The Big Picture

The Erdogan Supremacy

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  • Last month’s Turkish elections saw a dirty, demagogic campaign, but for President Recep Tayyip Erdogan, victory will be seen as vindicating his policies.

  • But economic challenges, a rapidly evolving region and the need to start a succession process means Erdogan Presidency 3.0 will be very different.

  • This was a massive defeat for Turkey’s opposition. Recovery in time for next March’s local elections is imperative.

This election was somewhat of an ambush. Pre-poll analyst consensus pointed to an Erdogan defeat on the grounds that the poor government response to February’s deadly earthquake, which killed over 50,000, would be fatal to his re-election prospects. In the event, a critical number of voters, including inside the quake-impacted zone, decided the incumbent was the candidate best equipped to lead the reconstruction effort.

If the quake didn’t get him, the economy would, predicted others. The lira has gone over a cliff in recent years: Five years ago the exchange rate was less than five lira to the dollar; now it is more than 20. Inflation is rampant. But there are positive narratives too. Inflation has improved, with April showing 42% compared to 2022’s horrific 64%. And 2022 GDP growth of 11% was the highest in a decade. Gulf and Russian support in the form of financial aid and deferred payment for gas imports, respectively, has been critical, and this aid looks set to intensify.

Erdogan can also boast a string of recent megaprojects — from the Canaakale bridge, connecting Europe and Asia across the Hellespont, to first gas at Sakarya, Turkey’s biggest ever gas project. Start-up looms at the first 1.2 gigawatt phase of the Akkuyu nuclear plant, built by Russia’s Rosatom.

Policy Pillars: Russia and Energy

Erdogan’s handling of two key (and related) policy areas, Russia and energy, will be central to whether he prospers or fails over the next year or two. The relationship between Erdogan and Russian President Vladimir Putin is symbiotic. Putin gets a trade lifeline and critical diplomatic support on key issues such as Nato accession for Sweden. Turkey gains from cheap Russian oil and the strategic leverage gained by its "deal-with-both-sides" Ukraine policy.

Turkish imports of Russian crude have eased somewhat since October’s record 476,000 barrels per day, but product flows have been steadily ramping up, according to data firm Kpler. This has enabled Turkey to become a player in the dark trade in Russian products, according to traders. Erdogan’s Western critics accuse him of support for Putin. And certainly, Russian financial and tourism flows, coupled with Akkuyu and a Moscow-backed Turkish plan to become a gas hub for Europe, supplied in large part by Russian gas, point to greater dependency.

However, this dependency goes both ways. In truth the Turkey-Russia relationship is a purely transactional one. Turkish drones, supplied by a firm run by Erdogan's son-in-law, have been a critical weapon in Kyiv’s fight against Moscow. And if oil imports are increasing, gas flows have been falling. In 2021, Russian gas had 44.9% share of the Turkish gas import pie. Last year, this fell to 39.3%, edging down to 33.9% in the first quarter of this year.

The fall appears driven by a new Turkish emphasis on LNG and diversification of supply. Russian falls would have been even more dramatic had it not been for the start of Turkish monthly purchases of Russian LNG from last December. In the last few months, Turkey has also debuted LNG imports from Oman, Mozambique, Belgium and Indonesia. In the first quarter, LNG made up 42.4% of Turkey’s gas import mix, up from 27.4% last year and just 24% in 2021. Turkey is also pushing ahead with domestic E&P, with Erdogan pledging a year’s free gas from Sakarya for citizens.

New Blood

A new cabinet is set to be announced later this week. Former Deputy Prime Minister Mehmet Simsek is set to return to government but as vice president for economic affairs. The former UK-educated Merrill Lynch executive will “upgrade the government’s credibility and the investor confidence,” notes consultant Mustafa Oguz. The energy and foreign ministries should also see change, he adds. Deputy Energy Minister Alparsalan Bayraktar could take over at the energy ministry, with current Minister Fatih Donmez having won a seat in parliament. Erdogan's spokesman, Ibrahim Kalin, is likely to become foreign minister, says Oguz.

Defense Minister Hulusu Akar, an important figure for the Nato relationship, is tipped to retain his position. The big question is what happens to the interior ministry. Erdogan’s selection here will be a key litmus test of how he sees his new administration. The next five years should also see Erdogan, who turns 70 next year, begin to put in place a succession plan. Selcuk Bayraktar, the architect of Turkey’s drone program, has leap-frogged Erdogan’s older son-in-law and former deputy prime minister, Berat Albayrak, as the chosen successor. “He has a proven track record and high popularity with the public,” explains Oguz.

Domestic Agenda

Three issues — the economy, earthquake reconstruction and refugees — will dominate Erdogan’s inbox in the lead up to March’s local elections. Tourism typically gives the Turkish economy a seasonal summer boost, but he will need to demonstrate both inflation and currency weakness — the lira dropped to record lows this week — are under control by March 2024 local elections.

The need to focus on reconstruction will likely postpone a decision on Erdogan’s controversial proposed $9.2 billion Kanal Istanbul project, aimed at diverting shipping traffic from the Bosphorus and Istanbul’s center.

Had the opposition won, Turkey would probably be a more democratic place, if nothing else due to the absence of a strong leader. But it would not necessarily have made for more tolerant government. In the run-up to the May 28 second-round vote, the opposition pledged to eject all immigrants from Turkey. Erdogan too has been forced to adopt a more anti-immigrant stance. At his victory speech he said nearly 600,000 Syrian refugees had already returned “voluntarily” and that Turkey and Qatar were working together to return another 1 million within a year.

Elections, Sanctions, Policy and Regulation, Macroeconomics , LNG Spot Trade, Oil Trade, Gas Pipelines
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