Turkey's deepening economic crisis prompts Erdogan to look West

Recep Tayyip Erdogan took a big step this week to warm relations with the West, in a quick political pivot that comes as Turkey's president looks for solutions to a long and worsening economic crisis.

Mr Erdogan stunned Nato allies on Monday when he suddenly dropped his long-held objection to Sweden's request to join the military alliance. Hours before arriving in Lithuania, he had hit out at Stockholm for failing to do enough to stop terrorism.

His sudden change of tack highlights just how much the newly re-elected president is looking to mend diplomatic relations with the West and reassure foreign investors who have ditched Turkey in recent years because of its economic woes.

"It's classic Erdogan. It comes out of nowhere, the sudden shift in policy and tone," said Batu Coskun, an Ankara-based political analyst at the Sadiq Institute think tank. "Any other political leader would suffer from such a U-turn. But he's prospering from it."

That's because he secured commitments from Sweden, the US, Nato and even the European Union in return for his about-face.

Turkey now looks on course to receive a long-awaited delivery of F-16 fighter jets from the United States, and Mr Erdogan says Brussels is "positive" about reviving Ankara's long-stalled bid to join the EU and moving forward on visa liberalisation.

But the swiftness of his change of heart is being seen as a clear sign he is taking a more constructive approach with US and European allies who, for years, have worried about democratic backsliding in Turkey.

US President Joe Biden highlighted his own bilateral meeting with Mr Erdogan, after years of keeping him at arm's length.

"I think post-elections Erdogan feels a bit more confident regarding relations both with Russia and the West," says political analyst Batu Coskun.

Confidence abroad, but urgency at home to revive Turkey's floundering economy. It was the biggest issue in his hard-fought election win in a historic second-round vote at the end of May.

"Business is not so good," says Burhan Morkoc, a baker who spends 17 hours a day shovelling bagel-like pastries called simits in and out of a wood-burning oven.

"Everything is so expensive… people who used to buy two, now buy one. The demand has gone down."

That's because inflation here is hovering stubbornly at just under 40%, down from its peak of 85.5% in October 2022.

The nation's lira currency has plumbed record lows against the US dollar this summer.

While central banks around the world have raised interest rates to cool rising prices, President Erdogan has resisted economic orthodoxy, arguing that higher rates would cause prices to rise. Instead he has kept pressure on the Turkish central bank to keep borrowing costs low.

Burhan Morkoc runs his small bakery with three brothers in Istanbul's Kadıkoy neighbourhood.

Rent in the area has surged 400% over the past year and a half, he complains.

During the same period, other essentials for the bakery have also skyrocketed - wood for the oven has gone up 900%, flour is up nearly 500%, yeast 255%, and sesame seeds are 150% more expensive.

To help ease such burdens, Turkish Finance Minister Mehmet Simsek, a Wall Street veteran whom President Erdogan appointed to the job last month, has vowed to restore "rational economic policy".

Together with newly-appointed central bank governor Hafize Gaye Erkan - who also has Wall Street experience - he oversaw the first rise in interest rates the country has seen in 27 months, from 8.5% to 15%.

But the baker isn't convinced the politicians understand the urgency of the situation for businesses like his.

"Come and stand here for 18 hours, 20 hours. I work with three hours of sleep. Let [Mehmet Simsek] do this. It is easy to sit on a seat and make decisions. It doesn't work that way," he said.

As he flew home from the Nato summit in Lithuania, President Erdogan's focus was on his promise to the Turkish public to restore economic prosperity.

"We will bring inflation down to single digits again," he told journalists on board the flight.

Repairing Turkey's embattled $900bn (£685bn) economy will take time and patience, economists say.

"There's really no quick, magical cure in sight. You have to prioritise the problems and perform triage," said Murat Gulkan, head of OMG Capital Advisors, a small investment firm based in Istanbul. "That involves cooling down the economy, which of course is politically undesirable."

Turkey also needs to win back the confidence of foreign investors.

Its current account deficit reached $37.7bn in the first five months of this year - a record level that means Turkey spent far more on imports than it made selling exports.

It's not just the West where President Erdogan hopes to bridge some of that gap. Next week, he'll visit Saudi Arabia, Qatar, and the United Arab Emirates.

"We are, once again, turning our face to the West. Behind us is Russia," declared economist Iris Cibre.

President Erdogan angered Russia last weekend when he allowed Ukraine's President Volodymyr Zelensky to return home with five military commanders who were supposed to remain in Turkey for the rest of the war.

The Kremlin has even warned Turkey not to view Europeans through rose-tinted lenses.

But President Erdogan also plans to host Vladimir Putin in August, and he hopes to persuade Russia to rescue a Black Sea deal that runs out next week and which allows Ukraine to export grain.

For Batu Coskun it is all part of a balancing act for a Turkish leader who wants to keep Russia onside: "That relationship won't be so easily replaced with supposedly growing relations with the West."