Many in Turkey and around the world got shocked as the Turkish Lira depreciated tremendously against the U.S. dollar in the last few days. It goes without saying that this sharp depreciation has nothing to do with economic fundamentals in any sense. This is irrationality and hysteria in action. And for many, it is utterly political as well, as the U.S. president Donald Trump has made it very clear in a tweet that reads “I have just authorized a doubling of Tariffs on Steel and Aluminum with respect to Turkey as their currency, the Turkish Lira, slides rapidly downward against our very strong Dollar! Aluminum will now be 20% and Steel 50%. Our relations with Turkey are not good at this time!” [Italics added by me] So, it looks like the hegemonic power of the world, the U.S., is going rogue “financially” against its so-called ally, Turkey.

Turkey has undergone five major financial attacks in the last two years. First in November 2016, second in January 2017, third in October-November 2017, fourth in May 2018. This is the last and by far the biggest one. The first three financial attacks, however intense were they, pale significantly in comparison to the last two. And the last one we are witnessing nowadays is an outlier still, in which the Turkish Lira lost its value by around 40 percent within the space of a couple of days.

Such a dramatic devaluation necessitates equivalently dramatic economic reasons if we are to adhere to an economic explanation. Yet there is none. As an economist, it is really difficult for me to try to understand and “analyze” what is going on economically. I wrote several articles both in English and in Turkish for the past two years regarding this very same subject and tried to show that these financial speculations, or “financial attacks” have their roots not in economics but in politics for the most part.

To reiterate briefly, although the Turkish economy has its own weaknesses such as a high current account deficit, as other countries have their own, the Turkish economy looks quite healthy. In addition, external debt to GDP ratio is 53 percent as of 2017. Public debt to GDP ratio, on the other hand, is only 28 percent. This ratio is one of the lowest in the whole world. Moreover, the Turkish financial system is quite healthy with a 16.3 percent of capital adequacy ratio. This holds for non-financial firms too. Short-term foreign exchange liabilities of non-financial firms in Turkey is lower than their short-term financial assets.

I should add that in the last quarter, the Turkish economy fared considerably well, too. The average economic growth rate for the last five quarters is 7.4 percent in Turkey. In addition, the unemployment rate, though relatively high, decreased by more than one percentage point to 9.6 percent in the last year.

Further, no macroeconomic indicator of Turkey went sour in the aforementioned period. Yet Turkey has now been suffering a very dramatic devaluation.

It is apparent for most people in Turkey that the U.S. has been exerting its financial influence on Turkey in order to promote its political aims regarding Turkey. And this is not the first time the U.S. is doing this. Take Chile in the 1970s. From 1970 to 1973, the U.S. strived hard to overthrow the democratically elected President Salvador Allende. As a small part of this endeavor, which is named Project FUBELT, the then President Nixon ordered the CIA to “make the [Chilean] economy scream” in 1970 in an effort to destabilize the country.

Note that these points are not speculations, but declassified facts as Collin Powell, the then U.S. Secretary of State, expressed in 2003 that “with respect to (…) Chile in the 1970s and what happened with Mr. Allende, it is not a part of American history that we’re proud of. I can’t justify or explain the actions and decisions that were made at that time.”

The Turkish economy looks strong enough to weather this irrational and politically motivated financial attack, though it will certainly make a dent in the short term. However, one should note that the U.S. government itself is undermining the very legitimacy of its “strong” currency by abusing its “power” to promote its political ends. This will certainly have important ramifications for the U.S. globally in the medium and long-term.

Turkey has been experiencing one of the most severe speculative attacks in its open-economy era since the beginning of May 2018. The Dollar/Turkish Lira parity, which was 4.1 on May 1, rose to 4.92 on May 23. Such a sudden surge on the currency does not reflect the reality of the Turkish economy. There is a strong economic growth performance, fueled not only by consumption expenditures, but also by investment expenditures and export. The Turkish economy created around 1,2 million new jobs in the last year. The unemployment rate is declining, albeit slowly. As in every country, Turkey also has some economic problems – the high current account deficit and double-digit inflation are two main problems of the Turkish economy. These problems are not new, plus they have not shown a significant deterioration for the last two months.

With the loss of the value of the Turkish Lira, rising food and energy prices were the main triggers of this high inflation rate. Since Turkey’s costs of imported intermediate goods and energy soar in periods when the country enters a phase of rapid growth, an increase in its current account deficit is unavoidably being experienced. Reducing the current account deficit and inflation require supply-side structural reforms. The government is aware of that. Turkish Deputy Prime Minister Mehmet Simsek tweeted: “None of Turkey’s macroeconomic problems are insurmountable. We’ve fixed problems in the past, we can do it again.” President Erdogan said that after the election serious measures will be taken without delay to reduce inflation and the current account deficit. In sum, inflation and current account deficit are not acute problems that could cause such a high jump in exchange rates in such a short time period.

