Armenia's Presidential Election and its Ramifications for Relations with Turkey

Armenia's presidential election has finally passed after simmering for much of the month of March. For a synopsis of the events before and after the election, please refer to this article in the Diplomatic Courier, or read the following open to an article from the February 21st Economist.

ELECTIONS in former Soviet republics rarely yield surprises. The incumbent wins; the opposition cries foul; it takes to the streets. The presidential vote in Armenia on February 19th ran true to form. Serzh Sarkisian, the prime minister, won 53% of the vote, enough to avert a runoff with his main rival, Levon Ter-Petrossian, with 21%. Mr Ter-Petrossian, a former president, said Mr Sarkisian had stolen the vote even before ballots were counted. Independent observers talked of ballot stuffing and intimidation.

It will probably be some time before elections in the Caucasus shed their flair for the dramatic. Even neighboring Turkey, a "pillar of political stability" for over half a decade, is giving the region a run for its money. The possibility of dismantling a ruling party due to alleged anti-secular transgressions would make any intrigue from the Caucasus look like a cheap B-movie.

Whether fraudulent elections or economic concerns, Armenian political debate rarely ventures far from a number of issues related to the country's intimidating western neighbor. Optimists could argue that the newest selection of political personalities in Armenia may indeed prove to be the necessary ingredients for improving relations between Armenia and Turkey. Other than the long-standing quarrel surrounding the Armenian Genocide, one of the most important issues defining poor relations between the two countries is the contemporary dispute concerning Nagorno-Karabakh.

The current conflict that defines this small region dangling between Armenia and Azerbaijan has its origins in the early days of the Soviet Union, and includes an intriguing historical connection to Turkey. Before the Bolsheviks swept through the Caucasus in the early 1920s, the Nagorno-Karabakh region had been traditionally inhabited by both ethnic Armenian and Azerbaijani peoples. It had therefore been a point of contention during the short life-span of the newly minted states of Armenia and Azerbaijan. With the arrival of the communist era in the Caucasus, this conflict would be subsumed under the greater strategic affairs of the Soviet Union.

In 1923 Stalin, who was the Soviet commissar of nationalities at the time, decided to cede Nagorno-Karabakh to Azerbaijan as an "autonomous oblast". According to a biography of Georgia's most famous son by Robert Service, Stalin made this decision in order to curry favor with Ataturk's Turkish Republic, which apparently maintained a keen interest in "Turkic affairs" even at that early time.

Following the collapse of the Soviet Union, Nagorno-Karabakh experienced a string of bloody conflicts between Azerbaijani and Aremenian military and paramilitary forces. While Armenia received the bulk of its military support from Russia, the comparatively ill-equipped Azerbaijani forces are believed to have been supported by non-Azerbaijani Muslim mercenaries. With Armenia emerging as the nominal victor of the conflict, Turkey has chosen to isolate Armenia politically and economically, possibly with the ulterior motive of deflecting attention away from the Armenian Genocide or inflicting punishment as a result of public-relations discomfort it has caused the Turkish state.

While the fall of the Soviet Union involved a very unpleasant reality check for all those involved in the communist market experiment, the last decade has seen many of these countries make economic progress quite often due to their energy reserves. Over 15 years after the fall of the Soviet Union, the circumstance of the Armenian economy remain dire when compared to any of its neighbors. The financial and travel blockade imposed by Turkey and Azerbaijan is largely responsible for its lack of economic progress. Like the economies of its neighbors, the Armenian market and political landscape is riddled with corruption. When considering the question of Armenian-Turkish relations in the near future, it appears that this issue of corruption, particularly as it relates Nagorno-Karabakh, is of great relevance.

The following Voice of America (VOA) article demonstrates the degree to which politicians hailing from Nagorno-Karabakh maintain a stranglehold on the Armenian political process.

Here is a selection of the article's most poignant ideas:

Aram Abramian, editor in chief of the Yerevan-based daily newspaper "Aravot" and who has roots in Nagorno-Karabakh, says Kocharian and Sarkisian brought in associates from the territory who took over state posts and dominated the business elite.

"There are 20, 30 families -- oligarchs -- people who, thanks to the opportunities that are provided to them by the authorities, became rich, and have wide possibilities of avoiding taxes and custom fees," Abramian says, adding that well-connected moguls were able to gain "monopolies" over fuel, sugar, and other commodities.

Among those identified by analysts as part of the Karabakh clan are Kocharian's son, Sedrak, who reportedly controls mobile-phone imports; Barsegh Beglarian, who dominates the gas-station market; Mika Bagdasarov, who controls oil imports and heads the national airline; and Karen Karapetian, head of the Armrusgazard gas company, a joint venture with Russia's Gazprom.

If the ideas advanced by the VOA article are indeed true, it is hard not to be pessimistic about the future of Nagorno-Karabakh issue and, as an extension, the future of Armenian-Turkish relations. The conflict in Nagorno-Karabakh legitimates the political class currently running Armenia. In particular, it distracts the electorate away from the single biggest issue affecting their lives on a daily basis - a sickly economy. As the VOA article suggests, what motivation does Armenia's ruling Nagorno-Karabakh cabal have to resolve the conflict and further improve relations with Turkey in order to resuscitate the economy? A more free-market economic system, involving trade and investment with Turkey, would only undermine their current political and economic existence as it would empower potential opponents.

