Erdogan's Risky Gamble: Turkey's President Tries to Wean His Country's Addiction to the Dollar

A fascinating article appeared at Stratfor’s website today about Turkish President Recep Tayyip Erdogan’s latest gamble to give his country’s economy a much-needed boost:

So far, President Recep Tayyip Erdogan’s plea for Turkish citizens and businesses to convert their foreign currency holdings, mostly dollars, into lira appears to be working. The value of the Turkish currency has climbed against the dollar this week.

In Turkey, patriotism appears to be running deeper than profit motive. A number of major Turkish companies in the past few days have announced that they will heed President Recep Tayyip Erdogan’s behest announced Friday to convert their U.S. dollars to lira. The switch may help to shore up the Turkish currency, but it does not make a great deal of purely commercial sense.

For now, however, they’re willing to play ball with Erdogan, if for no other reason than out of pure patriotism. Another part of their willingness to ditch the dollar is, undoubtedly, that Erdogan is becoming more powerful and authoritarian by the day; it’s not smart for any company to anger him. So they give him what he wants, hoping it will not damage them too much in the long run.

Perhaps, however, there’s more behind it: what if they share Erdogan’s dream of weaning themselves and their country off their addiction to the almighty dollar?

The dollar’s identity as the global reserve currency means that the world largely keeps its wealth as dollars. A decision by a country such as Turkey to turn its back on the dollar would thus come with immediate costs. Moving trade into the ruble, the yuan and the real would, by extension, increase the proportion of Turkish foreign exchange reserves that would have to be held in those currencies. Unlike the dollar, the ruble has a recent history of sharp devaluations, while the yuan is also on a depreciating course. A shift to local currencies increases the risk of a rapid loss of national wealth should those currencies collapse.

There certainly are risks connected to such a move. As Stratfor points out, a shift in the value of local currencies could hurt Turkey hard. On the other hand, if other countries follow Turkey’s lead, those risks will be severely limited. In fact, it could work out rather well for all involved — well, make that all except for the U.S.:

The greater the number of countries that use their own currencies to conduct interactions, the less overwhelming the dollar’s power becomes, thus shrinking the pool from which those countries are excluded.

If that kind of movement were to pass a tipping point, a clamor might grow for an alternative currency to rise as the global reserve.

One such possible replacement would be the International Monetary Fund’s unit of account, the SDR (Special Drawing Rights). According to Stratfor, the SDR could be “rebooted to replace the dollar.” And that would change everything about the way global trade is carried out. It would weaken the dollar and make the U.S. less influential than it is right now, because other countries’ economies wouldn’t be tied to the dollar and, therefore, to the U.S. economy.

On the one hand, then, Erdogan and the Turkish companies involved are certainly gambling, but this specific gamble would pay off for them if other countries follow the Turks’ lead. The question for the Obama White House and, one month from now, the Trump White House is how they can prevent that from happening.

In other words, the U.S. and Turkey could very well be at odds in 2017. America is a global superpower, but make no mistake about Turkey and its influence: it’s a regional powerhouse and can do great damage to America’s interests in the Middle East.