So why is the Turkish Lira depreciating? Although there is no serious deterioration in economic indicators, it is obvious that there is an intense effort to worsen the economic perception as snap elections approach. The deterioration of economic perceptions is paving the way for speculative attacks that cause a surge in exchange rates. The international economic press is circulating news suggesting that the Turkish economy is overheating. In addition to this, international media outlets misinterpreted the statements regarding the future of economic management, which President Erdogan had made in interviews during his London visit.

Many economists and analysts claimed that Turkey is moving away from a free-market economy. This is a cock-and-bull story. But this type of distortional or fabricated news made financial investors anxious. The Turkish Lira depreciated with speculative movements. Following, some foreign investors began to sell their Turkish Lira assets even more to offset the loss. When Turkish companies, which have foreign currency-denominated debt, started to buy foreign currencies, the Turkish Lira depreciated even further.

After an emergency meeting, the Central Bank of the Republic of Turkey (CBRT) raised its late liquidity window rate to 16.5 percent from the previous 13.5. In the speech he made the day the Turkish Lira depreciated, President Erdogan clarified his previous statements as follows: “Turkey is a country that practices free market economy with all its rules and policies. As it is today, we will continue to adhere to global governance principles in monetary policy in the new (presidential) system.” With the statements of President Erdogan and Prime Minister Binali Yildirim, which calmed the financial markets, this rate hike prevented the Turkish Lira to depreciate further. It is not yet over. There will be further speculative attacks before the election. The current level of exchange rate is also disturbing for Turkish companies.

So, what should be done to bring the Turkish Lira to levels that reflect economic reality? First, the CBRT should be more pro-active and take more timely decisions. The last move of the central bank was late. The CBRT should have increased interest rates a week or ten days ago. Until its next meeting, which is on June 7, the CBRT should use forward guidance to steer market expectations and monitor market movements closely. If exchange rates do not loosen as expected, the CBRT should restart to fund the banking system through 1 week repo and tighten its monetary policy further.

Economic ministers should make informative and guiding explanations of the latest developments in the markets and the policy measures taken. The economic management team, including ministers, high-ranking bureaucrats and advisors, should not allow manipulative news circulation on the market by communicating with markets closely. Last but not least, all presidential candidates and political parties should explain their potential economic policies, which will be implemented with the start of the presidential system after the elections.

These are potential short-run policies and moves. In the medium and long-run, Turkey should reduce its reliance on foreign capital inflows by speeding up structural reforms (especially on imported medium- and high-tech intermediate goods, and energy resources) that can reduce its current account deficit, and by diversifying its financial instruments that can increase domestic savings and channel domestic savings to financial markets.

There are three major global rating agencies in the world, namely Fitch, Standard & Poor’s and Moody’s. Hence the concentration ratio in the rating industry is shockingly high (95 percent). While Moody’s and Standard & Poor’s have around 40 percent market share each, Fitch has approximately 15 percent.

Like in any oligopolistic industry, it is markedly susceptible to collusion and corruption. Moreover, when the abstract and highly subjective nature of assigning ratings taken into account, it becomes apparent that the extent to which the collusion and corruption level could reach is off-limits.

This “agency risk” emanates naturally from the fact that these corporations try to maximize profits in an unregulated and tremendously concentrated industry. So, if for one reason or another, attaining more profit means zooming in on weaknesses and overlooking strengths in a national economy or industry, and more importantly amplifying or fabricating political risks when there is little or none, then the rational action to take is obvious on the part of these “unchecked” credit rating agencies: go for it. This is the “financialization of ratings.”

Furthermore, one should not disregard the fact that these corporations have their headquarters in New York (all of them) and London (one of them, Fitch, has dual-headquarters). So, though almost always goes unmentioned, the U.S. – global hegemonic power – is home to these agencies and it is more than clear that there could be a “political collusion” between the U.S. and these credit rating agencies, if this is to the interest of both parties. This is “rationality” after all. Credit rating agencies could easily be used as expedients in an effort to further political goals and their ratings could be employed as some kind of an “economic sanction.” This is the “politicization of ratings.”

With the onset of neoliberalism, the global economy has increasingly become interconnected in terms of both trade and finance, hence financialization of the world. In the end, developing countries have found themselves in a delicate financial position, resulting in a myriad number of financial crises in the 1980s and 1990s. In this dramatically intertwined and financialized world, both the absolute size and concentration level of the financial industry have grown exceedingly, resulting in an unspeakably powerful financial industry, with all its “sidekicks,” such as credit rating agencies. In addition, one has to mention that investment funds based in the U.S. have a share of 47 percent in the world, of which just 25 investment banks have a total share of 76 percent in the U.S.

Therefore, when you are the center of global finance and home to the global credit rating agencies that literally dominate the industry almost entirely, it is unimaginable not to collude and form alliances with these financial corporations and to use them to an extent to achieve political goals. After all, this is an expedient among other tools.

This is probably why credit rating agencies do not make “economic” sense sometimes partly and sometimes terribly for both industrialized and developing countries around the world, not to mention gross failures of credit rating agencies in the cases of Enron and the global financial crisis of 2007-8.

