Turkey Forgets Lesson It Taught Russia on Ending Market Rout

(Bloomberg) -- Turkish President Recep Tayyip Erdogan shouldn’t forget the time he taught Russian leader Vladimir Putin how to manage a currency crisis.

When the ruble was plunging in 2014 and the Bank of Russia was moving slowly to steady it, economists pointed to the Turkish central bank’s emergency increase in interest rates during a late-night meeting at the start of that year as the right way to handle a currency run.

Now, it’s Russia’s performance -- the central bank jacked up its key rate to 17 percent in the middle of the night in Moscow to stabilize the ruble in December 2014 -- that could set the example as the lira hits new lows while Erdogan denounces the evils of high rates.

“As Russia opted for more and more orthodoxy since 2014, Turkey, the emerging-markets darling of the 2000s has gone the other way,” Elina Ribakova, head of EMEA research at Deutsche Bank AG in London, said by email. “Hence the market keeps testing the Turkish central bank.”

Deepening political tensions between Erdogan and the U.S. and Europe have combined with Turkey’s ballooning current-account deficit to sap investor confidence. By contrast, Russia built on its success in fighting the crisis three years ago by keeping borrowing costs elevated and allowing the ruble to trade freely even as its relations with the U.S. deteriorated. It’s a policy stance that earned the Russian central bank the name of developing Europe’s “most orthodox” from Morgan Stanley.

“In Russia, it was a question of gritting your teeth and putting up with the pain, whereas it’s very, very hard to see a scenario for Turkey where this doesn’t end as being much more painful than it was for Russia,” said Paul McNamara, who oversees an $8.2 billion emerging-market local debt fund as a money manager at GAM UK Ltd. in London. “Because Turkey is much more leveraged, higher interest rates bite the Turkish economy much faster than that of Russia.”

The lira recovered slightly on Tuesday after the central bank tightened liquidity by cutting off access to the overnight repo window, but economists said a full-scale rate hike is likely to be needed during the policy committee’s next meeting on Dec. 14. Yields on 10-year debt surged to a record high after Erdogan blasted the central bank on Friday, saying raising rates to contain inflation was the “wrong path.”

“We think Turkey may well end up doing a rate hike of 300 to 400 basis points as they have done so often in the past,” said Charles Robertson, global chief economist at Renaissance Capital in London. “This is not a terms-of-trade shock like Russia experienced in 2014 when the oil price plunged.”

At that time, the combination of plunging prices for oil, Russia’s main export, and U.S. and European Union sanctions that limited access to foreign capital, knocked the ruble into a tailspin that took it down as much as 20 percent against the dollar. The steep rate hike, followed by tightening on the fiscal side and the stabilization of crude, has helped make the ruble one of the best performers in emerging markets since then.

Russia’s “was a crisis in response to external shocks and they adapted well,” said Kiran Kowshik, a strategist at UniCredit SpA in London.

Turkey faces a situation that could be equally dire, with the lira the worst-performing currency this year. What’s more, confusion about policy, combined with limited foreign-exchange reserves, have dented confidence. Turkey “has pursued unclear, confusing and non-credible inflation-targeting policy while fiscal policy has been easing -- further worsening external balances,” Kowshik said.

Viktor Szabo, a portfolio manager at Aberdeen Asset Management, who manages both Turkish and Russian debt, recalls that Turkey’s central bank was also slow to tighten in late 2013 and 2014. 

“They burned a lot of reserves in a short time before an emergency hike to 10 percent,” he said. This time around, “a hike looks increasingly unavoidable.”

Given that unlike Russia, Turkey runs a current-account deficit and needs capital inflows to balance it, interest rates are the “key tool” to use because foreign-currency reserves are limited, according to Akin Tuzun, head of Turkey and EMEA financials research at VTB Capital.

“So in theory, the Turkish central bank should push up the rates much more than Russia in such case,” he said. “There may be other measures from the government side as well to attract foreign capital.”

--With assistance from Constantine Courcoulas

To contact the reporters on this story: Anna Andrianova in Moscow at aandrianova@bloomberg.net, Ksenia Galouchko in Moscow at kgalouchko1@bloomberg.net, Olga Tanas in Moscow at otanas@bloomberg.net.

To contact the editors responsible for this story: Gregory L. White at gwhite64@bloomberg.net, Paul Abelsky

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