Turkey, for its part, should also be expected to engage the Nagorno-Karabakh with a more constructive attitude. This is especially the case in light of its role as the region's most important power broker after Russia and its aspirations to join the European Union as a valuable diplomatic partner. Prior to its construction, Turkey offered to route the Baku-Tbilisi-Ceyhan pipeline through Armenia, allowing its neighbor to collect the lucrative transit fees, in exchange for recognition of Nagorno-Karabakh as a part of Azerbaijan.

Such a swap would have merely fattened the wallets of the corrupt. More importantly, it would have done little to address the underlying issues stoking the Nagorno-Karabakh conflict - disputes between two distinct ethno-religious groups wanting to living on the same plot of land. While a more constructive approach must be demonstrated on Turkey's part, such an expectation may prove foolish. The rising levels of ethno-nationalistic sentiment that could very well mark the post-AKP era of Turkish politics render the possibility of reconciliation with Armenia increasingly unlikely.

Regardless of Turkey's role, there is a much greater motivation for Armenia to resolve Nagorno-Karabakh compared to Turkey considering Armenia's desperate need to reintegrate itself into the regional economy of Eurasia. Armenia cannot afford to be locked in its current economic ice age and slip further behind its neighbors in terms of economic development. Unfortunately, there does not appear to be a clear sign of when the country's democratic process will be capable of overcoming Armenia's suffocating political-economic corruption.

Turkey's Next Economic Horizon: reviewing financial indicators

At the beginning of this past week, the world was gripped by the imminent possibility of global financial Armageddon. While the global markets have encountered and overcome small patches of turmoil over the last eight months, only this most recent turn of events has caused the Turkish media, government and upper-classes to immerse themselves in an open round of soul searching. What was once a whisper or secondary thought is gradually becoming the palpable hum of financial anxiety - a reality with which Turkey is extremely familiar.

Over the past few years, Turkey has emerged as one of the global stars of foreign direct investment (FDI). The Turkish lira has reached unprecedented levels of strength, allowing Turks to better cope with rising energy prices, experience unprecedented buying power in the form of cheap goods from China and for wealthier Turks, it has given them more confidence to purchase foreign delicacies such as sunglasses from Gucci. Whether one is a bus driver in Malatya or a bank employee in Izmir, Atatürk's famous saying Ne Mutlu Türküm Diyene (How happy is he who says "I am a Turk") has acquired a new meaning for today's Turkish consumer.

Turkey's AKP-led government continues to maintain a very confident demeanor. The World Bank released a very favorable review of Turkey's GDP prospects in 2008 and investors still show interest despite the looming global financial turmoil. While this observer does not mean to suggest that Turkey's economy will abruptly dive into utter chaos as a result of a global economic downturn, it is important to remember that multiple years of robust growth have produced a lot of fat, which a downturn will ruthlessly trim away. It is only after this inefficient excess has been exposed and removed, that one can truly evaluate the AKP-administered economic renaissance in Turkey.

The following are a number of noteworthy Turkish financial statistics and remarks for consideration. Many of the initial comments were taken from this TDN article.

Year-to-date current account deficit: Rises by 11.6% to $32.758bn in November 2007. The figures for the January-October period were adjusted from $29.06bn to $29.48bn.

12-month trailing current account deficit: Rises to $35.74bn in November from $35.16bn in October 2007 according to Türkiye Ekonomi Bankası (TEB).

Sertan Kargın, chief economist at TEB, said, “We are not concerned about the current account deficit thanks to robust Foreign Direct Investment (FDI) stock, record high foreign exchange reserves, and solid non-debt creating capital inflows.”

TEB key factors driving the current account deficit: “The widening trade gap was mainly due to higher import substitution in intermediate goods, the overvaluation of the Turkish lira, record high oil and commodity prices, private sector capital investments, and the spillover impact of fiscal loosening on domestic demand.”

Global slowdown according to Kargin of TEB: Global growth conditions are the key risk for Turkey’s current account outlook, according to Kargın. "In our view, a consumption-led global slowdown is creating a risk on the current account balance as Turkey’s foreign demand sensitive export industries account for 60% of total exports," Kargın said. "Furthermore, exports are highly sensitive to foreign demand rather than the exchange rate."

FDI in 2006: Almost $20bn in FDI in 2006.

Projected FDI for 2008:
Kargın of TEB: “In 2008, we expect Turkey to raise an additional $20bn to $25bn through FDI, and $4bn to $5bn via global investors’ equity and Turkish lira debt instrument purchases.”

Özgür Altuğ, chief economist, Raymond James, Istanbul: Turkey will probably get $23bn of FDI in 2008. That will finance less than half of a current account gap that’s likely to swell to more than $50bn.

Government Assets and FDI: The recipient of almost two-thirds of foreign investment will likely be the sale of government assets, such as banks, power generation and distribution companies according to Altuğ.

It has also been reported in recent months that the government is trying to accelerate the pace of privatizations.

Sovereign Wealth Funds and FDI: "In the wake of these developments, Economy Minister Mehmet Şimşek traveled to Dubai yesterday to encourage the Saudi Arabia Public Investment Fund and other sovereign wealth funds to increase their investments in Turkey." (For more, please click here.)