Therefore, one will have a very hard time finding an “economic rationale” behind the downgrading of Turkey’s credit rating by Standard & Poor’s recently. It becomes more suspicious when one adds that planned schedule for reevaluating Turkey’s unsolicited credit rating was due on August 2018. And it becomes even more so when one points out that this downgrade came days after Turkey decided to go to snap elections to be held on June 24, 2018. Maybe, it is politics, stupid, after all.

What are the ratings of credit rating agencies themselves, then? It is well below “credibility” for most people around the world, apparently. With a negative outlook. And no (upward) revision is on the horizon.

The Turkish economy has proved its resilience again and again in the last decade. First, having endured a sizeable contraction of 4.8 percent in terms of GDP in the aftermath of the 2008 global financial crisis, the Turkish economy has expanded tremendously by 8.8 and 9.2 percent in 2010 and 2011 respectively. Second, starting from 2013, different terrorist organizations, namely FETO (Gulenist Terror Organization), PKK, Daesh and DHKP-C, one after another, so to speak, have waged war against Turkey. However, the Turkish economy managed to grow by 3.3 percent a year on average from 2012 to 2016. Although this growth performance is weaker than the long-term average growth rate (4.7 percent) for the last six decades in Turkey, it is still a considerable performance given the bleak performance of the world economy and particularly the struggling European economy, not to mention the extremely dire situation in Syria and Iraq. Third, Turkey suffered a hideous coup d’état attempt by FETO on July 15, 2016, only to be crumbled in the hands of the Turkish people. However, once again, the Turkish economy proved its robustness: There was hardly any panic in the financial markets, no negative impact on the real economy nor deterioration in consumer confidence. It was amazing that the economy of a country, which had just lived through a coup attempt, was running as if nothing particular happened. The Turkish economic growth rate is expected to be well over 7 percent in 2017, the very year right after the coup attempt.

After a brief period of “silence” after the coup attempt, all of the aforementioned terrorist organizations resumed their attacks against Turkey mostly in the form of bombings. In addition, “stranger things” began to occur in the financial markets as of November 2016. The Turkish lira started to lose value against the U.S. dollar in a very “strange” way. It is true that national currencies of almost all emerging countries lost value against the U.S. dollar in November 2016 after the election of Donald Trump as the next president of the U.S. and because of the growing expectations that Fed would raise policy interest rates in December, which duly materialized. However, the Turkish lira lost more value than that of most of the emerging countries in that month. This was strange as the Turkish economy and financial system have been in good shape, as has been proved in the last decade time and again, and which can easily be seen in the “important” ratios such as the public debt-to-GDP ratio, which is only 28 percent in Turkey. More, Turkey is among the most successful countries in the world in terms of public debt-to-GDP ratio.

However, this financial attack was only the beginning. After a relatively calm December with a 4 percent loss of value, the Turkish lira plunged in the first days of 2017 – it had declined by 10 percent against the U.S. dollar in November 2016. In the first days of 2017, as of 11 January, it lost its value by an additional 10 percent. However, in the following months, the Turkish lira appreciated against the U.S. dollar, gaining more than the ground lost in the second financial attack, only to be followed by yet another attack that occurred between September and November 2017, in which the Turkish lira depreciated by around 25 percent, losing almost all gains made in real terms after the second attack.

The financial attacks against the Turkish lira between November 2016 and November 2017 were truly extraordinary in the sense that such volatility did not happen in years, if not decades. Moreover, such volatility needs a very good explanation, only there was none. Hence why it was very understandable that both Turkish society and politicians thought that high volatility in Turkish lira had nothing to do with economic fundamentals.

Therefore, it is no surprise that there is a general sentiment within Turkish society that volatility in the Turkish lira has its roots not in economy, but in politics, and is an economic extension to the slow motion war against Turkey waged by “subcontractor” terrorist organizations.

While there were important developments transpiring in the cryptocurrency market throughout the last year, Bitcoin was the most prominent among these currencies. This is due to Bitcoin’s market volume, its high number of users and the fact that it has become an accepted currency by certain firms and companies. Since its conception after the Global Crisis, Bitcoin has become a phenomenon of the last couple of years, increasing its value tremendously in terms of trade volume and market capitalization.

Growing twenty-fold within 2017, the value of Bitcoin was around $20,000 by the end of the year. Beside its increase in value, piquing individual and corporate interest in Bitcoin, its acknowledgement as a legal entity for example in Japan, and cryptocurrencies being managed in prominent derivative markets (CME, CBOE, Nasdaq) were some of the most important developments. These developments aimed to increase interest in cryptocurrencies, while also decreasing the fluctuation in terms of their value. The instability and over-volatility of Bitcoin and other cryptocurrencies still raise the question as to whether they have a future in the markets.

The rise of Bitcoin

What makes Bitcoin different and special is that it can be exchanged between buyers and sellers digitally without the requirement of any third-party authority such as a state or central bank. Even though Bitcoin is defined as the brainchild of a utopian crypto-anarchism due to the fact that it is decentralized and encrypted, it has transcended their control. The introduction of Bitcoin into the market and its ever-increasing demand has led to the creation of diverse cryptocurrencies – currently over 1469 different types. Meanwhile, within the approximately 7814 markets, the trade of these cryptocurrencies increase day-by-day.

