Conflicts Forum’s Weekly Comment 31 January – 7 February 2014

Conflicts Forum

It is clear that many ‘Emerging Markets’ are suffering from a withdrawal of the short-term funds that were parked with them as a result of the unprecedented monetary expansion being pursued principally by the US, Japan and China. Now, (following the US Fed’s ‘taper’) ‘hot money’ is being brought home – and EM currencies everywhere are falling.  But the drop in the value of its currency has been particularly evident in Turkey (10% versus the US dollar over the last year) which has brought a ‘shock and awe’-type response by the Turkish Central Bank of a rise in interest rates from 7.75% to 12.5% — a rise sufficient possibly to ‘pop’ the Turkish ‘miracle’ and indeed the ‘Turkish (Muslim Brotherhood) model’.

The Turkish Central Bank had good reason to press the alarm button. Turkey has been highly dependent on this foreign ‘hot money’ to cover its burgeoning current account deficit, totaling $60.8 billion, or roughly 7% of gross domestic product (for the period January to November 2013).  To lose this short-term portfolio is not just debilitating; it is potential potentially fatal – both economically, as well as to Erdogan’s political fortunes. 

As one economic commentator has noted, “Turkey cannot fund its enormous current borrowing needs without offering interest rates so high that they will pop the construction-and-consumer bubble that masqueraded for a Turkish economic miracle during the past few years … It seems unlikely that the central bank’s belated rate increase will forestall further devaluation of the lira. With inflation at 7.4% and rising, the central bank’s 10% reference rate offers only a modest premium above the inflation rate.  About two-fifths of Turkey’s corporate debt is denominated in foreign currency, and the lira’s decline translates into higher debt service costs. Turkey is likely to get the worst of both worlds, namely higher local interest rates – and a weaker currency … In some respects, Erdogan’s bubble recalls the experiences of Argentina in 2000 and Mexico in 1994 where surging external debt produced short-lived bubbles of prosperity, followed by currency devaluations and deep slumps. Both Latin American governments bought popularity by providing cheap consumer credit as did Erdogan in the months leading up to the June 2011 national election”.

It is not just the construction-and-consumer bubble that may ‘pop’ though; the Turkish crisis also threatens an entire ‘narrative’ and identity. The political ramifications are profound for Sunni Islamists, such as the Muslim Brotherhood. The Muslim Brotherhood took the Erdogan model very seriously.  Erdogan, for them, seemed to offer a sure and certain path to power:  offer socio-economic progress; adopt ambiguous and general Islamic principles; present an unassertive Islamism; but above all else, espouse a (neo) liberal economic doctrine. The Brotherhood had concluded that, in adopting such neo-liberal economic policies, they might somehow inoculate themselves against the instinctive western distrust of Islamist governance – in other words, by being economically neo-liberal, the West would overlook their Islamism, provided that it was an unassertive, mild Islamism. 

But Erdogan now risks being discredited both by his domestically widely deprecated foreign policy, which has brought a Takfiri jihadist blowback seeping back into the arteries of Turkey itself – as well as (now) the added danger of his Islamist economic miracle turning out to have been no more than a chimaera. The Muslim Brotherhood, grievously wounded in Egypt, now risks losing its intellectual foundations – and its very identity too.  This is the more serious as – from Banna’s time – Sunni Islamism has deliberately severed itself from the historic discourses of Islam. When communities face existential crisis, it is usually only by returning to their deepest roots that they can renew themselves.

Turkey is now applying all of its tools to stabilize the lira, even with the knowledge that the move is unlikely to have a lasting impact. This is because Turkey’s financial troubles have been greatly exacerbated by a deep-rooted power struggle that is only going to intensify in the lead-up to local elections in March, Presidential elections in August and parliamentary elections in 2015.

From early in 2012, Conflicts Forum warned that what was being called the ‘Arab Awakening’ was being misread in the western mainstream as a spontaneous popular upsurge, demanding reform, and which largely reflected the influence of western values. We argued then that the ‘anti-system’, popular anger of the time lacked any guiding ‘big idea’, and was being overshadowed and dominated by several ‘power-projects’, which events had also unleashed.  One of these power-projects was that of the Brotherhood, and the other was that of the the Gulf states’ counter-revolution which was determined to crush any move that threatened the monarchs and ruling families of the Gulf. 