"Government officials had previously said Turkey could attract around $10bn in investment from the Gulf countries, excluding the new Saudi Arabia Public Investment Fund, to the real estate, tourism and financial sectors as well as to privatizations." (For more, please click here.)

TUSIAD Remarks: According to the chairwoman of Turkish Industrialists and Businessmen's Association (TUSIAD), Arzuhan Dogan Yalcindag:

“Our growth has slowed down to a large extent and inflation has a relatively upward trend,” she said during an address to a TUSIAD general assembly meeting in Istanbul. “The unemployment rate has begun to increase with high current deficit figures and damaged financial discipline. And unfortunately that is how we are bracing for the upcoming global wave.”

“The world is closing in to a global crisis and 2008 will be a difficult year for Turkey. We need to concentrate all of our energy to economy.” (For more, please click here)

Perhaps the most remarkable issue to emerge from this small assembly of viewpoints is the degree of urgency and weight shouldered by FDI regarding the stability of Turkey's economy in 2008. Turkey needs FDI in order to address its great imbalances in trade. The fact that a government official is openly lobbying for a greater share of the petrodollar FDI pie is rather telling. It also confirms the degree to which the AKP's economic success has been linked to their close ties with the more religiously conservative, petroleum-rich countries. (For further analysis of this political development, please click here.)

Another point worth considering is the two-thirds figure for the amount of total FDI directed towards the sale of state-assets. It is probably quite normal for an emerging market economy like Turkey to attract the majority of FDI in this matter. However, at some point the number of state companies available for auction will dwindle. Ideally, the newly-privatized and traditionally private firms will generate enough new growth to create the market enthusiasm necessary to attract sufficient levels of FDI. However, the transition for state-asset oriented FDI to ultimately represent the minority of overall FDI in Turkey, instead of the majority, could prove quite difficult in the near term. This will be especially true if the global economy stumbles in the next couple of years and investors decide to retreat to economies with less risk. No wonder Turkey is so keen to attract a portion of the more than $1trn on the table for Saudi Arabia's new sovereign wealth fund.

"Made in Turkey" - but for how long?

During a flight from Istanbul to Europe, this observer had the great fortune to strike up a conversation with a gentleman named Mehmet. Mehmet and his wife, along with half of the economy section of the plane, were on their way to a two week tour of South America. All of the tour participants were of retirement age or older, wore gold watches and jewelery, and lived in some of the nicer residential areas of Istanbul. They collectively represent a sort of golden generation of Turks, who were born toward the beginning of the Turkish Republic. Ataturk's reforms have influenced the entirety of their personal and professional development. They are accordingly some of the staunchest defenders of secular and westernized Turkey, since it is they who largely realized Ataturk's vision and have been its greatest beneficiaries.

Mehmet began his career in the navy as a cadet at Turkey's naval academy and ultimately served as a electronics technician. He spoke with great pride about the technical training he received from the US Navy and also boasted that his daughter completed a masters in electrical engineering from a major American university. When Mehmet left the Turkish Navy, he started a manufacturing business with the technical expertise, which he had acquired during his career. His factory, which is located on the Asian side of Istanbul, has a vibrant business producing electronic components used in televisions made by Turkey's largest household electronic goods manufacturer, Vestel.

Mehmet's manufacturing business serves as a microcosm of Turkey's economic renaissance, which has particularly bloomed during the past few years of the AKP leadership. No longer dominated by state-owned businesses, agriculture and textiles, Turkey's economy emerged from a politically tumultuous period in the 1990s with an aggressive approach and strong support from foreign investors. According to the president of the Turkish Confederation of Businessmen and Industrialists, Rızanur Meral, 60% of Turkey's exports are purchased by European Union members. Turkey's historically weak currency, lower wage levels, emerging domestic economy, long-time NATO membership and proximity to Europe have made it a logical location for manufacturing growth.

While the lure of these conditions continues to prevail for the most part, Mehmet's forecast for the future of his business would appear to have great relevance to the prospects of the Turkish economy in general. "In three years I will have to close my production line," Mehmet predicted. In order to compete with Chinese manufacturers vying for Vestel's supply contracts, Mehmet's business has been forced to cut the price of its electronic components. These cuts will eventually render his domestic production operations completely unprofitable - a phenomenon that is relevant to many of the world's emerging market economies including Turkey.

Mehmet's story exposes one of the many vulnerabilities of the Turkish economy, which this observer views as an increasingly visible theme for 2008. While Turkey's labor costs may be low compared to Western Europe or even most of Eastern Europe, it offers little advantage when compared to India or China. Moreover, raw material costs in India and China benefit from substantial state subsidization. Due to Turkey's considerable trade with Europe, local Turkish suppliers of raw materials have raised their prices to European levels and the Turkish market furthermore does not feature nearly the same level of raw material subsidization.

Throughout 2007 the great strength of the Turkish lira, buoyed by record levels of foreign investment covering Turkey's growing deficit as well as by substantial foreign exchange trading, kept pace with the rising price of oil. Unlike in the US economy, which has felt the effects of higher energy costs, the Turkish economy was relatively buffered. Despite this situation, the following analysis from a Bloomberg article references a chronic fault in Turkey's manufacturing system.

“The essential problem for Turkey is the fact that manufacturers rely on imported goods to make products,” said Şengül Dağdeviren, economist for Oyak Bank in Istanbul. “Whenever exports increase, imports go up accordingly.” Exports rose 30 percent to $11.3 billion in November, a record for a single month, the statistics agency said Monday. Imports increased 29 percent to $16.6 billion in November from the year-earlier period, the agency said.