The most distinguishing feature of Bitcoin is that unlike fiat money (for example the Dollar or Euro), which is controlled by a central authority, Bitcoin is controlled through a software algorithm. Backed by an advanced technology called “blockchain,” Bitcoin’s creation and exchange relies on encryption (cryptography) principles. Being the most prominent cryptocurrency, Bitcoin was founded to be limited to 21 million units, 16,814,000 of which are currently in circulation. The limited supply of Bitcoin indicates that its increase in value is inevitable due to recent skyrocketing demands. Bitcoin’s supply was limited as it is intended to be used as the gold-standard.

When introduced in 2010, the value of Bitcoin was around $0.07, by early 2011 it had increased to around $1. Valued at $13 in 2012, Bitcoin continued to rise to $266 in 2013 and reached $960 by the end of 2016. By 2017 however, Bitcoin skyrocketed to the value of $20,000. This tremendous rise was widely covered by news outlets and Bitcoin was labelled the “digital/virtual” gold. The performance of Bitcoin triggered many individuals to re-direct their investments to cryptocurrencies. This interest in cryptocurrencies increased the demand of Bitcoin and led to the growth of its trade volume and increase in its value. Bitcoin’s swift rise in terms of value transcended its purpose and its fluctuations allowed it to become a speculative investment. Causing loss to investors and users, this extreme fluctuation sparked discussions regarding Bitcoin being some sort of a bubble.

Despite not being based on any legal currency, there are various platforms (such as online exchange markets) where users can exchange Bitcoins. Bitcoin and altcoin markets are different than conventional markets. Dubbed as cryptocurrency markets, these platforms are independent from countries and do not have opening-closing hours. There are also other platforms that allow the exchange of Bitcoin into real money.

While Bitcoin has become increasingly widespread over the internet and online shopping, there are also an increasing number of companies and ATMs that accept Bitcoin. Many establishments such as eBay, Amazon, Dell, Microsoft, Subway, Tesla and Bloomberg, accept Bitcoin as a method of payment. Currently, Bitcoin is accepted as a payment method for over 11,000 establishments worldwide. Besides being a popular digital currency, Bitcoin is also – physically – available at 2088 ATMs across 61 different countries. 35% of these ATMs also allow transactions with select altcoins. 60% of ATMs that allow Bitcoin transactions are located in the U.S.

In terms of numbers, the U.S. has 1197, Canada 316 and the U.K. has 104 ATMs. In respect to continents, 96% of the ATMs are located in North America and Europe, while only 2.4% of them are located in Asia. The increasing number of Bitcoin ATMs indicate that on average, every 2.5 days, a new Bitcoin ATM is placed.

Bitcoin in Turkey

The Japanese Yen and the U.S. Dollar are the two currencies that are used the most while buying and selling Bitcoin. Looking at the share of currencies, the Japanese Yen stands at 46%, the U.S. Dollar at 26%, the Korean Won at 18.76% and the Euro stands at 5.1%.

The demand to cryptocurrencies also attracts users in Turkey. The Turkish Lira stands at 0.3% in terms of usage and is among the top 10 currencies. There are four cryptocurrency markets in Turkey: Paribu, BTCTürk, Koinim and Koineks. The 24-hour volume of these four cryptocurrency markets were $42 million by the end of 2017. Even though the majority of transactions were realized through Koineks, Paribu is the most valuable Turkish cryptocurrency market (worth approximately $19 million) with the largest 24-hour volume. These markets allow for the exchange between some select cryptocurrencies and obtain a share of transactions for acting as an intermediary between buyers and sellers. Although the interest in cryptocurrencies in Turkey has increased visibly, with the number of users increasing from 9000 to 42,000 within the last 6 months, the latency experienced by users during their transactions constitutes a prominent issue.

Similar to how Bitcoin has become a payment method on many international platforms, it is also accepted by numerous establishments in Turkey. There is news about Bitcoin becoming a payment method in sectors such as the real estate, food and education. BTCTürk, one of the intermediary cryptocurrency markets in Turkey, has announced that it was working to establish the infrastructure which would protect establishments against the sudden shifts in exchange rates and allow users to use Bitcoin online and during shopping. In this respect, it’s definite that Turkey needs certain laws to regulate the usage of cryptocurrencies. While cryptocurrencies and their markets, along with the backing blockchain technology is spreading internationally, Turkey should implement regulations which will transcend individual initiatives.

Security and risks

Despite having significant volumes, Bitcoin and altcoins are prone to volatility and speculations. Meanwhile, as they may be used for money laundering and other illegal activities, these currencies are as dependent as they are independent. Thus, due to the risks and opportunities they pose, cryptocurrencies will be addressed by governments all around the world. Indeed, many countries have already implemented certain regulations, while others have been observing cryptocurrencies and legitimizing them.