Again, as Goldman points out, “now that Erdogan’s [‘miracle’ is in jeopardy], few analysts have asked how Turkey managed to sustain a current account deficit that ranged between 8% and 10% of gross domestic product during the past three years, as bad as the Greek deficit during the years before its financial collapse in 2011.  “The likely answer is that Turkey drew on vast amounts of credit from Saudi and other Gulf state banks … Data from the BIS show that Turkey financed a large part of its enormous deficit through the interbank market, that is, through short-term loans to Turkish banks from other banks.  Western banks report no such exposure to Turkey; the Gulf banks do not report regional exposure, [but] anecdotal evidence suggests that Sunni solidarity had something to do with the Gulf States’ [original] willingness to take on Turkish exposure.  Relations between Turkey and the Gulf States are now in shambles. Whether the Gulf States simply ran out of patience or resources to support Erdogan’s credit binge; or whether their displeasure at Turkey’s misbehaviour persuaded them to withdraw support, is hard to discern.  Both factors probably were at work.  In either case, Erdogan’s rancour at Saudi Arabia has brought him closer to Teheran”.   The latter – to paraphrase Donald Rumsfeld – may count as an “unknown unknown … there are [potential outcomes] we don’t know we don’t know”.

In any event, whether deliberate, or resulting from a shift in Gulf bankers’ (and politicians’) perceptions, or both, it must count as another apparent victory for the counter-revolutionaries – however brought about.  Certainly, Gulf States have the means – and also have before them the example of PM Berlusconi, who was pushed from office exactly by just such a (manipulated) escalation in external debt financing costs. In Libya, Gulf money helped fund the rebels, and provide the training for the insurgents who overthrew Gadhafi; in Syria and Lebanon tens of billions have been spent in the attempt to exact a revenge on President Assad for his alliance with Iran; in Egypt, the Gulf States funded much of the protest movement against Morsi, and directly promoted the military coup there; and in Turkey too, the power of Gulf ‘money’ seems to have played its part in bringing down the very model – the icon, the AKP ‘success’ – by which the Brotherhood defined itself.  The counter-revolution can also claim the scalp of Hamas, which it successfully de-fanged – courtesy of the military junta that it helped install in Cairo. 

In 2012, the GCC states were estimated to have a total current account surplus of just over $400 billion (more than twice that of China in the same year). While the Gulf’s surpluses have reached these record levels, the rest of the Arab world has seen its balance sheets face parlous decline. And, besides this state wealth, the levels of private wealth held by GCC banks, private companies, and the wealthiest individuals and families were reported to have reached $3 trillion (and neither these figures for state or private wealth, includes the vast resources of the SWFs (sovereign wealth funds)).  This accumulation of ‘big’ money has both given rise to a hugely privileged (and arrogant), hugely rich, cosmopolitan Gulf élite of a united (neo-liberal and reactionary) zeitgeist that has used its wealth as a primary tool to contain and row back popular unrest – as well as to intervene in regional politics order to maintain this lucrative status quo.

This huge wealth, now deeply integrated into the global financial system, has largely immunised Gulf States’ actions from any serious criticism by the West for their military interventions or their repression of dissent – rather the reverse: Western think-tanks often lavish praise on the Emirs for their ‘survivability’, and for their ‘social spending’. At best, there have been mild cautions aired concerning the resort to jihadists acting as the military ‘arm’ of Gulf States; but the basic contradiction between the Gulf desire to stifle the  democracy and popular calls for reforms of the ‘Arab system’, which at first so prompted the West to identify with the protests, is never challenged. 

