Turkey Is Taking Flight

The Wall Street Journal Europe (USA) Thursday, December 4, 2014, p. 32

Richard Barley

Energy united Russia and Turkey this week, as Moscow scrapped a planned naturalgas pipeline to the European Union in favor of a link to Turkey. But the price of energy, and oil in particular, is driving the two countries’ outlooks apart.

The Russian ruble has tracked oil closely this year and is now down about 38% against the U. S. dollar. The scale of the move is creating headaches for the Central Bank of Russia, which has essentially allowed the ruble to float, as it will push inflation higher from an already elevated level of 8.3% and potentially poses systemic risks. The central bank might be thinking of raising rates, but it has already put them up by four percentage points this year to 9.5%. The Russian Economy Ministry on Tuesday warned of a looming recession.

Just a year ago, however, it was the Turkish lira under fire in the foreign- exchange market. Investors were concerned about the country’s current- account deficit and the unorthodox approach of the Central Bank of Turkey to interest- rate policy, as well as political risk. But after a bout of turbulence in January, the lira has had a relatively smooth ride against the dollar and is down about 4% year to date.

Lower oil prices are a boon for the Turkish economy. It is a big energy importer to the tune of some $ 55 billion a year, or 6.5% of gross domestic product, according to Standard Bank. Falling oil should deliver benefits for both the current account and for inflation. That might even allow the central bank room to cut rates as Turkey continues to pursue strong growth. Investors are becoming more enthusiastic about Turkey’s prospects.

The price of energy, and oil in particular, is driving the two countries’ outlooks apart.

Exchange rates aren’t the only sign of divergence. The annual cost of insuring $ 10 million of Turkish government debt against default for five years has fallen more than a third this year to $ 155,000, while for Russia it has more than doubled to $ 355,000.

Russia’s problems seem unlikely to go away soon. But investors should be wary of assuming Turkey is well- positioned purely as a result of an oil windfall. The country still needs to carry out overhauls. If lower oil prices allow the government to dodge hard decisions after next year’s elections, that would be a worrying sign.

Turkey needs to use the benefit of lower oil prices to ensure that it doesn’t end up in the hot seat again.