While the interest in Bitcoin increased after a crisis in Southern Cyprus, it has become especially useful in European countries where banks are unable to provide services to the public, like in Greece, Italy, Spain and Portugal. Due to the fact that Bitcoin allows people to realize various transactions such as withdrawing and transferring money independent of the financial system in the country, they have become popular. As it could be remembered, the Finance Minister of Greece, one of the countries that suffered from the Euro Crisis, had threatened the troika with making Bitcoin the national currency of Greece.

The production and transfer of Bitcoin, which could be defined as a tax and cost-free currency, could be observed by anyone. While the amount of dollars, euros or liras in circulation are unknown, Bitcoin is monitored with ease. Everyone is able to see the amount of Bitcoin in circulation and observe the transfers between wallets, including the amount and the date. In this respect, Bitcoin is established on a transparent system.

Besides their advantages, Bitcoin and altcoins possess certain risks. While their simplicity and cost-free transfer are advantageous, the lack of management or control by an institution or central authority poses certain risks in terms of security. For instance, while paying university tuition fees, or paying employees their salaries with Bitcoin is an opportunity, the fact that JP Morgan’s CEO deemed Bitcoin as “fraud” and expressed that he would “fire anyone buying Bitcoin,” affects not only the demand but also the value of Bitcoin to an extent.

Meanwhile, there are newly emerging altcoins, whose numbers are over a thousand, that do not have a future and are a get-rich-quick scheme. Inspired by the de-centralized Bitcoin, the arms race between altcoins in terms of hash processing power, excessive power consumption and Bitcoin mining becoming monopolized as an industry are some of the negative aspects of cryptocurrencies. Moreover, prohibitions against cryptocurrency investments and mining are being implemented in Asian countries. As is known, China has prohibited the exchange of cryptocurrencies, while Korea may put an embargo on cryptocurrency markets.

Cryptocurrencies are an important component of the great digital transformation. As discussed in various circles, Bitcoin and similar currencies might be a bubble that could burst. However, the technological development suggests that these kinds of currencies will become an inevitable part of our daily economic activities. In this respect, Bitcoin and altcoins have influenced the globe within a short time.

Despite being new, not having any legal status and having the possibility of being used for illegal activities, the swiftness, low costs and risks render Bitcoin and other cryptocurrencies attractive. In fact, even though Bitcoin has yet to prove itself, cryptocurrencies have tremendous potential in the mid and long-term. Rather than dis-regarding, governments should take initiatives that will prevent people from being victimized and allow the employment of blockchain technology. The increasing number of users and investors, both individual and corporate, make it necessary for governments to implement regulations and enact laws in order to keep up with this transformation.

The Bretton Woods system, which had been in place for about thirty years after WWII, was a system of financial stability. Under this system, exchange rates were fixed, interest rates were capped and international capital flows were highly restricted. While industrialized countries were protected from foreign trade by various implicit foreign trade walls such as anti-dumping duties and voluntary export restraints, high tariff walls and trade quotas were also in place for industrializing countries such as Turkey.

With the collapse of this system and the rise of neoliberalism in the 1980s, the rules of the game changed almost altogether. Exchange rates were left to float freely, caps on interest rates were removed altogether and restrictions on international capital movements were discarded almost entirely. This period also witnessed the rise of the internet and much more powerful computers, which made possible financial transactions unimaginably faster and easier and expanded the outreach and influence of the financial system to cover almost all the globe.

This two dimensional “radical” transformation was accompanied by financial deregulation or absence of it altogether, which spearheaded by the U.S., though quite the opposite –more regulation- was badly needed. Hence, the financial industry unleashed. In the end, financial transformation along with financial deregulation made the world much more unsafe in financial terms.

On the other hand, developing countries were trying to industrialize through import-substitution policies in the old Bretton Woods system. With the rise of neoliberalism, policy-makers in industrialized countries and officials of global institutions such as the IMF and World Bank began to preach free-market gospel forcefully. The usual development prescription was the almost total elimination of trade barriers and liberalization of the financial system altogether. Industrializing countries were told that rather than an import-substitution, an export-oriented growth strategy was the right way in leading to prosperity. In the end, restrictions on trade have been discarded to a significant extent, albeit selectively and porously in favor of industrialized countries.

In the end, industrializing countries found themselves in a rather delicate position in the neoliberal era: they became much more connected to the global economy and trade, and they needed international capital in order to both industrialize and secure economic and financial stability. In order to achieve these goals, a firmly established financial infrastructure should have been in place. However, as is well known, this was not the case. In the end, the number of financial crises in the neoliberal era skyrocketed.

Equally important was that financial speculation and instability of different sorts and magnitudes have become the norm, not just for industrializing countries, but for industrialized countries as well. Hence, in the neoliberal era, the relationship between countries and financial markets transformed significantly to the advantage of the latter. Having been under constant threat of financial turmoil and instability, state power over financial markets diminished to a great extent and the power of financial markets over states increased steeply. Prominent IR (International Relations) scholar Susan Strange makes the same point in her famous book The Retreat of The State (1996) and says that “where states were once the masters of markets, now it is the markets which, on many crucial issues, are the masters over the governments of states.”

