Russia’s strategy is quite clever; it continues to accumulate reserves by using dollar and euro for its exports while using ruble for one third of imports. By receiving 7-8 percent of its net foreign trade in ruble, it creates demand for its currency at the same time.More so, Russia is trying to recruit Turkey as a customer for its Russian made SWIFT alternative SPFS and again homemade credit card system MIR.
October 31 2019
Trading with domestic currencies and reducing dollar dominance is an issue that Turkey and Russia have long been declaring intentions about in diplomatic space.
President Erdoğan, back in late 2016, had suggested to Russia and Iran to “trade using national money” and proposed that “the importer pays in the currency of the exporter”. According to this proposal; Turkey would pay for Russian imports in rubles.
I had written back then that this proposal would be difficult to put into practice. Because only declaration of intensions existed, nothing else.
Similar news came up in early October; it was said that Russian Finance Ministry had signed a bilateral agreement with Turkey and with that “the usage of ruble and lira in mutual trade would gradually increase.”
Also, it was emphasized that a financial market infrastructure in accordance with the agreement would be created, and currencies of both countries would become more attractive for commercial institutions. Two points were underlined once again; Turkish banks connecting to the SWIFT alternative SPFS system, which Russia put in place last year after the Ukraine crisis, and extending the usage of Russian MIR cards in Turkey.
These two are not functional systems. We know nothing about SPFS. MIR, on the other hand, was on the agenda in 2017 but has not progressed at all since.
Let’s get to the point which resides in the data Russian Central Bank published on Oct. 29. A breakdown of foreign currencies Russia used in its trade with Turkey was published. According to the published data; Russia mostly deals in dollars in export transactions with Turkey from which it earns income. In 2018, for every 100 units of products Russia sold to Turkey, 11.3 percent of payments were in ruble, 84 percent were in dollar, 4.4 percent were in euro and 0.3 percent were in other currencies.
When Russia was paying for imports from Turkey, 31.8 percent were in ruble, 44.3 percent were in dollar, 22.2 percent were in euro and 1.7 percent of payments were in other currencies.
Three points require attention;
First, Turkish Lira is not mentioned in any of these payments. Its share in “other currencies” must be very low, if it exists at all.
Second, the share of payment-revenue currencies in 2013 total was close to that of today. Meaning that the intention to “trade with national currencies” did not materialize.
Third, by looking at the ratios, we see that Russia imports in rubles while exporting in dollars, when trading with Turkey.
Let’s look at these currency composition with trade volume weighted basis.
According to Turkish Statistical Institute (TÜİK) data; Russia imported 3.4 billion dollars worth of goods from Turkey in 2018 and sold 21.9 billion dollars worth of goods to Turkey. Which means that its trade surplus against Turkey was roughly 18.5 billion dollars. Its trade surplus in 2017 was 16.7 billion dollars.
So what happens when we look at these trade numbers using the foreign currency shares announced by Russian Central Bank? Russia paid 1 billion dollars worth of rubles for one section of its imports while receiving 2.5 billion dollars worth of rubles for one section of its exports. Therefore, Russia has received a net worth of 1.5 billion dollars of rubles from Turkey. For the rest of its net exports volume, Russia has received 17 billion dollars; 16.8 billion in dollars and rest in euros.
So it seems that in 2018 Russia has received 8 percent of its foreign trade surplus against Turkey in rubles. This accounts for 7 percent of its total exports.
Let’s remember again; this outlook is not new, Russian Central Bank data from 2013 show that it was the same in 2013.
Time for the question on everyone’s mind; where does Turkish Lira stand in this picture?
Turkish Lira has no name. It’s not in any of the statistics announced by Russian Central Bank – if it’s not lost among “other currencies”.
Russia’s strategy is quite clever; it continues to accumulate reserves by using dollar and euro for its exports while using ruble for one third of imports. By receiving 7-8 percent of its net foreign trade in ruble, it creates demand for its currency at the same time.
More so, Russia is trying to recruit Turkey as a customer for its Russian made SWIFT alternative SPFS and again homemade credit card system MIR.
Why is Putin pushing for MIR? Very simple; so that the almost 6.5 million Russian tourists that go to Turkey every year can make their payments in ruble when they return to Russia. This model would have worked if Russia accepted the ruble payments for gas Turkey buys. But this was never even mentioned.
It should also be noted that; according to the retrospective data published by Russian Central Bank, 2014 was the year when Russia accepted relatively more rubles for products it sells to Turkey (mostly natural gas). In March 2014 Russia received a ruble payment of 2.2 billion dollars worth.
It looks like Russia is still the profitable side in this by increasing its foreign trade surplus while also strengthening its reserves by isolating Turkish Lira and receiving payments of a bit of ruble along with mostly reserve currencies (dollar and euro).
Who is Uğur Gürses?
He graduated from Ankara University, Department of Economics at
Faculty of Political Sciences in 1985. He started his professional career at
Central Bank of the Republic of Turkey at Foreign Exchange
Transactions Division in 1986. He worked at various divisions on reserve
management, foreign exchange transactions and open market operations.
Uğur Gürses moved to private sector in 1994. He worked for banks as
executive manager. His main responsibility was on treasury activities.
After leaving banking sector in September 2000, Gürses started to make
TV programs on business and financial markets at CNN TÜRK.
Gürses had been regularly writing articles on business and economics for
Radikal Daily between 2001-2014 and Hürriyet Daily between May
After July 2018, Gürses started to share his views at his personel blog,
“Ekonomi Alla Turca” – www.ugurses.net
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Can the forex loss in Turkey be recovered without sending the bill to the public? If first signs of the establishment of political normalization, democratization and rule of law emerge in a powerful way in Turkey, then the “shrunken” foreign currencies will come back to the system.
If the ruling Justice and Development Party (AKP) sees an increase in erosion of their votes and the increased possibility of losing power in a possible election then it would "use all the ammunition till it is finished" for their own political continuity. But this would indeed mean leaving a “gigantic wreckage” for the citizens of the country.
The trend in that started just before the presidential elections in 2018 and accelerated after the elections changed the chemistry of the economy in Turkey. Private sector in Turkey was restricted in every aspect. From pricing to sourcing, to investment licenses, all regulatory higher bodies worked to make the entrepreneurs feel that ‘the party state’ was watching them at every step.
A currency, that is losing value and is not the good money to its own citizens, cannot be the good money of another country. Most probably those who declared they have switched to the Turkish Lira in Syria will be doing their payments in Turkish Liras and - even if it may be only a few pennies - they will keep dollars to store the value of their accumulation.
No matter how long or short the COVID-19 crisis lasts, a broad range of working masses, but especially the unskilled labor force will be the ones exceedingly affected. They will lose income and their jobs. As a result, inequality will spread on a mass scale and poverty will soar.
Ankara thinks it can obtain stability through the sale of foreign currency from the “back door,” which erodes reserves. Ankara has also resorted to bans and restrictions on foreign currency, but these are actually very old tools from the 70s.
The economy management in Ankara may have this thought of stopping the devaluation of the Turkish Lira by wounding the lira’s convertibility but actually it also damages the debt capacity of the Treasury.
What would we have included if we wanted to write a guideline for those who have the wish to intervene in foreign exchange rates but who do not have the adequate experience, but at the same time want to do it right? Taking into consideration today’s circumstances in Turkey, here is a list.
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