Turkey’s Reeling Economy Is an Added Challenge for Erdogan

As Turkish authorities grapple with the agony of a mounting death toll from the deadliest earthquake in a century, President Recep Tayyip Erdogan is confronting a parallel crisis: the disaster’s blow to an economy that was already in urgent need of repair.

The quake, which has killed over 40,000 people in Turkey and thousands more in neighboring Syria, will saddle Ankara with a staggering reconstruction bill and weakened economic growth, posing a fresh challenge to Mr. Erdogan as he seeks a third four-year term and maintain a grip on his political fortunes ahead of a crucial presidential election in May.

Before the devastation, which also left millions homeless, Turkey was already reeling from a collapsing currency and runaway inflation that had reached an annual rate of 85 percent in October.Those vulnerabilities have punched holes in the nation’s balance sheet and tipped Turkish families and businesses into a cost-of-living crisis.

Aggravating the problems are unorthodox financial policies pursued by Mr. Erdogan, a strongman leader who has tightened his control over the economy and strengthened ties with Russia and the Gulf States to help bolster Turkey’s finances.

Reconstruction is expected to cost $10 billion to $50 billion, although the Turkish Enterprise and Business Confederation has put the total closer to $85 billion. Over 8,000 buildings were flattened and supply chain infrastructure, including roads and the Iskenderun seaport, were damaged when the quake rocked southern Turkey. The area, a manufacturing and maritime transport hub that was also home to thousands of war-hit Syrian refugees, accounts for 9 percent of Turkey’s economic activity.

The situation remains dire, with emergency crews still extracting the dead from the ruins of apartment buildings and homeless survivors sheltering in cars and making bonfires from wreckage to stay warm. They are also short on food, fuel and medical supplies.

Analysts say Mr. Erdogan, who has been criticized for his handling of relief efforts, is doubling down on an autocratic playbook for managing the economic and political fallout.

“His main focus is on the elections,” said Soner Cagaptay, director of the Turkish Research Program at the Washington Institute for Near East Policy. “Erdogan has never won without delivering growth, and he will be seeking a rebalancing effect once reconstruction starts.”

Brushing off accusations of crony ties between his government and Turkey’s construction industry, Mr. Erdogan earlier this month ordered the detention of dozens of building contractors and announced a fast-track rebuilding program to start replacing thousands of destroyed homes within one year.

Turkey’s economy had been slowing from an 11 percent growth rebound in 2021 from the pandemic, and it had been expected to grow 3 percent this year and next, according to the European Bank for Reconstruction and Development.

The earthquake could now reduce growth by at least a third — but Mr. Erdogan’s huge rebuilding effort will limit the hit, the bank said.

“Economic activity could rebound quickly after the quake,” said Liam Peach, senior emerging markets economist at Capital Economics in London. “Any impact this quarter will be made up.”

Whether that is enough to resolve Turkey’s entrenched economic problems remains to be seen.

The Turkish lira lost nearly 30 percent of its value against the dollar in the past year as inflation soared,  severely damaging Turks’ purchasing power and hurting Mr. Erdogan’s popularity. In January, inflation cooled slightly, to an annual rate of just under 60 percent, as energy prices fell.

Turkey also faces a mountain of external loan payments, worth nearly $185 billion, that have grown harder to pay off because of a plunge in foreign currency reserves, raising fears of a crisis.International investors, worried about heavy debt burdens at Turkish companies, have increasingly pulled money from the country since 2018.

Adding fuel to the fire isMr. Erdogan’s insistence on lowering interest rates in defiance of a broad economic consensus that inflation should be contained by raising them.

Although that approach has helped stabilize the lira’s free fall — a dollar now buys nearly 19 lira, compared with 13.50 a year ago — it has come at a high price. Today, over two-thirds of households are struggling to pay for food and rent, and more than half of workers earn wages worth less than the equivalent of $300 a month because of the lira’s devaluation, according to an analysis by the Middle East Institute.

Mr. Erdogan has tried to offset the pain by increasing salaries for public-sector employees, raising the minimum wage twice last year and boosting fixed pension payments. But those measures have largely been gobbled up by inflation, said Atilla Yesilada, an investment analyst with Global Source Partners in Istanbul.

“The economy, the way Mr. Erdogan has been running it, wasn’t working for most people before the quake,” Mr. Yesilada. “Benefits aren’t trickling down.”

Turkey’s current state is in sharp contrast to Mr. Erdogan’s first 15 years in power, when he revived the economy after becoming prime minister in 2003. He pursued liberal economic policies and a debt-fueled construction spree that spawned high-rise office towers and a new Istanbul airport. More Turks became prosperous, the middle class expanded and Turkey overcame its status as an emerging market laggard.

But the gains unraveled as he tightened his grip on the country, asserting control of the judiciary and the media, firing three central bank governors and naming his son-in-law finance minister.To help shore up Turkey’s finances, he leaned more heavily on Qatar, Saudi Arabia and the United Arab Emirates, whose autocratic leaders are keen on keeping him in power.

“He has been a useful counterbalance to the West,” said Timothy Ash, sovereign strategist for emerging markets at BlueBay Asset Management in London. “That is what the Gulf countries want.”

More recently, Mr. Erdogan has played both sides of Russia’s war against Ukraine for economic advantage, said Marc Pierini, a senior fellow at Carnegie Europe and a former European Union ambassador to Turkey. As bad as the economy is, it would be worse without Turkey’s energy trade with Russia, and the money that it reels in.

Mr. Erdogan allowed Turkish drones to be sold to the Ukraine military, even as he provided President Vladimir V. Putin of Russia with a way to work around European and American sanctions by ushering the transport of electronics, construction materials and more through Turkey. Russian flights continue over Turkish airspace. And Russian oligarchs who were shunned on the French Riviera headed to the Turkish Riviera.

The gambit has paid off: Turkey’s trade with Moscow surged last year, with Turkey selling $1.3 billion in goods to Russia and importing $4.5 billion in products — including large quantities of Russian crude at discounted prices. As the only NATO country not to participate in international sanctions, Turkey has converted the Russian oil in its refineries to be sold to the European Union and the United States, according to an analysis by the Center for Research on Energy and Clean Air in Finland.

Another $20 billion has flowed to Turkey from a long-term deal in which Moscow provided financing for the construction of the Akkuyu Nuclear Power Plant, a 4,800 megawatt reactor being built on the Mediterranean near an eastern earthquake fault line by Rosatom, Russia’s state-owned nuclear power provider.

On top of that, an additional $24 billion in funds of unidentified origin helped to finance half of a record deficit that Turkey racked up last year from importing more goods and services than it exported. Some of that mystery money, reported in 2022 data published by the government last week under the obscure heading “Net Errors and Omissions,” is thought to be of Russian provenance, Mr. Ash noted.

Headed into the presidential elections, “Erdogan will use all imaginable means to stay in power,” Mr. Pierini said.

“Irrespective of the reconstruction effort and whatever flow of money might be generated,” he said, “the economic outlook is linked to the result of the upcoming election, because there is the possibility that for the first time in 20 years he could be defeated.”