Faced with this “financial challenge” and endured financial crises and/or instabilities, governments around the world mostly gave in as Susan Strange expresses, because containing this financial problem required a concerted effort on part of governments around the world and no single country could overcome this challenge alone. In other words, in order to be able to decrease financial risk to acceptable levels in which “states are masters over markets,” the world needs to leave the neoliberal system behind and enter a new era, similar to the Bretton Woods system, at least in financial terms.

Nevertheless, there are certain measures that states can take in an effort to mitigate market supremacy to an extent within the boundaries of the neoliberal system. With the lesson learned from financial crises, states around the world understood that they needed much more foreign reserves –particularly U.S. dollar denominated- to withstand financial attacks and speculations. Today, it is not uncommon that countries boast about how much foreign reserves they have accumulated in their coffers. For example, Turkish foreign exchange reserves have risen from around 20 billion to over 100 billion U.S. dollars just within a decade and stands at over 110 billion U.S. dollars as of 2017.

However, apart from using foreign exchange reserves as a cushion against financial speculations and financial attacks, there are at least three additional tools to be exploited by governments, which do not necessitate coordination among them or a new paradigm such as Bretton Woods. First, sovereign wealth funds could be used as a counter-measure and an indirect preemptive tool against financial attacks and speculations with foreign exchange portfolios at their disposal. As a case in point, the Turkish Wealth Fund (TWF) was formed in August 2016 and its portfolio value reached 160 billion U.S. dollars within just 6 months after its inception. In this regard, the Turkish government could exploit the vast financial sources at TWF’s disposal directly or indirectly.

Second, while the free movement of international capital became a norm in the neoliberal period, in the wake of the burst of the global financial crisis in 2007-08, an increasing number of scholars around the world began to question the merits of this. Even the IMF, which has traditionally been the ardent supporter and enforcer of laissez faire capitalism, began to defend some sort of capital control for financial stability reasons. In this regard, capital controls of sorts could be implemented as a direct preemptive tool to decrease volatility in financial markets and narrow the space in which financial attacks and speculations could be realized.

Third, states can make bilateral agreements on using their own currencies when trading with each other in order to alleviate exchange rate risks and their vulnerability to the U.S. dollar or Euro. While this option has important merits in terms of financial stability, its implementation is not easy for obvious political reasons. However, this idea can be exploited to a significant extent and there are some initial steps towards this end, for instance between Turkey and Russia.

All in all, although financial stability in today’s extremely financialized world is not easy to achieve, there are important – yet not exhaustive – tools such as wealth funds, capital controls and use of local currencies in order to lessen the negative effects emanating from unfettered financial markets in an era of financial supremacy.

The globalisation of finance has produced a structural and ideological transformation in the financial system since the beginning of the 1970s. The globalization of the financial system in turn has accelerated the process of globalisation in other sectors, ever since states first made the decision to enter into the financial markets.  Such involvement has enabled some countries to assume prominent positions in the global financial system. This is clearly noticeable in the case of the Gulf Cooperation Council (GCC) countries – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE).

These countries have achieved economic prosperity due to the accumulation of wealth generated from oil and gas revenues. However, the Gulf has struggled with regional troubles for the last few weeks. Although a regional diplomatic crisis has plagued the Gulf in the past, the recent crisis has gone beyond a diplomatic one with the imposition of tangible sanctions on Qatar. Although Qatar is a small country in terms of its population and land area, it is an example of the “small States, big politics” trend experts describe in literature about the region. Under these circumstances, the impact of the Qatar crisis on current politics and economics will be not only regional but also global, as can be understood from the official reaction by world leaders.

According to the IMF, Qatar had the highest GDP per capita in the world –  $128,000 GDP per capita (at purchasing power parity) in 2016. Beside this, Qatar, which holds the world’s 9th largest Sovereign Wealth Fund (SWF) worth some $350 billion, has invested in real estate, banking, automotive and technology sectors. This already means Qatar has a significant role in the global financial system. Furthermore, Qatar is one of the biggest financial supporters of professional sports – its SWF owns the French Paris Saint Germain football team, and sponsors the Barcelona Football Team through Qatar Airways. Qatar will host the 2022 World Cup, and is buying beIN Sport, one of the biggest sport channels in the world.

