Turkey Looks to End Dollar’s Dominance in International Payments
By THO Non-Resident Fellow, Liam Hardy
This month Turk Telekom, the former public telecom utility of Turkey, took steps to trade in local currencies with China through a mechanism provided by a new swap agreement between the two countries (Anadolu Ajans, 2020). This demonstrates the most recent instance in an ongoing effort by Turkey to sidestep the US dollar for its international payments. Long-standing grievances with Washington, of which there are many, have caused Turkish leaders to seek out ways to decrease the US dollar’s dominance in international trade, at least in its own transactions.
Turk Telekom is a major mobile carrier and internet service provider in Turkey, and it was a public utility company before its privatization and sale to a Saudi conglomerate, Oger Telekom. With headquarters in Ankara, it still has close government ties. On June 19, the company used Yuan for import payments. In a statement, the company said this action “removed the obstacles for using local currencies in bilateral trade instead of a third country’s currencies,” referring to hard currencies like the US dollar, which are most often used for international payments.
Turkish leaders, and President Erdogan in particular, are keen to move away from using the dollar because of what they perceive as “economic warfare” against their country. Rather than blaming and addressing real economic weaknesses, they have found a convenient scapegoat in the dollar while watching the Turkish Lira depreciate 157% over the past five years, averaging just over a 30% depreciation per year. Erdogan has long accused an international coterie of bankers of imposing higher-than-necessary interest rates, or what he refers to as the “interest rate lobby,” on the country.
The dollar as the World’s Reserve Currency
The dollar still serves as the reserve currency for much of the world because it has remained stable and liquid. Ever since the monetary system moved away from the gold standard with the Bretton Woods Agreement in 1944, demand for the currency has made it the backbone for international payments. Central Banks around the world have depended on it to stabilize their economies and facilitate trade, with the World Bank and IMF supporting developing economies.
Threats to the dollar’s position as the leading reserve currency have arisen gradually over the past few decades. The rise of the Euro as a large internal market and source of demand has created one alternative, and the fast growth of China’s economy with its ability to become a global manufacturing powerhouse has presented another. While the 2008–2009 global recession demonstrated the weaknesses of the dollar as a global reserve currency, neither the Euro or Yuan has surpassed it in terms of scale and use in international trade. This has frustrated Turkey’s leaders over the past several years, who have been eager to move away from dollar-denominated transactions and seek other alternatives, particularly as relations have improved with Washington’s foes, such as Russia, China and Iran.
Fractures in US-Turkey relations have developed on several fronts and have caused serious distrust, especially from the point of view of Turkey’s AKP leadership. A perceived lack of support from the U.S. during the July 15, 2016 coup attempt by the Gulenist movement, or FETO, now considered a terrorist organization in Turkey, became one area of contention. The very real support of the Kurdish PYD/YPG by the U.S. during its campaign against Islamic State in Iraq and Syria (ISIS, or Daesh) became another. Frustration over U.S. sanctions policy spilled into public view when Turkey was exposed as facilitating “gas for gold” trades via its public banks, including Halkbank. Additional crises over the detention of Pastor Andrew Brunson, visa cancellations, the purchase of Russian S-400 missiles, and others have shown that US-Turkey relations stand on considerably shaky ground.
Against this backdrop, the steady depreciation of the Turkish Lira has created a perception that the U.S. maintains an upper hand over the economy, an irksome consideration for Turks. After sharp depreciations, some have smashed their iPhones and burned dollar bills on YouTube as public displays of protest. Real weaknesses in the economy are glossed over with criticism of the U.S. and the fabricated “interest rate lobby.” Rhetoric aside, Turkey has made moving away from the dollar for its international trade policy an economic priority and is following through.
How has Turkey sought to sidestep the dollar in international trade?
Turkey’s finance minister Berat Albayrak has made it clear that prioritizing trade in local currencies by opening foreign currency liquidity swap agreements with other countries is a major goal of the administration. These swap agreements generally work in two transactions. First, a foreign central bank sells local currency for Turkish Liras, holding the proceeds in an account for the Central Bank of Turkey (TCMB). The foreign central bank and TCMB then enter into an agreement for the foreign central bank to buy back its currency on a future date at the same exchange rate. The foreign central bank can use the swap facility to make Lira-denominated loans in its jurisdiction and vice versa for the TCMB, reducing exchange rate risk and eliminating the need for transactions in hard currencies.
Earlier this year Turkey made a push to establish swap agreements with England, Japan, South Korea, Malaysia, and India and sought to expand on agreements with China and Qatar (Kucukgocmen, 2020) (Gumrukcu, 2020). Qatar tripled its swap line to $15 billion in local currencies last month, providing liquidity for Turkey.
Another front to bypass the dollar in international trade involves the creation of an alternative to the SWIFT system, which facilitates international payments. The effort has support from the E.U., Russia, and China, as well as Turkey, but has not yet come to fruition due to the difficulty of creating a network of great enough scale. The withdrawal of the U.S. from the Iran Nuclear deal (JCPOA) caused frustration among European partners that remained in the deal, and Russia and China have long sought to knock the dollar off its pedestal as the dominant currency for international trade. While most banks’ use of SWIFT allows the U.S. greater ability to impose sanctions for illicit trade with Iran, an alternative would make imposing these more difficult.
Turk Telekom’s recent Yuan transaction provides a microcosm of what may come if countries continue to see the dollar as a threat and impediment to international trade. Since World War II, the U.S. has fostered an international monetary system and trading regime that bolsters cooperation, leading to unprecedented global economic growth over the second half of the 20th century. Its recent turn toward isolationism and protectionism has put these efforts in jeopardy and its leadership in doubt. Turkey, with its long list of grievances against Washington, is one of several countries trying to chart a different course.
Anadolu Ajans. (2020, June 20). Turk Telekom uses yuan for trade with China. Retrieved from Hurriyet Daily News: https://www.hurriyetdailynews.com/turk-telekom-uses-yuan-for-trade-with-china-155845
Gumrukcu, T. (2020, May 27). Turkey holding swap talks with several countries: Finance Minister. Retrieved from Reuters: https://uk.reuters.com/article/us-turkey-economy-swaps/turkey-holding-swap-talks-with-several-countries-finance-minister-idUKKBN23331I
Kucukgocmen, A. (2020, June 19). Turkish central bank says used Chinese yuan funding for first time. Retrieved from Reuters: https://www.reuters.com/article/us-turkey-cenbank-china/turkish-central-bank-says-used-chinese-yuan-funding-for-first-time-idUSKBN23Q2AH