The Turkish government has responded to this situation by calling for Turkish manufacturers to pursue more value-added products. However, this observer wonders how moving up the value chain for manufactured products will alleviate Turkey's troublesome import-export cycle. Value-added products will make the country's exports worth more, but they will still require Turkey to import the necessary inputs - perhaps even at greater levels of cost.

The Turkish economy thrives on political stability and it appears unlikely that the magicians in the AKP will be able to ensure such conditions for 2008. The political calendar in 2008 will be marked by the inevitably heated battle over the series of constitutional reforms desired by the AKP. In addition, Prime Minister Erdoğan has demonstrated considerable resolve to overhaul the country's social security system, which is a key sticking point for Turkey's relationship with the IMF and with the European Union to a certain extent. At the moment, roughly 8m Turks directly receive social security payments and "90 percent of the Turkish population is directly or indirectly a part of the social security system" according to this article in Today's Zaman.

The legacy of last year's drought, the potential for military activity related to the PKK and interruptions in energy cooperation with Iran and Russia could also contribute to the brewing storm, which will hamper Turkey's economy in 2008. With slower levels of growth predicted for the coming year, Turkey and its AKP-led government must be extremely sensitive to the social and ethnic tensions that will most likely rise as the general climate of economic prosperity dissipates. It is this potential for unrest in Turkish society, which ultimately represents the greatest threat to the near-term progress of the Turkish economy, in addition to the nation at large.

Turkey and Iran: Further Reading

The following article by John C.K. Daly in United Press International offers readers a nice overview of Turkey's latest string of energy dealings with Iran. Daly's article also considers the American view of these growing energy ties. He reviews the frequently referenced array of diplomatic exchanges, which have communicated Washington's aggravation with Turkey's creation of a small, yet symbolic, hole through the wall of international sanctions against Turkey's southeastern neighbor.

The second half of Daly's article documents the highly over-emphasized saga of estrangement between Turkey and the U.S. To his credit, Daly makes the very astute observation that Turkey has crossed Washington due to its practical energy needs. He also makes the rather novel argument (for a Western journalist) that it is Washington's responsibility to propose workable solutions, which do not involve Iran, if Washington is truly dismayed by energy cooperation between Turkey and Iran.

It is time for the Bush administration to realize, however belatedly, that its inattention to Turkish domestic and foreign policy concerns has produced the growing estrangement between the two nations and that Washington has nothing to offer Ankara in the energy sphere except criticism. The Erdogan government, as a necessity, has accordingly moved national energy concerns ahead of placating U.S. foreign-policy initiatives.

It is the opinion of this observer that the Erdoğan government was absolutely correct to prioritize Turkey's energy concerns over U.S. foreign-policy initiatives. Moreover, there is little evidence that closer ties with Iran are an example of the AK Party's religious agenda other than its interest and success in doing business with religiously conservative countries like Iran, as well as Gulf countries and Saudi Arabia.

While Daly should be lauded for his analysis of Turkey's rationale, he places too much importance on the cool distance that currently marks the relationship between Washington and Ankara. As George Bush and Nicolas Sarkozy have demonstrated, relations between two countries with historic ties can be repaired overnight if there exists the common interest to do so.

Pursuing energy trade with one's neighbors is a very healthy practice. In fact, growing regional energy integration breeds an atmosphere of greater normalcy through interdependence. While it is true that Iran is an exceptional case, selling electricity and other forms of energy to Turkey is absolutely the type of activity that the international community should condone. It is constructive compared to Iran's typical machinations. Perhaps this is why neither Washington nor the European community have accorded much punch to their criticisms of Turkish-Iranian energy ties.

Pipeline Politics: Israel

Details were released last week concerning an advanced proposal for a pipeline from Turkey to Israel, which would provide Israel with a new source of natural gas, oil, electricity and water. The project is a notable development in Turkish-Israeli relations during a month that has been highlighted by Shimon Perez's diplomatically significant visit to Ankara today.

(Please review either this article from Zaman for the Turkish perspective or this piece from the Jerusalem Post for an Israeli view of the proposed pipeline.)

If the proposed connection is indeed constructed, this project will represent an intriguing addition to Turkey's growing web of energy pipelines. As an estranged member of the Muslim Middle East, it has been relatively easy for secular Turkey to cultivate a relationship with financially capable and technologically advanced Israel. Perez's invitation to Ankara, which was officially offered by President Gül, reflects the degree to which Turkey's supposed "neo-Islamists" are distinct from other political movements in the Middle East. Perhaps to a lesser extent, the move underscores the historic mistrust that undermines Turkic-Arab solidarity whether in Anatolia, the Caucasus or in Muslim Central Asia.

While the deal appears to be mutually beneficial in terms of Turkey adding a new market to its energy transfer network and Israel diversifying its energy needs, this observer is skeptical of the greater oil export applications for the pipeline suggested in the Jerusalem Post article. In particular, it is unclear what basis there is for the assertion that it is "more practical" to deliver oil to Asian markets via Israel compared to overland routes.

