Turkey After the Referendum An Update Alp Basaran November 8, 2017
Part I Turkish Markets After The Referendum
Turkey had better-than-expected first and second quarter growth - GDP grew 5% in Q1 and 6.5% in Q2 2017 vs prior year - Analyst estimates for GDP in Q3 2017 have been revised up from 3.9% to 5.1% vs prior year - GDP growth for 2017 is expected to be 5% for the year Tax cuts and cheap credit as part of the government stimulus package fueled household spending - Contributed 2.2% more to GDP vs prior year in Q1, 1.9% vs prior year in Q2 Government expenditure also increased as part of the stimulus plan - Contributed 1.3% more to GDP vs prior year in Q1, but did not contribute as much vs prior year in Q2
4 Fitch revised Turkey s outlook from Negative to Stable in July 2017, noting concerns regarding the sustainability of growth after stimulus measures expire As the government incentives are about to expire: - Consumer confidence index is dropping again: 71.3 in July to 67.3 in October - Inflation is rising: 9.8% in July to 11.2% in September - Unemployment rate does not show enough improvement, expected to remain at 10.3% in 2017
Government-backed growth trend means Turkish markets are still vulnerable to shocks, and forward growth expectations for Q4 2017 and 2018 are winding down as stimulus measures are pulled back
6 Strengthening euro led to an increase in Turkey s exports to the European Union As of August 2017, 76.7% of all foreign direct investments into Turkey was from EU countries However, foreign direct investments in Turkey continue to be low - FDI dropped 14.9% as of August 2017 vs prior year International tourist arrivals have been slow to recover, not enough to stimulate the economy
Due to high inflation, the effect of high interest rates to attract foreign capital not only remained muted but drove the Turkish Lira down 7
Part II Kurdish Conflict
9 The Iraqi Kurdish Independence Referendum September 25, 2017 - Referendum was passed by 92.7% of voters
Reference Re Secession of Quebec Supreme Court of Canada, 1998 10 Internal self-determination - The right to self-determination of a people is normally fulfilled through internal self-determination The pursuit of political economic, social and cultural development within the framework of an existing state - The right to external self-determination, which may take the form of unilateral secession, arises in only the most extreme of cases External self-determination: - Former colonies, - Where a people is oppressed (e.g., foreign military occupation), or - Where a definable group is denied meaningful access to government to pursue their political, economic, social and cultural development.
11 1933 Montevideo Convention on the Rights and Duties of States Criteria for statehood: - Permanent population, - Defined territory, - Government, and - Capacity to enter into relations with the other states.
12 Simon Says Not a Declaration of Independence Non-binding - No constitution - No parliament - No referendum law
13 U.S. Turkey Relations: The Syrian Crisis President Erdoğan: We will never allow a terror corridor to be formed along our border. - U.S. directly armed the YPG in Syria to battle ISIS in Raqqa - Turkish air strikes against the YPG in Syria and Peshmerga in Iraq - Turkish state television revealed positions of 10 U.S. military posts in Syria - Turkey agreed to purchase Russian S-400 air defense system - Turkish army entered Idlib to create a de-escalation zone in coordination with Russia and Iran - YPG captures Rakka and raises massive poster of
Part III Visa Crisis
Visa Crisis: What Happened? U.S. suspended the issuance of non-immigrant visas in Turkey Turkey responded with mütekabiliyet (reciprocity) - Additional sentence in Turkish response: This measure will apply to sticker visas as well as e-visas and border visas. President Erdoğan: We do not see the U.S. ambassador as a representative of the U.S. in Turkey 15
16 Visa Crisis: Can t Touch This 1961 Vienna Convention on Diplomatic Relations - Diplomatic Agents - Members of Administrative and Technical Staff - Members of Service Staff 1963 Vienna Convention on Consular Relations - Consular Officers - Consular Employees - Consular Service Staff Exceptions - Any nationals or permanent residents of the host country Question: Why is this slide irrelevant to the Visa Crisis?
17 Visa Crisis: The Mustachioed Man in the DEA Jacket Metin Topuz arrested for espionage and attempting to overthrow the government Pro-government Sabah newspaper: - Turkish employee of the U.S. Consulate in Istanbul for 35 years - DEA liaison for the past 25 years - Alleges heavy telephone traffic and meetings between Metin Topuz and 121 FETÖ suspects - Alleges he facilitated escape of FETÖ suspects from Turkey U.S. Ambassador Bass: - Speaking to and traveling with Turkish police was part of his regular duties. This arrest has raised questions about whether the goal of some officials is to disrupt the longstanding cooperation between Turkey and the United States. Question: Why did the U.S. draw a line in the sand here?
18 U.S. Turkey Relations: Court Battles or Hostage Diplomacy? FETÖ Investigation in Turkey - Citizens of U.S. and E.U. countries detained in Turkey - President Erdoğan: You have a priest, we have a priest Reza Zarrab Investigation in the U.S. - Rudolph Giuliani and Michael Mukasey traveled to Turkey to broker a deal - U.S. indicted Mehmet Hakan Atilla, Süleyman Aslan and Zafer Çağlayan - President Erdoğan: You have detained my citizen for almost two years, and you want to try him without any evidence and use him as an informant.
Part IV Are Sanctions Next?
20 Sanctions Can Mean Many Things Possibility 1: Civil or Criminal Penalties Possibility 2: Sanctions Because of Secondary Sanctions Possibility 3: Sanctions Regime
21 Sanctions Regime Origin - Executive orders - Legislation Types - Country or Region-Based - List-Based Specially Designated Nationals And Blocked Persons List (SDN) Sectoral Sanctions Identifications List (SSI) Enforcement - U.S. Department of Justice - U.S. Department of the Treasury Office of Foreign Assets Control (OFAC) - U.S. Department of Commerce Bureau of Industry and Security (BIS) - U.S. Department of State Directorate of Defense Trade Controls (DDTC)
Alpaslan "Alp" Basaran 212.808.2739 basarana@pepperlaw.com