Recep Tayyip Erdogan may have won plaudits from admirers at the Nato summit in Vilnius with some fancy political footwork, but make no mistake, Turkey’s president is a desperate man. For a national leader, there’s nothing so sobering as the prospect of economic death.

Whether the observer is taking stock of Erdogan’s sudden acceptance of Sweden’s Nato bid, his call for the breathing of life into Turkey’s application for European Union membership, or his  cooling of relations with the Kremlin and tentative warming of relations with the West, there is one common and prevailing thread—Turkey’s economy is mired in a nightmare and, without sufficient financial inflows and consistent doses of economic realism, it’s headed for a systemic crisis. Admiration for the chameleon Erdogan’s skills as a veteran political negotiator is all very well, but a quick gaze over his shoulder reveals an economy that remains on the edge of the abyss, while a glance to the floor shows the strongman’s feet of clay.

Firstly, take note of the import of that subtle but all too tangible shift in allegiances from Russia to Western capitals. Weaknesses in Russian President Vladimir Putin's power construct exposed by the Wagner rebellion appear to have been instructive for Ankara, which since hostilities began in Ukraine has attempted to stick with a largely neutral hand. It might be that the Turks fear Putin’s days are now numbered, meaning some realignment with the West becomes the way to go in terms of currying favour with partners who can provide badly needed economic ballast. Erdogan’s decision to allow five Azov battalion commanders to return home to Ukraine was a telling moment. Captured by Russia, they were supposedly, in a delicate deal between Ankara and Moscow, exiled to Turkey for the duration of the war.

The analysis that Turkey is gripped by its worst economic crisis since the shuddering 2000/2001 calamity that led to an IMF bailout is not in doubt. Erdogan’s growth-at-all-costs stance that has kept the country’s boom-and-bust economy running on hot for much of the two decades since has, as BlueBay Asset Management’s Timothy Ash said on July 17 following a week-long visit to Turkey, created “an economic mess of distortions, resource misallocation and price and market distortions”. 

However, recapping on how “Erdogan’s unorthodox, and just plain wrong, views on interest rates … have been intrumental in creating the crisis conditions”,  Ash determined that “for whatever reason Erdogan seems to be understanding finally (again) that his policies are no longer sustainable [and] it’s clear … that without change Turkey is heading for a systemic crisis—BOP [balance of payments] to banking then likely to sovereign debt”.

Following his controversial late May re-election, Erdogan swallowed some pride by appointing a new market-friendly economic team spearheaded by Finance Minister Mehmet Simsek and central bank Governor Hafize Gaye Erkan, two former Wall Street bankers.

Simsek and Erkan immediately moved to straighten out the Erdogan administration’s contorted fiscal and monetary policies, but Ash remarked: “All feels very jenga like—Simsek and Erkan are trying to remove the bricks gradually to avoid a collapse, but that might still be inevitable.”

A BBC report on July 17 assessed that the Turkish leader’s geopolitical pivot was related to his need to reassure Western investors. It quoted Murat Gulkan, head of OMG Capital Advisors, a small investment firm based in Istanbul, as saying on Turkey’s economic woes: "There's really no quick, magical cure in sight. You have to prioritise the problems and perform triage. That involves cooling down the economy, which of course is politically undesirable."

Erdogan’s pivot in the face of “an acute financial crisis and foreign currency crunch” was further picked up on by a July 14 report from Al-Monitor, which referred to “Erdogan's government scrambling to draw international funds to the country”.

“As part of his first regional tour since his reelection in May, Erdogan will travel to Gulf countries on Monday [July 17] mainly to secure much-needed funds. The revitalised EU bid may have been driven by a similar motivation,” said the publication, before citing Serhat Guvenc, professor of international relations at Istanbul's Kadir Has University, as saying: “The government’s priority right now is to recover the economy. One of the ways to do that is to progress the modernisation of the Customs Union.”

Despite the colossal difficulties besetting Turkey’s economy, Ash, it should be said, does see a viable way out of the shambles.

“You could argue,” he said, “that despite the terrible macro backdrop, the appointment of a new credible, economic policy team, the first steps to policy normalisation, and then the prospect of a big Gulf bailout [with commitments perhaps adding up to $75bm-$100bn in total] plus better relations with the West and prospect of a new Customs Union [with the EU] provides a path out of crisis. 

“It does in my view but the biggest risk here is a repeat of the fate of Nagi Agbal, the last Turkish central bank governor who tried to move to tighten monetary policy through rate hikes and then paid the price of being removed by Erdogan after just a few months in the job.

“The consensus is that Erdogan just cannot help himself, that he is fundamentally opposed to higher policy rates, and is just so hands-on over monetary policy he just cannot help himself from intervening in economic policy and that Simsek and Erkan will ultimately not be given the free hand they need to sort out the massive economic problems that Turkey faces, or else they will be fired at some point in the run up to local elections in 2024 as Erdogan will again want to go back to running the economy on hot.”

Running counter to that argument is that, as Ash noted, “the sheer extent of the economic headwinds facing the Turkish economy are so severe, that it’s hard to ignore”.

“Turkish banks and industry are on the edge, and I think even AKP [ruling party] friendly business people will have made the extent of the crisis clear to Erdogan. This simply cannot go on. Enough people have finally told truth to power,” Ash concluded.