The Qatar crisis has had a negative impact on many markets, and Qatar’s stock market experienced a severe fall. The Qatar stock exchange underwent its largest price drop in 18 months, nearly 8 percent, after the diplomatic rift on Monday. According to Wednesday market data, Although the Qatar Stock Exchange became the world’s worst performer with 8,965.01 point since January, 2016, Qatar Stock Exchange reached the high of 9,237.86 point since Monday, when was started the sanctions against Qatar. Some companies, moreover, were uptrend on Wednesday and Thursday by contrast with Monday, when all companies were down. In addition to Qatar Stock Exchange, the investments of Qatar through SWF, which are, mainly, invested in abroad such as European and Asian countries, could be affected by Gulf crisis in the long term.

http://thenewturkey.org/what-is-behind-the-crisis-in-the-gulf/

In addition to the stock market, the crisis will lead to trade problems in the region, and will have an impact on Qatar’s import-dependent food sector. Food imports from Saudi Arabia account for about 90% of Qatar’s daily food consumption. According to 2016 data, Qatar’s trade volume was around $11 billion with the other GCC countries. However, Qatar’s trade volume with Saudi Arabia, the United Arab Emirates, and Bahrain, which cut diplomatic ties with Qatar, were around 85% of the total GCC trade volume of Qatar in 2016. This data shows that Qatar will be faced with a daily food scarcity in the short term, and a lack of food products in long-run if they don’t find alternative daily food suppliers from friendly countries.

Another impact of the crisis on Qatar’s economy is the changing air route of Qatar Airways, which will decrease customers because of the longer distance and cost-plus pricing the airline will have to follow. Lastly, the businessman who are visiting Dubai and Abu Dhabi, which are financial and business hubs for the region, will not prefer to visit Doha after their UAE visits due to travel difficulties to Qatar from the UAE. After mentioning the potential worst scenario of the Gulf crisis on Qatar’s economy, it is important to emphasise that this crisis will not affect the country’s gas production and its transportation to customers abroad, mainly Asian countries. Qatar may also have a shortage of cash to pay for imports, and the fact that its border with Saudi Arabia is sealed will further exacerbate this problem, but one solution is to find a trade partner the country can import from, in exchange for providing energy and raw materials for construction.

President Recep Tayyip Erdoğan has clarified that Turkey stands with Qatar, and is focused on mediating between the sides to calm the tension. Turkey’s parliament also approved draft bill allowing troop deployment to a new military base in Qatar on Wednesday. After these political and military steps, it is important to evaluate the impact of the crisis on the economic relationship between Qatar and Turkey, which has historically not been as promising as the political relationship.

In 2016, Turkey’s export to Qatar were around $440 million, mainly comprised of ships, yachts, appliances, furniture, and electronic products. In the same year, Qatar’s exports to Turkey were worth around $271 million, and were chiefly aluminium products, plastics, fertilisers, fossil fuels, and mineral oils.  Turkey has an advantage over Qatar because its products cover a wider range, and Turkey has an overall trade surplus. From this perspective, Turkey has positioned itself as a major supplier to Qatar in the new conjuncture. Turkey, thus, will find an opportunity to increase its exports in the near future. Furthermore, new products, which have not been sold to Qatar before, might be brought into line for export. The increase in Turkey’s exports to Qatar, therefore, would relax Qatar’s shortage of food supplies in the long-run. This trade partnership will initially bring extra cost for Qatar, mainly due to higher transportation overhead, but in the long term, if a viable system of trade is found and new channels opened, Qatar will meet its needs.

Today, financial centers, are formed to bring financial institutions together to provide more effective services and have become the subject of economic policies to stimulate commercial activities of countries and attract international investors. After the global economic crisis started in 2008, while capital movements in the world were flowing towards developing countries from developed countries, this situation has accelerated the establishment of financial centers operating on different continents.

In the post-2002 period, with Turkey’s massive economic transformation, Istanbul’s perception in the eyes of international finance circles has changed significantly. On the axis of changing foreign policy priorities, relations developed with the Balkans, the Middle East, North Africa and the Caucasus have brought Istanbul into a position where capital movements are driven by economic interests. While this situation enhanced Istanbul’s potential to become a center in the financial markets, Turkey’s strong position in the fields of banking and insurance, which are a sub-category of financial services, has enabled the emergence of the Istanbul Financial Center (IFC) project. The IFC project, which is one of Turkey’s 2023 targets, aims to make Turkey the central country in the area of finance.

Turkey’s strong position in the fields of banking and insurance has enabled the emergence of the Istanbul Financial Center (IFC) project.

Turkey, which is at the forefront of countries in terms of international investment and capital movements, wants to establish an institutional framework within the scope of the IFC project. Turkey’s rising international position will become permanent with long-term investments and strong institutional structure with the IFC project, instead of short-term capital movements. These economic gains will also play a key role in solving structural problems in the Turkish economy, especially in saving rates, making the IFC project important for the future of the Turkish economy. Nevertheless, parallel to Turkey’s increasing political and economic ties with the Middle East and the Islamic world, the Islamic Finance field has significant opportunities for the future of the IFC project.

There are number of advantages Istanbul offers as a global financial center, and efforts are underway to strengthen the city’s attractiveness even further.

Istanbul is the intersection point that brings together the most important financial centers of the world in terms of its central geographical position between East and West. This makes it an important tourism and culture city, and a center of attraction with its 4 hour flight distance to 56 countries and its developed transportation infrastructure. Furthermore, important steps are being taken every day to improve the city’s transportation infrastructure. Advanced rail systems, the third bridge and airport, and the Marmaray and Eurasia tunnels are important examples showing the continuously improving transport capacity of Istanbul.