First of all, this observer wonders what real advantages oil transited through Israel has over shipping it from the Turkish terminal at Ceyhan and onto Asia through the proven Suez Canal route. Since the oil will originate in either Iraq or the Caspian Sea, it furthermore seems rather odd to first move the oil west to Ceyhan and then south to Israel and finally onto a destination in Asia. It would make far more sense to ship the oil from Basra or from a port in Pakistan through the growing network of pipelines crossing that country.


It is ultimately of little concern to Turkey whether or not such dreams of exporting oil to the "Far East" via Israel are in fact realized. Of far greater importance is the considerable geopolitical leverage Turkey will acquire through this increased cooperation with Israel. If the proposed pipeline proves successful, Israel will ultimately come to depend on it for a relatively significant portion of its subsistence. Therefore, Turkey will possess a greater means to "lean on" Israel for certain types of military or diplomatic support that the US or Europe will otherwise be reluctant to provide.

Pipeline Politics: Turkey's South Pars Project

Turkey and its state-owned oil company, TPAO, have made an uncharacteristically bold move in the theater of geopolitics. Despite intense political and financial pressure from the Bush administration, Turkey has taken a brave step forward, choosing to independently finance the $3.5bn necessary to initiate the South Pars natural gas development project in Iran. Turkey was unable to secure the outside financing, which is typical of a project of this scale, due to the recent American-led financial embargo on Iran.

Ankara apparently considers the strategic opportunity presented by the development of the South Pars fields as having sufficient long term value to outweigh the short term diplomatic turmoil, which will most likely ensue from this decision. From the prospective of this observer, the choice to independently pursue this opportunity should be strongly lauded for being very shrewd in both political and economic regards.

By disregarding Washington's warnings concerning any type of engagement with Iran, Ankara has tacitly communicated the obvious: President Bush is a lame duck. This blatant, yet well-calculated, act of defiance is a healthy gesture for Turkey as it tries to forge its own future as opposed to relying on heavy-weights like the US or hypothetically even the EU. If one considers this act along with Turkey's decision not to allow the US military to use Turkey as a northern invasion route for the second invasion of Iraq, it would seem that Turkey is no longer simply an acquiescent member of the Western/NATO camp. The Cold War is over and Turkey is very right to adjust its geopolitical posture accordingly.


In terms of its economic significance, the South Pars decision confirms the general consensus that Turkey's development of these natural gas fields will play a very important role in its future rapport with Europe. In particular, the supply of gas guaranteed by the project will further promote Turkey's goal to position itself as a critical energy transit corridor for Europe. Europe, like Turkey, currently depends on Russia for the majority of its natural gas needs. Once the flow of resources from South Pars join those energy resources already flowing from Central Asia, Turkey's pipeline network will emerge as a preferable alternative to Russia's divisive behavior regarding energy supply. (For further reading about Turkey's emerging role as an energy transport corridor, please read this Bosphorus Watch article from July.)

It is of course another matter whether the South Pars fields actually get developed by Turkey in the near future. Although this observer is not particularly convinced that there will be an invasion of Iran, a military conflict nonetheless represents one of a myriad of other factors, which could ultimately stall or even terminate the project. Chief among these factors would be the character of the current Iranian regime, which has shown its penchant for the unpredictable.

Another factor suggested by a a friend of mine, who is a Turkish businessmen, concerns the true intentions of Ankara. By demonstrating its ability to self-finance and independently cooperate with Iran, Ankara has gained a very valuable geopolitical bargaining chip with both the US and possibly even the likes of France. As my friend astutely pointed out, it is possible that Ankara has in fact no intention of actually realizing the Iranian project, but will instead use it to diplomatically extract certain equally valuable concessions from the West. Either way, South Pars is a win-win situation for the Turks.

Considering the Turkish Economy and the Conditions of its Success

The Turkish economy is currently moving at full throttle. Not since the privatization reforms of the venerable Turgut Özal has there been such a sustained stretch of economic progress. While the average Turk will point to the fact that unemployment, which probably unofficially hovers at 14-16%, remains a sizable dampener to overall well-being, a considerable cross-section of Turkish society would nonetheless agree that the country's economy is enjoying unprecedented prosperity.

Taxi drivers in Istanbul and even the heads of conglomerates will tend to point to the same rationale for this long period of positive growth: the political stability experienced under the AK Party. There is little dispute that Turkey's current period of economic success correlates nicely with the starting date of the AKP's leadership of the Turkish political system. In a country that is accustomed to military coups, hyperinflation and dramatic terrorist attacks, the AKP's tenure has been quite serene by Turkish standards. This point was not lost on the AKP during the July parliamentary election and Abdullah Gül's subsequent successful bid for president. Many Turks voted for the AKP simply due to economic issues and not as a result of the party's much ballyhooed portfolio of social views.

These calm conditions have given foreign investors cause to increasingly reward Turkey with much needed sources of investment. Foreign capital inflows have been quite often directed toward the very large number of government assets, which the AKP has aggressively sought to privatize. The growth of exports have also played a prominent role in the country's economic resurgence. According to the head of the Turkish Congress of Exporters (TIM), Turkey's exports exceeded $100bln during the past 12 months for the first time in the country's history. Exports of automobiles took the lead, followed by clothing and textiles and steel-iron in a distance third.

The numbers would indeed seem to indicate that AK Party is doing something correct. However, "the numbers" only tell a small sliver of the entire story as is often the case. In addition to the AKP's adept management and calming presence, one must also consider certain other factors that have equally contributed to the situation.

