Will the S-400 Missile System Be the ‘Death Knell’ for Turkey’s Economy?

News of Turkey’s plans to conduct comprehensive tests of the Russian-made S-400 air defense system has added to the country’s economic pains and is helping send the Turkish currency to a record low against the US dollar.

Washington Warns Turkey Against Activating the S-400s

According to Bloomberg, Turkey will test the advanced missile system next week at a site in Sinop province on the Black Sea coast. The news immediately drew fire from Washington, which warned Turkey against testing the Russian missiles.

Washington and its allies are worried that the S-400 system will enable Russia to gather intelligence about NATO’s air defense capabilities, specifically the US-made stealthy F-35 fighter jet.

The S-400s, known in Moscow as the “F-35 killer,” are considered the most modern long and medium-range surface-to-air missile system. The missiles can engage targets at a range of up to 400 kilometres, up to six times the speed of light, at heights of up to 30 kilometres. The S-400s can also launch 40N6 missiles (long-range, hypersonic, surface-to-air missiles) to engage low maneuverable aerodynamic targets.

Turkey’s Decision to Buy the S-400 Missile System from Russia

The government of Recep Tayyip Erdogan moved to buy the Russian missile system after the US hesitated to provide Turkey with the Patriot air defense system. As the first equipment of the Russian system arrived in Turkey last year, the Trump administration kicked Ankara out of its F-35 program, in which Turkey was a manufacturer and buyer.

The US also threatened to impose economic sanctions on Turkey if it deployed and activated the Russian-made S-400s, but has not yet imposed these measures.

“We continue to object strenuously to Turkey’s purchase of the S-400 air defense system, and are deeply concerned with reports that Turkey is continuing its efforts to bring the S-400 into operation,” a spokesman for the State department said. “We continue to stress at the highest levels that the S-400 transaction remains a major obstacle in the bilateral relationship and at NATO, as well as a risk for potential CAATSA sanctions.”

Ankara reportedly tested the S-400’s communications systems by scrambling the US-made F-16s last year, in a move seen by Washington and its allies as hostile to the NATO members.

The Turkish Lira Takes a Nosedive

As tension mounted over the planned test of the S-400 system, the Turkish lira plunged into a historic low on Thursday, registering 7.9 lira against US dollar. The drop was the latest in more than two years of continuing depreciation of the Turkish currency amid military tensions between Turkey and its neighbors.

In 2018, Turkey’s relations with Washington further nosedived over the detention of Pastor Andrew Brunson on terrorism charges, with the Trump administration imposing devastating economic sanctions on Ankara. These sanctions have caused the lira to plunge and forced Turkey’s economy into recession.

Turkey has been considered among the riskiest emerging markets in recent years. The Turkish economy is categorized as one of the fragile five, along with India, Brazil, South Africa and Indonesia, mainly due to the country’s large current-account deficits.

Ankara’s Growing Foreign Trade Deficit and Rising Unemployment

According to the Turkish Statistics Institute, Turkey’s foreign trade deficit leapt 168.2% year-on-year in August to $6.278 billion under the general trade system. Exports fell 5.7% and imports jumped 20.4% compared with August 2019. Turkey’s annual consumer price inflation rate registered 11.75% last month and the unemployment rate climbed to 13.4% in the three months to July.

Turkey has long survived by attracting strong capital inflows, prompting strong credit expansion which in turn encourages economic growth. But this virtuous cycle turns vicious in bad times, dragging the lira to the brink.

Erdogan’s political and military adventures have also contributed to the country’s economic woes. On the political scene, Turkey has had at least one election every year except 2016. There were local elections in 2014, two general elections in 2015, a referendum on the government system in 2017, general and parliamentary elections in 2018, and local elections in 2019. This has put continuous pressure on the authorities to spend money and keep stimulating the economy with interest rates low enough to encourage more borrowing.

Turkey’s Numerous Military Engagements

On the military side, Turkey is involved in several conflicts in its neighborhoods. The Turkish army is conducting military operations in neighboring Syria, Iraq as well as Libya, where Ankara is supporting the Tripoli-based Government of National Accord. Turkey is also engaged in a heated standoff with NATO members Greece and France over gas exploration rights in the eastern Mediterranean. Ankara also supports Azerbaijan in its military conflict with Armenia over the disputed region of Nagorno-Karabakh.

Last month, Turkey’s central bank defied pressure by Erdogan to keep the interest rate low, raising the rate from 8.25% to 10.25% in an attempt to strengthen the lira against the US currency.

But as the central bank is facing mounting pressures from Erdogan not to raise the interest rate in order to help curb inflation and amid the ongoing Turkish military disputes with neighbors, the Turkish currency is expected to bleed more in the coming weeks.