Istanbul not only offers a great set of cultural and touristic attractions, but the city’s low real estate prices, labor costs and other operational costs make it a highly competitive location for a global financial center.

Although Istanbul is one of the most important cities in Turkey with a qualified labor force, it is necessary to support a capacity increase in this regard in terms of the future and functioning of the IFC. Particularly in the field of finance, the local labor force is expected and encouraged to grow, and international experts are expected to come to Istanbul.

In addition, the taxation system, the provision of safe legal infrastructure, and transparency and accountability are among the most important criteria for becoming an international financial center. Investors will find a predictable, reasonable, and encouraging tax regime due to the work being done as part of the IFC.

To further provide investors with confidence in a fair business environment, an arbitration center working along international standards is being developed as part of the IFC which will ensure the effectiveness of legal processes.

Language teaching is the infrastructure of a qualified workforce. Turkey, which is successful in the economic sense, plans to meet the needs of foreign language staff, especially in English, through educational reforms to become an important center in the field of finance.

The Potential of Istanbul as a Financial Center

According to the “Global Financial Centres Index“, a publication by the Qatar Financial Centre accepted as a reference in the evaluation of financial centers, factors such as the quality of the workforce, the functioning of the financial sector, the legal infrastructure, and the investment climate play a decisive role in a city’s position in global financial markets. Istanbul, which finds itself in the Global Financial Centers Index from 2009 onwards with the IFC Project, is on its way to becoming one of the most important centers with its rising performance.

Istanbul is on its way to becoming one of the most important centers with its rising performance.

According to the March 2016 index, of the top future financial centers, only Istanbul and Luxembourg are located in Europe, and according to the index, centers in Asia are expected to increase their activities and raise their position. Moreover, Istanbul ranks first among the centers in Eastern Europe and Central Asia. The position of Istanbul as a financial center between Eastern Europe and Central Asia brings with it the potential to become a new center in addition to the cluster centers in America and the Far East.

The June 24, 2016 Brexit referendum result will also help push Istanbul towards being a new global financial center.  Britain hosts the world’s most important financial center, London, and the country’s departure from the European Union will have an impact not only on the global economy but also the Turkish economy. The increasing risk environment and the low pace of sterling have threatened global markets, and the global economy has begun seeking safe havens. It is expected that the process of negotiating the Brexit, which will start after the conclusion of the referendum, will further contribute to the uncertain environment. This uncertainty will accelerate the reorientation of the global economy towards important, more reliable, financial centers such as Paris, Frankfurt, and Dublin. While the UK and the European Union are expected to enter an uncertain environment with the Brexit process for a while, with Istanbul’s potential to become a global financial center, the opportunity to fill London’s position should be on the agenda for Turkey in the near future.

Istanbul’s Position and Potential in Islamic Finance

Islamic finance is one of the significant areas for potential growth for the IFC Project, and has a possible potential to make the city an international financial center. Islamic finance, whose position in financial markets has developed rapidly in recent years, is at the forefront of global financial markets, with a $ 1.2 trillion market share as of 2015. The availability of capital from Gulf countries and the rising market share of Islamic finance has encouraged economies to take some initiatives to attract investment in this area. European countries, especially Britain, have applied serious incentives to attract Gulf capital to their countries, and Islamic finance has strengthened its position, as indicated by an increasing diversity of instruments in the field of finance, and a rapid proliferation in institutions providing compliant services.

This has also been true for Turkey, where a large part of the population is Muslim. Turkey’s strengthening economy and changing foreign policy after 2002 has resulted in closer geopolitical ties with the Middle East, and thanks to that Turkey has begun to strengthen its economic and commercial relations in the region as well, especially with Saudi Arabia and Qatar.

Istanbul needs to take some quick steps to meet the kind of international criteria in finance.

Looking at the IFC Project in this context, the endeavor will bring huge economic gains to Turkey in the sense that Middle East-oriented capital will turn into long-term capital flow instead of short-term money inflow. Turkey will turn into an investment center for the Caucasus, Middle East, North Africa and Balkans from an economic point of view, given the stability that Turkey enjoys in a region where many every day geopolitical risks are present. In this context, Istanbul’s quest to become a financial center will enable Turkey to develop its position in the international economy in addition to producing high domestic economic growth rates. With the IFC Turkey will be able to increase influence in these regions, and naturally, Istanbul will become a strong financial center in the region.

But Istanbul needs to take some quick steps to meet the kind of international criteria in finance mentioned above. These steps have been noted in the “Istanbul International Financial Center Priority Conversion Program,” and include: Establishing a new administrative structure, increasing the diversity of financial products and services, strengthening the legal infrastructure, improving the physical infrastructure in the cluster regions, strengthening the technological infrastructure, improving the qualified human resources, and developing participation banking and an Islamic financial system.

Eliminating these shortcomings will accelerate Istanbul’s integration into the global financial system and offer a new attractive option for international investors. With work already underway to meet these needs, and it is likely that Istanbul will soon become a regional and global center in the global financial sector.