There has been a great prevalence of "petrodollars" in the Middle East looking for "shariah-compliant" homes for investment. Under the unprecedented political auspices of the religiously conservative AKP, Turkey emerged as a much more viable option for this capital. In this regard, the Turkish economy of the AKP era has been a direct beneficiary of the oil-crazed world and its oil market. Second, the availability of inexpensive products from China has also had a great influence on the Turkish economy. In addition to increasing the buying power of the Turkish consumer, cheap Chinese products have so far been a benefit to the non-textile sectors of the Turkish economy. This has particularly been the case for the outsourcing of component parts, which are used for goods manufactured in Turkey.

All of this should be reconsidered in the increasingly gloomy shadows cast by the foreign trade deficit, which Turkey currently maintains. In addition to considerable spending in the public sector, Turkey's great affinity for imports is strongly driven by its energy consumption needs. While this situation is more palatable during periods of reliable foreign investment, the continued strength of such inflows is certainly ephemeral.

In the opinion of this observer, it is time for the AKP to stop riding on its somewhat false laurels concerning economic management. The AKP must instead use its strong political mandate to take the types of tough measures, which are necessary to cushion the Turkish economy's inevitable descent into more turbulent economic waters. If the AKP chooses not to take such steps, it will eventually find itself in equally hostile circumstances.

Turkey's Silence On Iran Question

During the past week, the global press has enjoyed a multimedia feast over the comments about Iran made by France's Foreign Affairs Minister, Bernard Kouchner. While these remarks were subsequently tempered by the French President, Nicolas Sarkozy, this week's exchange nonetheless underscores the increasing weight that the Iran-question currently receives in diplomatic and political circles outside of Washington.

The press in Turkey has also been following this story quite closely, which is only natural for a country that borders on the pariah-nation in question. What has particularly puzzled this observer is the general absence of Turkey's political elite in the overall international dialog related to Iran and its potential development of nuclear weapons. While there does seem to have been discussion between Ankara and Washington concerning the Bush Administration's view that Turkey should freeze all trade with Iran, there has been little proactive commentary about the Iranian issue on the behalf of Ankara. Such relative silence on the part of Erdoğan and Gül would seem to be misguided for two main reasons.

Even a limited military attack on Iran would most likely have disastrous effects on the relatively fragile Turkish economy. In addition to losing its direct trade with Iran, the Turkish economy depends on increasing future levels of foreign investment in order continue its positive growth trends during the coming years. Needless to say, investors will be very reluctant to sink meaningful amounts of capital into Turkey if Iran is launching missiles through Turkish airspace as a retaliatory measure.

Moreover, the Turkish economy has come to rely on the flow of natural gas from Iran during the past two decades. A military action against the country would clearly necessitate the cessation of this supply and force Turkey to further rely on Russia for its energy needs.

The second important concern related to Ankara's silence is related to how Turkey views itself as a regional player. The now cliche reference to Turkey functioning as Europe's bridge to the Middle East and Asia would suggest that Turkey is consistently active in the affairs of the region. While Iran and Turkey do have very clear religious and cultural differences, the current drama in Iran would seem to be a perfect opportunity for Turkey to show the world its ability to act as a regional facilitator.

Although this observer does not believe in the practical value of "Camp David-style" political summits, which are meant to reconcile the differences between two foes through a series of photo opportunities, it would seem that Turkey could gain incredibly valuable recognition by demonstrating its ability to play such a role.

Instead, it appears that Turkey is content to remain in the shadows of the West instead of embracing this looming disaster as a potential diplomatic extravaganza. Such opportunities are few and far between. Turkey's unwillingness to seize the initiative in this scenario ultimately communicates a rather petty self-image in regard to its involvement in the region.

Considering Turkey's Transport System

A recent article in Zaman about the state of Turkey's highway system encouraged this observer to consider the current and future state of transportation in the Republic of Turkey. Visitors to Turkey will no doubt remark the ease with which the individual traveler can move from one part of the country to another. Turkey's private bus, dolmuş and taxi network arguably represents one of the most formidable achievements of the Turkish experiment with capitalism. The not so uncommon image of a sheep strapped to the roof of a dolmuş minibus underscores the importance of this network to the development of the domestic economy over the past decades.

As is the case in all countries, the suitability of logistics network is one of the keys to economic growth. In its position as an emerging market economy, Turkey is faced with the typical challenge of upgrading its logistics infrastructure in order to meet the criteria of foreign investors. The aforementioned bus, dolmuş and taxi network is not particularly relevant to the logistic needs of modern industry.

The challenge of strengthening a country's logistics infrastructure has traditionally fallen on the back of the public sector. More recently, there has been a growing liberalization of state control over strategic assets. A deluge of worldwide private investment has ensued. Turkey's ruling AK Party has embraced this trend, having already sold off significant portions of Turkey's infrastructure portfolio. Most recently the port of Izmir was sold to Hong Kong-based Hutchison-Whampoa for $1.25 billion. Similarly, Germany's Fraport bought the operating rights to Antalya's airport for $3.2 billion. Although such sales inevitably arouse suspicion concerning whether the government received fair value, the fact remains that these infrastructure assets are better off in private hands in terms of the future investment that they will receive.

