There comes a point when the salon talk and parlour games over whether Turkey’s Erdogan regime will or will not stay the course with “orthodox” economics must end. By now, you may or may not have caught up with the overnight news that Turkish President Recep Tayyip Erdogan has fired his central bank governor. I say to you, click here if you want his name. And click here if you are interested in the name of his successor. The only name that matters in this third firing of a central bank chief by the mercurial authoritarian within two years—announced late on March 19 in the Official Gazette—is that of Erdogan. Moreover, the key question you should be asking in the wake of this latest about-turn is not “What does this now mean for Turkey’s monetary policy?” but “What is Erdogan’s state of mind?”  

Back on November 7, the day after Erdogan sacked the previous central bank governor (click here if you want his name), we put out a story in an effort to explain to those who follow too much “orthodox” reporting on these matters what is actually going on in Turkey. Believe me, it might have appeared so, but this was not purely a story for fun (we have too much respect for the constraints on people’s time to simply toy with such events). We set out to remind readers how things work in a banana republic, and in this case a banana republic with the biggest economy in the Middle East and 83mn souls to provide for.

At this point, I need to contain myself—there are professionals in other fields who can offer a far better assessment—but Turkey and those who still believe its economy is still being managed with any semblance of rationality desperately need some insights into the head of the wretched sultan alone at the helm.

Erdogan is a ruler who is only exposed to some tepid influence within a rather narrow circle, mainly made up of family members such as sons-in-law or his sons and some of their friends from university, acquaintances and associates. It is questionable whether even Zeus—currently facing the threat of homelessness given the activities of regime-blessed gold miners around Turkey’s Mount Ida—knows what is going on in the head of the boss.

Of course, after all this time it is difficult to shake the habit of determining who in Turkey is orthodox and who is not, so here are some links to help you keep your gallery of the fallen up to date. To give you my ha’penny, it appears that the latest central bank chief bears some policy likeness to Berat Albayrak, Erdogan’s elder son-in-law who last November 9 quit the finance minister post after a great stink arose over who knew and who didn’t know that the country’s economic team had burned through Turkey’s FX reserves in an absurd and always doomed attempt at defending the lira while simultaneously keeping interest rates low.

But, enough of this. For let us return to the overriding salient fact: these comings and goings at the central bank are in the final analysis utterly meaningless, for all decisions on monetary policy and everything else need the signature of a single man.

Nevertheless, let us delve where we can:

1-) The latest actions of Erdogan suggest he has entered some kind of blackout zone; he appears to have lost sight of the reality out there.

You might plead the case that he knows what he is doing, and indeed you have the right to, but the frequency of Erdogan’s uninterpretable and shocking moves has been increasing and the magnitude of the damage they have caused has leapt. For instance, his firing of the central bank governor in the summer of 2019 was an alarming move, but the firing of the successor last November was off-the-scale shocking and the latest firing—of a governor in post for less than five months—is totally incoherent.

 

2-) Putting a brake on the lira may require hardcore capital controls.

Is this the USD/TRY chart for Monday, March 22?

Rapt markets will already be trying to work out what the Erdogan regime is planning for the lira. Soft capital controls have been used since 2018 but it seems impossible that officials will not be forced to go hardcore.

The lira closed the week on March 19 at 7.22 versus the USD, while at the Grand Bazaar in Istanbul on March 20 it traded in a band of 7.35-7.45.

3-) Big time balance of payments crisis?

Under normal conditions, Turkey would face sharp portfolio outflows in the coming days.

4-) When will the policy rate be cut?

Should we expect an emergency rates meeting? See here for what happened at the last meeting held on March 18.

5-) Turkey is hurting. Many who have voted for Erdogan in the past are now living penurious, impoverished lives because of the economic mismanagement. This is no time for a strongman to be thinking about holding a fair election. Will the country instead be faced with an attempt to entrench a heavy authoritarian state?

On March 17, a regime prosecutor filed a case with the “constitutional” court (there’s not much that is constitutional about Turkey’s courts nowadays) to ban the pro-Kurdish Peoples’ Democratic Party (HDP), the country’s third largest party in parliament.

On March 18, when the central bank hiked the policy rate by 200bp, with a big-time “orthodox” move that far exceeded market expectations, it was thought that the Erdogan game-plan would be to keep the finance industry as an anchor while laying waste to all remnants of what could still be described as part of a democracy. After all, the ultra-nationalists, or fascists as some observers would rather describe them (we’re not going to take issue here), who enable Erdogan to run a ruling coalition, would be happy enough with that.

Within around 36 hours, by late on March 19, it was shown once more that analysts trying to decode the regime’s moves day by day are truly in a desperate business.

Those who unapologetically use the word “fascism” when describing what is under way in Turkey were given a helping hand by some police officers on March 19 when Ozturk Turkdogan, the head of Turkey’s Human Rights Organisation, was arrested.

Also late on March 19, Erdogan announced in the Official Gazette that he had pulled Turkey out of a Council of Europe accord to protect women known as the Istanbul Convention (since it was signed in Istanbul in 2011).

Some smart money, meanwhile, may go on the conclusion that Erdogan is going hardcore Islamist, but not so fast—Erdogan officials this week asked Istanbul-based TV channels of the Muslim Brotherhood to dim their criticism of the government of Egypt's President Abdel Fattah el-Sissi. Istanbul has been a redoubt of the Brotherhood since Sisi mounted a coup against its Egyptian administration in 2013, but Erdogan now seems intent on warming relations with Cairo.

6-) So what about foreign policy?

Ankara’s foreign policy is in perfect chaos. Will burning the bridges with the finance industry also mean burning the bridges with the Biden administration too?

On March 19, Erdogan talked about the recent “killer” controversy in which Joe Biden told an interviewer he was fine with using that description for Vladimir Putin. Erdogan described Biden’s stance as unacceptable.

So is what we have here Turkey becoming a proxy of Russia and China to challenge the US hegemony? Unfortunately life is not that simple; the past week saw rockets fired into Turkey from Russia-controlled territories in Syria. Some rockets were also fired from Turkey-controlled territories in Syria into Russia-controlled territories.

With Biden and Erdogan so far it’s a case of “I just (didn’t) call to say I love you”. Biden since becoming US president is yet to call the Ankara palace and that’s a snub its most important resident may well be stewing over. But where this relationship goes from here is not at all clear.

7-) Finally, a big thank you must go out to everyone who helped build, support, finance and normalise the Erdogan regime. We will now see who can benefit from the collapse of Turkey and who were just useful idiots.