Turkey, a NATO member that once fought against the Chinese in the Korean War during the 1950s, is now becoming increasingly dependent on China to stave off a financial crisis. According to Morgan Stanley, Turkey’s deficit widened in April to $5.60 billion from just $500 million in late 2019, thanks to the combination of a trade deficit and a drop in revenues from tourism. Chinese investment has rushed to the rescue as Turkey has all but run out of crucial foreign reserves needed to pay down its debt. Just last week the People’s Bank of China extended a swap for Turkish lira for Chinese renminbi valued at $400 million. The currency swap deal was originally signed in 2012, but is finding new life now after Ankara found every other door to staving off a currency collapse was closed.
Beijing is eyeing this opportunity to ensure Turkey becomes a vital part of its Belt and Road Initiative (BRI). One Chinese logistics company recently bought 48 percent of Kumport Terminal for $940 million; located on the northwest coast of the Marmara Sea, Kumport is Turkey’s third largest container terminal and is a strategic link to Europe. According to the Daily Sabah, in November 2019 Turkey also welcomed the first freight train from Xi’an via the Chinese-built and funded Marmaray Tunnel. Using this tunnel, any train can make a non-stop transit from China to Europe for the first time.
Gao Tian, the China-Germany Railway project manager, argues that projects like these foreshadow how Turkey will be the very center of the BRI rail and infrastructure project connecting East and West. The vision involves developing Turkey from a simple transit hub for LNG, freight goods, and other products into an active, global hub of international trade, the “Middle Corridor” of China’s Silk Road Economic Belt. Additional ancillary projects to help develop the Middle Corridor include Turkey’s Thermal Power Plant project, worth nearly $1.7 billion, which ensures the country’s long-term energy security.
Very enthusiastic Chinese investment, however, may not immediately offset either Turkey’s looming currency crisis or the long-term corporate debt problem, which is soaring to more than $300 billion. Issues of insolvency have already impacted Chinese-funded projects. Yavuz Sultan Selim Bridge — one of the tallest in the world — was financed by China to the tune of $2.7 billion. When it became clear the owner would not be able to pay it back, the bridge was sold to Chinese investors for $688 million.
Beyond the failing areas of the economy, the only sector in Turkey that is still growing is technology — and it, too, is being heavily sought after by China. This includes Turkey’s largest e-commerce platform, Trendyol, with 2 million active shoppers and 25 million members. It was bought for $750 million by Alibaba. According to one person inside of Alibaba, the Chinese e-commerce giant is promising cost savings with Chinese-origin goods, believing Alibaba’s vast infrastructure, transport, and logistics expertise will benefit Turkish consumers with cheaper goods and even free three-day shipping.
But is the heavy investment by China enough to save Turkey? As Western companies fleeing Turkey — where last week the world’s largest stock indexer announced $900 million is at risk in the likely event Turkey is downgraded from “emerging” to much lower “frontier” status — blue-chip European companies pull out, and private equity firms sell their stakes, China will not only have to fill the investment gap but also the looming foreign currency gap, too. Here is where the two problems are a distinction without a difference.
According to a former economic advisor to Turkey’s ruling AK Party, it is clear to Ankara the lira must be devalued even more than it has. The question is not if but when. The lira has lost nearly half of its value since 2018, but a shock devaluation will cause significant economic pain for a country that is a net importer, as goods will become more expensive. With large foreign investment, a gradual devaluation might be possible. One silver lining of COVID-19 is the lower energy prices — due to lower global energy demand — slightly lengthened the time Turkey has to use its limited amount of foreign currency to pay off its debt.
But in the next six months, Turkey will have to find a whopping $60 billion to enable Ankara to convert its foreign debt into more easily manageable local debt. If a foreign investor were to invest in Turkey in installments, then maybe the Turkish corporate sector will be able to ride out the COVID-19 storm. China does not want Turkey to end up like Argentina in the 1990s, where corporate earnings — which were backed by major U.S. creditors — were strong until a sudden shock currency crisis caused the peso to lose nearly all of its value. The resulting destruction of the Argentine peso meant corporations then had wheelbarrows full of worthless currency that could never pay off their American-denominated debt. Turkey might avoid such a catastrophe so long as Ankara opens its economy to more Chinese investment, especially with the very slim chance of being extended a lifeline by Washington.
For the civil servants in Washington D.C., the emerging influence of China into the economy of a NATO member is deeply unsettling. Thus Turkish President Recep Tayyip Erdogan is waiting out the storm, hoping U.S. President Donald Trump wins re-election and decides to aid his ally’s economic recovery by reversing the American veto on a IMF bailout of Turkey.
Finally, there is nothing inherently wrong in Turkey buying more from China than they sell. But the fact that trade is so one-sided should concern Ankara. Last year, Tajikistan — heavily indebted to China — paid a Chinese company building a power plant with a gold mine; a few years earlier it swapped Beijing some land for debt, according to Eurasianet. Turkey’s widening trade imbalances with China may be a warning for deals to come.
A graduate from the University of Edinburgh, George Marshall Lerner worked as a consultant for the last two and a half years focusing on trade and reconstruction in the Middle East. He helped co-found an NGO, Hêvî (which means hope in Kurdish), supporting women, children, healthcare initiatives in local communities, as well as starting the University of Kobane.