While seeking suitors for its existing assets, Turkey's government has turned its attention toward the development of the country's road system. In line with the seaports and airports, the government is trying to sell the management rights to the country's existing toll-roads and toll-bridges. This strategy of selling toll-road concessions is the key to Turkey's ability to afford the creation of new highways across the country. The construction of a highway linking Gebze-Orhangazi-Bursa-İzmir is already underway, and another such project linking Ankara with Izmir will most likely begin in 2008. When the AK Party took power in 2002, it aimed to build 15,000 kilometers of new roads. Roughly 4,000 kilometers have already been completed.

Like public works projects all over the world, the AK Party's program is not without its inequities. For example, the number of roads built in the region of Kayseri (770km), which is a traditional stronghold of the AKP, is greater than any other part of the country by more than 100 kilometers.

Beyond this type of age-old political dilemma, there exists the broader question of whether the AK Party's emphasis on roads is in fact prudent. Istanbul's traffic is already horrific and the construction of a system of wider roads elsewhere will only cause this phenomenon to spread to other locales. In light of the rising costs of petroleum of which Turkey has nearly none, this observer wonders if is truly wise to concentrate so much of the country's infrastructure investment on motorized transportation.

As it turns out, Turkey has a very long, albeit largely unfruitful, history of train transportation. British military activity in Egypt and Iraq during WWI was largely motivated by an urgent need to stop Germany's ambition to build a rail connection between Berlin and Baghdad via Anatolia. A subsequent effort by Ataturk to expand the country's rail network was cut short by the leader's death.

Therefore, the majority of Turkey's contemporary railroad network was built at the beginning of the 19th century by German engineers, who were paid by the kilometer. As a result, Turkey's rail routes are far from direct. A cross-country train voyage is not only dangerous, but it also takes an eternity. This state of affairs exists in stark contrast to the modern Mercedes coach buses and trucks, which can complete the same journey in half the time and twice the comfort, safety and reliability.

If Turkey is to improve the competitive position of its economy in the future, it ought to pay more attention to the realities of today's world. European governments are aggressively investing in linking together their rail infrastructures since they realize the economic benefits this will add to their increasingly integrated economies. Even America, which boasts the world's most impressive highway network, relies on its railways for a great deal of freight transportation. Initiatives like the Trans-Asian Railway Network are the future and are highly complimentary to Turkey's desires to function as a gateway between Europe and Asia.

Developments such as fast-train service connecting Istanbul to Ankara (and eventually Ankara with Konya) as well as the recent announcement of the reconstruction of the Baku-Tbilisi-Kars railroad in the near future are encouraging although insufficient. To meet Turkey's future economic ambitions, laying new and reliable track would not only benefit interior Anatolia's highly agrarian economy, but it will also encourage more dynamic industrial development.

The construction of more roads possesses the short term benefit of helping the country's growing automobile industry as well as the pockets of its bus company tycoons. However, this decision would appear to have unfortunate consequences for the Turkish economy's long term competitive position.

Pipeline Politics: Further Reading II

In its August 23rd print edition, The Economist magazine published an article, which echoes many of the same observations that were made in the July Bosphorus Watch piece entitled, "Turkey's Pipeline Politics: Russia, Iran, Greece, Italy".

To view The Economist article, please click here.

The Economist posits that Prime Minister Erdogan's effort to cultivate greater energy ties with Iran will help his country's chances to join the European Union in the future. It believes that Turkey's heightened role as an energy transportation corridor will only increase its strategic value to the EU.

While these energy developments will certainly not hurt Turkey's bid to join the EU, it seems unlikely that they will represent a deciding factor in the EU's admission process as The Economist might be suggesting.

Simple economic and geographic realities dictate that Europe is by far the most important and logical market for any energy supplies flowing through Turkey. This will be the case whether or not Turkey is eventually offered the opportunity to join the EU.

It is therefore the opinion of this observer that that the EU would not gain any meaningful, strategic energy advantage by drafting Turkey into its ranks. The lack of formalized political ties between the Republic of Turkey and the EU will not influence the realities that govern Turkey's future energy transportation business with Europe.

Azerbaijan - Iran Relations: Further Reading

In light of Iranian President Mahmoud Ahmadinejad's recent state visit to Baku, Rovshan Ismayilov of Eurasianet.org has published an excellent article detailing the current state of relations between Iran and Azerbaijan.

Click here

In addition to Azerbaijan's close geopolitical ties with the United States, Iran is primarily concerned with Azerbaijan's territorial claims in the resource-rich Caspian Sea.

Turkey's Future in Central Asia

Discussions with Turkish citizens concerning topics related to the ethnic diversity of their country, such as the infamous "Kurdish problem", tend to return to the same idea: Turks and Kurds came from lands in Central Asia and settled in Anatolia along side ethnic Armenians, Greeks and Arabs. Due to manner in which it is depicted in their school books, ethnic Turks in Turkey have a rather romantic impression of their Central Asian Oğuz ancestry.

While ancestry plays an important role in anchoring Turkish interest in Central Asia, more contemporary interests related to economic and political influence have developed this relationship further. Until the fall of the Soviet Union, Turkey's connection to its Turkic cousins in Central Asia was considerably limited due to the Soviet Union's suzerainty in these areas. When the fall of the Soviet Union opened the Turkic countries of Central Asia to outside influences, Turkey considered itself in a prime position to augment its influence in Eurasia.



