Unless you’ve been asleep for the past 72 hours you’ve no doubt heard that Turkey shot down a Russian fighter jet. Of course, whether the Russian fighter jet did or did not cross into Turkish airspace is debatable.
What is not debatable, however, is the rising tension between the two countries, which seems to be leading to a trade war. Though less grave than a military conflict, it could ignite a rout in Emerging Markets and their currencies.
What Ignited the Mess
Even before the unfortunate incident it was clear that tensions between Moscow and Ankara were heating up. The reason for that is a very clear conflict of interest between Russia and Turkey over what’s happening in Syria. More specifically, it involves the area of Turkey’s border with Syria.
The Sunni-Shia Muslim conflict over dominance of the Middle East is centuries old. It has, in fact, existed for far longer than the Arab-Israeli conflict which, historically, is a rather new gripe. This conflict of the two Muslim currents has known ups and downs; this period is certainly one of the climaxes.
It is on the back of this macro picture of the Middle East that recent tensions between Russia and Turkey have been brewing.
At the heart of the conflict is Russian President Vladimir Putin. Putin is determined, alongside his Iranian counterparts, to protect their Syrian ally, Bashar al-Assad and his pro-Shiite regime. Putin’s reasons are two-fold; to protect his own interests and fear of Muslim terrorism in the Russian homeland.
On the other side, Turkey and Saudi Arabia, primarily Sunni Muslim territory, wants to protect their own power in the region. That makes them counter-Shia, or perhaps another way to say it, anti-Assad.
And that contradiction creates tensions.
For once Turkish authorities (at least according to reports) are turning a blind eye to Oil sold by ISIS (Sunni) in Turkey. Moreover, across the border, Turkey is supporting Turkmen rebels against Assad. Of course, Russia is fiercely bombarding those Turkmen rebels in order to protect Assad. Naturally, Moscow hasn’t turned a blind eye to the fact that Turkey is “soft” on the ISIS.
War of Sanctions
Both sides, at least at the moment, fear a direct military conflict. Repercussions, in either case, could be too severe to handle. Turkey is part of NATO, and a strike on Turkey could, as a consequence, ignite a world war. And it goes without saying that Turkey will be taking a very grave risk starting a war with the much bigger Russia. So, what’s left? Of course, just like in Ukraine, the two sides result in a war of sanctions.
Both countries manage a substantial economic trade relationship. Turkey imports roughly 60% of its gas from Russia and is generally very dependent on Russian energy. At stake also is the pending Russian gas pipeline across Turkey which would benefit both countries. On the other side, Russia imports much of its vegetables and other foods from Turkey. Russia has now banned those imports.
Moreover, Moscow has “advised” its citizens to refrain from visiting Turkey. That has put tremendous pressure on Turkey’s tourism industry as Russian tourists are a key source of income. That Russian citizens have now stopped vacationing in Turkey suggests a trade war between the two nations is brewing.
The biggest risk of this trade war is, of course, the tenuous energy partnership that could begin to unwind. That would leave Russia with much less income and send the Russian economy into another tailspin. Meanwhile, Turkey will be compelled to find alternative energy sources which will be difficult. Not to mention, expensive, and that would result in inflationary pressures.
How this could radiate to FX
Now to my point; how does this trade war spill into the FX market? Say if the trade war escalates to the extent that ties between the countries are severed. Then both economies will face severe repercussions. Russia, already under sanctions, is vulnerable. Turkey, with its high deficits and a shaky economy, is also already in a vulnerable state. Since both sides consider this showdown a matter of survival it might escalate to that point.
Both the Russian Ruble and the Turkish Lira could potentially spin out of control given the deteriorating economic outlook. That, in turn, could send ripples across other emerging currencies that are considered risky, from the Brazilian Real to the Thai Bat. Emerging market currencies deserve a second, perhaps even a third thought as this conflict could very well spill over to exotic pairs.
Look for my post next week.
INO.com Contributor - Forex
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.