The backstage role of Schroeder.
President Erdogan seems intent to further expand the impact zone of the S-400 deal – testing the tolerance of his partners in NATO and the EU. Both are contemplating sanctions which seem too lenient to bite yet indicate a path that has no worst-case scenario beyond the realm of the possibility. Volkswagen’s investments in Turkey, with the heavy lobbying of the key Kremlin asset ex-Chancellor Schroeder, inevitably will face huge and potentially escalating tough-to-mitigate political risks.
No immediate collapse foreseen – slowly evolving strategic shift
To start with – the nature and the timeline of the risk evolve in time. Although no immediate collapse in Turkey is foreseen as part of Erdogan’s departure from Kemal Ataturk’s European and part of the West identity, the long-term trends and consequences forecast the direction and the dynamics of the brewing conflict point to an incremental curve. The source of the conflict between Turkey and the US on one side and the EU on the other is a fundamental difference in values and interests that might easily reach a point of irreversibility and rupture, turning Turkey into a new Iran.
The decision made by the head of state of Turkey to buy the latest SAM defense system from Russia, in his own words, has been the most important in the modern history of the country. This is a major shift in the direction of the country. There is no red line that President Erdogan is not prepared to cross in order to serve his own ego. The acquisition of the S-400 is not a lonely act of defiance but instead an attempt to renegotiate his relationship with the West on his own terms. There is no middle ground to explore – NATO can’t afford to cast a blind eye on the purchase of weapon system from an adversary that could be exploited tomorrow by other members, effectively leading to the demise of the Alliance. On that point, NATO can neither negotiate nor step back. President Erdogan is fully aware that he is setting a dangerous precedent and is intentionally undermining the Alliance.
Note that his reasoning on the S-400 purchase is not based on covering essential and immediate needs of Turkey’s national security. US Patriot air defense systems, manned by Dutch and other NATO countries crews, are already protecting the southern border of Turkey as part of the integrated air defense of the Alliance. This Russian SAM system has never been tested in real combat – the Syrian record with the Israeli and US attack on Assad targets is not convincing to say the least.
Yet, the Turkish president needs S-400 for his personal protection against what he perceives as a potential threat from the Turkish air force in a new military coup. President Erdogan still believes the West was behind the attempt and seems adamant to reason otherwise.
The West’s wrong calculus with Erdogan – Russia steps in
Many in the west believed that ultimately he will back down and buy US Patriots, moreover, that President Trump promised to put Ankara first on the buyer’s list for supply and delivery. On the contrary, President Erdogan deeply believes relations with Russia and Russian weapons are his best hedge against the West reluctance to agree to new modus in relations on his own terms. Therefore, he has already decided to walk a middle line and instead of being a part of NATO and the West in general, he has opted to become a middleman and broker Turkey’s place between Russia, China, the Middle East and the Islamic world on one side and the West on the other. Henceforth, this is a strategic shift and a political risk that no EU or US investors can afford to ignore, as a politically driven escalation of conflicts and tension with immediate impact on trade and investment should irreversibly follow.
Why Volkswagen deal is a testing ground of a new Kremlin German-Russia blend?
If the German carmaker intends to sell VW cars to Russia and the Middle East – the decision to invest in Turkey seems plausible. However, if the target is the EU market – the decision invites a more critical look.
Russia has been nervously waiting in the aisles on how Erdogan will react to the inevitable sanctions. It is no match for what the West can offer Turkey in terms of technology, capital, and markets. That is why it is testing a new Schroder assisted line, wherein Volkswagen defies common US and EU policy concerns and rewards Erdogan for his decision to buy the S-400 while he continues to expand the erosion range within NATO and the EU. This Schroeder line – the German – Russian axis matching Moscow’s defense and military options with German technology and capital builds on the Nord stream and its twin project Turk stream – cordial relations with business underpinning.
Volkswagen and other investors could always disregard or downplay the risks of investing in Erdogan’s Turkey at their or their shareholders’ peril. It is rather symptomatic for the new Putin-Erdogan Entente to see ex-chancellor Schroeder, whose pro-Kremlin and anti-NATO efforts in Russia have earned him millions, acts as a chief lobbyist for Turkey in attracting Volkswagen’s investment.
With this general context of President Erdogan’s geostrategic shift come the next layers of divergence with the West and the overlay of interests with Russia – Moscow encouraging Turkey’s role as an indispensable energy and security hub for Europe.
TANAP vs the Turk Stream
Some ten years ago Erdogan promoted Turkey as the pivot to the Southern Gas Corridor, enjoying an unrivaled status with the US and the EU, and hosting the TANAP as a unique and only opportunity of the West to diversify energy supplies away from Russia. Erdogan played ball with the West in securing safe transit of hydrocarbons from the Caspian Sea to Italy and the world.
Gas discoveries in the offshore area of Israel gave birth to plans for off-onshore transit pipelines from the East Med via Turkey to the EU. That is until Ankara decided to play big and broker its strategic place – offering to host the Turk Stream 1 and 2 pipelines that rival TANAP and essentially serve Moscow’s needs to bypass Ukraine.
No one is contemplating anymore passage of East Med hydrocarbons via Turkey. And TANAP no longer seems to have an exclusive bet on Ankara.
The new conflict line between Turkey and the EU and the US
The S-400 system, positioned in the Mercin province, would cover the whole of the East Med, and the four drilling ships in the economic zone of Cyprus. This points to an attempt by Erdogan to coordinate actions with Russia regarding the control of production and transit of hydrocarbons in the whole region.
What EU and US investors in Turkey fail to understand is that there is no stopping or reversing Erdogan in his head-on pursuit of independence from what he perceives as a hostile and untrustworthy West. The Turkish President cherishes most his personal grip on power and autocrats like Putin, while he distrusts the EU and the US with their democratic values and tradition in the protection of human rights and freedoms.
Therefore, he could easily take on Moscow’s offer to buy SU-57 jets, fully cognizant that they are no match for the US stealth plane and Russia is unable to engage in their serial production on a scale that will allow Turkey to replace the 115 F-35 already ordered and partially prepaid.
It is a self-perpetuating crisis with no cap for escalation
As Erdogan is driven by ego, not rationale, this implies that the political risk of grand investments in Turkey can be neither predicted nor understood or alleviated.
The toxic mix of high inflation and reduced interest rates, after Erdogan replaced the head of the country’s Central Bank, mean only one thing – the country’s top bank has lost its independence, a rare hedge against the President’s egocentric policy moves.
The story of the firing of the Turkish Central Bank chairman speaks volumes. President Tayyip Erdogan fired the governor on a completely bogus charge – for refusing to lower high-interest rates amidst high inflation. Bad reasoning leads to bad judgment and bad decisions, fueling higher risk perceptions and further unpredictability.
This is hardly a surprise for a President who believes markets could be reined in and brought under his control. The fate of the governor of the CB is no exception. This is the rule, after a sequence of events starting with the appointment of his son in law Berat Albayrak as a Finance Minister in 2018.
The new head of the Central Bank, Murat Yusal, was quick to go on record with an intention to cut interest rates, in order to boost economic growth and investments.
End part one