On the face of then, the Gulf States’ might seem to have a clear victory in their hands. And they can draw satisfaction from the way that Europeans – particularly France and Britain – have so closely identified with their interests.  But for all this apparent success, there is a vulnerability, a fear, a neurosis, evident in the Gulf discourse. There is even a touch of paranoia in the way Saudis have begun to believe their own propaganda: discerning a Shi’i hiding behind every tree.  Gulf States have indeed spent billions to buy off domestic disaffection; but accounts suggest (see articles circulated by CF recently – herehere, and here), that despite their immense wealth, ‘Gulfies’ “are not happy”, to quote theEconomist.  The kingdom’s leadership is adrift; “They have too narrow a bandwidth,” judges a foreign diplomat. “It’s barely enough to run their own country, let alone an ambitious regional agenda.”  Saudi Arabia’s neighbours and allies, too, are increasingly wary, says the Economist: “Their concern is not just about internal strains. In recent years Saudi foreign policy has grown both more assertive and more erratic”. Their Gulf allies fear that the al-Saud are losing their erstwhile control of the religious sphere, which has been fired-up in order to fulfil Saudi’s regional ambitions – particularly in Syria.

The Gulf States have contributed to the fall of Gadhafi, Morsi, the Muslim Brotherhood, Hamas, and now possibly Erdogan; but their collective policies cannot really be said to have furthered their aims: According to one spokesperson, “within the new environment, as seen from Riyadh, Saudi Arabia’s policy continues to be driven by the prerogatives of regional stability”. But far from bringing regional stability, Saudi policies have brought huge insecurity and turmoil, and have opened the Pandora’s box to a radicalisation of Sunni extremism that is presenting dangers more serious than those that followed wake of the 1980s Afghan conflict.  Just as Erdogan’s dalliance with jihadists in Syria has resulted in blow-back into Turkey, so Gulf dalliance with radicals is seeping back into their own societies, in terms of widening disaffection with the status quo back at home. It is not really feasible – as Saudis claim – to compartmentalise incited radicalism: to have young men think and act radically towards Syria, yet be docile and obedient at home.

“The government keeps people quiet with money, and in the rare cases where that doesn’t work, with threats,” The Economist quotes a diplomat in Riyadh as saying. Indeed both Bahrain and Saudi Arabia have had to introduce draconian legislation intended to curb any criticism of the Ruler, framed under the rubric of “fighting terrorism”. Gulf States, for all their domestic spending, have failed to bring about national institutions (everything revolves around ‘the family’ and its close advisers) and all are experiencing deep social problems, which money has only partially mitigated. 

Despite rising government spending, many Kuwaitis say their quality of life is getting worse. “People are getting furious,” says a young opposition activist. “How could you ask me to spend less while the government is throwing money away?” The biggest gripe is about the quality of services. Kuwaitis are entitled to a government-built home or a loan to buy one after they get married.  But the waiting list is now 106,747-Kuwaitis long and will likely take decades to clear. A dearth of housing has made the cost of buying a house privately prohibitive. Almost half of Kuwait’s population is under the age of 20 and will live at home well into adulthood. Many Kuwaitis cling to the benefits that do work. Petrol, for example, is cheaper than water. Electricity prices haven’t been raised since 1966 – so members of the government, some of whom recognise they must reduce spending, are loth to cut back. “Generous spending programs over the past few years have been cited as an important reason that the country was left relatively unscathed by the Arab spring,” says Raghu Mandagolathur of the Kuwait Financial Centre, an investment bank. “The government is wary of changes that could prove unpopular.”

But to stand back from it all, the most striking element is that the Gulf States simply have failed in all their major foreign policy objectives which they set for themselves six years ago. Saudi Arabia and its proxies have failed to roll back the Iranian ‘renaissance’ as Professor Hossein Mousavian has termed it; they have failed to break Hizbullah, or Syria, or Malaki in Iraq, or the ‘resistance front’ (Hamas excepted). Gulf States no longer have the influence they once had in Lebanon or Yemen; Libya is a mess, and Egypt already is in the first stages of messiness too. 

On the contrary, they find themselves facing the reality that Saudi (and GCC) regional primacy likely is over. A new equilibrium is emerging – with Iran as the other pole – but rather having contrived a modus vivendi with this new ‘dispensation’, they have placed themselves deeply at odds with it – and with three historic major nations, which have the economies, the armies and the resources (both materiel and in terms of population) for effective political action (Iran, Iraq and Turkey).

Their main achievement in this period has been to keep the West so closely aligned with the Sunni states and their interests, but the widening appreciation of just how much this grouping of monarchies relies on the jihadists as ‘our army’ has put even this ‘achievement’ under strain.


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