Turkey's contemporary attempts to make inroads in Central Asian affairs peaked in the middle of the 1990s. Hoping to renew older attempts to forge Pan-Turkism under the direction of the secular and western-oriented direction of Ankara, Turkey set out to promote new modes of cooperation in the Turkic world. Although Turkey was successful in realizing the adoption of Latin script in Azerbaijan, Turkmenistan and Uzbekistan, their efforts to create greater cultural, political and economic cooperation were stymied. Progress was made in Azerbaijan due to a shared antipathy for Armenia, but Turkey was unable to overcome the lingering obstacles related to the Soviet era in Turkmenistan and Uzbekistan. Since meaningful progress was not made during this first post-Soviet attempt, the cause of Pan-Turkism seems to have been abandoned for the time being.

American military activities and the new Great Game to control the flow of Central Asia's energy resources have dominated the region's geopolitical headlines during the past decade. Compared to its political initiatives in Europe and along its southern borders, Turkey has not been particularly active in the east. Making deals to transport Central Asian energy through Turkey's system of pipelines represent the recent highlights of Ankara's dealings in Central Asia.

Joshua Foust of Registan.net recently wrote a piece about the future of Central Asian geopolitics entitled, "Iran and China Rise; Shall Russia and the U.S. Fade Away?" While his insights are all quite sound, it is remarkable how Foust does not feel it necessary to mention the possibility of Turkey playing a bigger role in Central Asia's geopolitics. When asked about this omission by this observer, Foust answered:

I certainly see Turkey trying (they’ve made a few weak stabs at it), but I don’t see how they can overcome the heft of Iran, Russia, China, the U.S., or the EU. The Turkic connection exists, but it’s also fairly weak, as you rightly said. There remains more cultural affinity for, depending on the country, China, Russia, or Iran—no one seems to want to announce Turkey as their best friend. Which, I think, is too bad. I would prefer Turkey to Russia or Iran or China any day.

It would seem that Turkey can not afford to continue this course of treading lightly in Central Asia. Central Asia simply has too much economic significance for Turkey's future. Although the United States currently protects Turkey's interests as a conduit for Central Asian energy, Turkey should not depend on this arrangement alone. While Ankara does not possess the same financial resources as Beijing or Moscow to back its policy in Central Asia, it will become more capable as the Turkish economy receives more foreign investment.

If Turkey does not pursue its interests in Central Asia more aggressively, it ultimately risks losing Central Asian energy to ports on the Persian Gulf and to pipelines built by Russia and China. Such a fate would significantly diminish Turkey's standing in the region.

Pipeline Politics: Further Reading

For further information concerning the transportation of natural resources in Eurasia, please refer to the article "Putin’s battle over Caspian energy resources and transport routes" in Turkey Financial. Click here.

This piece outlines Russia's energy strategy and competitive interests related to future pipeline development in the region. Its consideration of Chinese interests in Central Asia is also noteworthy.

In July 2007, The Bosphorus Watch featured its first article about Turkey's recent maneuverings concerning pipeline politics in Eurasia.

Turkey's Pipeline Politics: Russia, Iran, Greece, Italy

Turkey's role in the global energy arena gained new layers of complexity during the month of July. Officials in Ankara and Tehran signed a Memorandum of Understanding to pump Iranian and Turkmen natural gas through the Turkish pipeline network for destinations in the lucrative Western European market. The two neighbors also agreed to a Turkish investment of $3.5 billion to develop three phases of Iran's South Pars gas field, starting in 2008. During the following week, Turkey, Greece and Italy agreed to terms in Rome for the transportation of Central Asian natural gas through an existing pipeline from Turkey to Greece, and then through a new underwater pipeline that will be constructed between Greece and Italy starting next year.

These July initiatives are important building blocks for Turkey's nascent efforts to acquire valuable political and economic leverage as a key purveyor of Central Asian and Middle Eastern energy resources. The successful opening of the U.S. backed Baku-Tblisi-Ceyhan (BTC) pipeline in May of 2006 constituted a proof of concept that Turkey is a viable alternative to Russia for transporting Central Asian oil and gas resources. While the U.S. was the initial supporter for Turkey's role as an energy transporter, Turkey has astutely developed its own relationship with Iran to increase its involvement beyond U.S. geopolitical interests. As early as 2001, Turkey began to purchase Iranian gas exported from Tabriz to Ankara to fulfill domestic demand. Just as was the case in 2001, U.S. officials have voiced their displeasure with Turkey developing energy ties with this international pariah.


U.S. criticism over Turkey's economic ties to Iran are quite irrelevant when compared to the political capital Ankara gains by fostering regional energy cooperation and development. Turkey's ascendancy as a regional energy transportation corridor exists in direct competition to Russian political and economic interests. Russia not only controls a significant number of existing gas pipelines linking Central Asia and Europe, but it also has the financial and political capability to stymie further Turkish energy initiatives. Russia's recent announcement in March to build an oil pipeline through Bulgaria and Greece in order to bring its own resources to the Mediterranean is a perfect example of this competitive challenge.

There is therefore considerable logic in Turkey's decision to grow its regional energy cooperation with Iran. Turkey needs Iran not only as a supplier of energy for its network of pipelines, but it also needs Iran's regional influence in order to parry Russian efforts to dominate Central Asian energy resources in the future.