport, oil and gas pipelines- of Azerbaijan and the Central Asian republics will be under directly or indirectly under Russian control. This effectively kills the new enterprises like Nabucco and others at the design stages, leaving the Iran-Turkey route as the only plausible transit corridor with its own risks. That is, of course, if the US does not start a military engagement with Iran before W leaves the office so he can crown his legacy of failed wars. Fourth, after almost two decades, West still has no clue about how to deal with Russia and for that matter other republics of the former Soviet Union. Fifth, it is also not clear how keen the leaders of the breakaway regions to join Russia as these areas have become centers of smuggling and contraband trade and sources of rents for the local rulers. While the cease fire agreement stipulates withdrawal of Russian troops from Georgia on Monday, the news reports so far are not very encouraging.

More to come? The 15 economies of the Eurozone as group declined by 0.2 percent in the second quarter, reflecting contractions in the German (-0.5 percent), French (-0.3 percent) and Italian economies, increasing concerns about a recession in the eurozone and spreading across the channel to the U.K. The signs of slowing down to Asia's emerging economies have began emerging. The Chinese Government revised down its own GDP projection to 7.7 percent. The fears of spreading economic gloom triggered a sell-off in commodity markets and started a downward trend for the commodity markets that will only price supply constraints now rather than expectations of a booming demand. In what is labeled as "macro risk switching", dollar is like to continue strenghtening despite the fact that doldrums in its financial markets are far from being over.

What to expect this week:

There will be a stream of not so good news from the European and Asian markets. Turkish markets will try to balance between the those and the signals from Wall Street that is likely be volatile.

August 17, 2008