Turkey’s gold rush: Is Ankara expecting US sanctions?

Turkey scrambles for gold, overtaking Russia as top buyer

Turkey has overtaken Russia as the world’s largest purchaser of gold amid concerns that it could be barred from dollar settlements over cooling ties with the U.S, claims Nikkei Asian Review. To recap, gross FX reserves of Turkish Central Bank, CBRT dwindled down to $90 bn as of last week, with most economists claiming that subtracting swap agreements with Qatar, China and Turkish banks, it actually has no net FX reserves left.  Such claims have pushed up Turkey’s 5-year CDS premiums to 520 pips, about 200 pips above equivalent EM, as well as  keeping Euro-bonds spreads around 450 basis points. Once again, these spreads are far wide than peer EM, save a few in LatAm.  Moreover, CBRT prefers to keep an increasing portion of its total reserves in physical gold and in Turkey, thus rendering them useless as collateral for short-term dollar borrowing needs. Why?

Central banks around the world have been building up reserves of the precious metal in the last decade to diversify their portfolios. Russia had been a major contributor to the trend and is now the world’s fifth-largest gold-owning country, holding nearly 2,300 tons, according to the latest World Gold Council figures.

But Russia’s gold purchases for the January-May period plunged roughly 60% on the year to around 28 tons. The country’s central bank said in late March that it would halt domestic gold purchases, starting April 1, without explaining why.

“Looking from the outside, it’s highly likely that the plunge in crude oil prices impacted Russia’s stance on gold purchases,” said Takahiro Morita of financial research firm Morita & Associates. If Russia is generating less from oil exports, the country has less money for gold.

Turkey now world’s largest gold buyers

Instead, Turkey has emerged the world’s largest buyer of gold for reserves. It purchased about 148 tons in the January-May period — roughly triple the year-earlier figure.

Like Russia, Turkey has recently seen its foreign-currency income dwindle. Tourist spending, a key driver of its economy, has fallen in light of the coronavirus outbreak, and the lira has traded at the weakest levels on record lately.

“There is little economic rationale for Turkey to stretch itself thin to buy gold right now,” said Kota Hirayama of SMBC Nikko Securities. The country would have an easier time defending its currency against further depreciation if it simply held on to its foreign-currency reserves.

Yet Turkey is acquiring gold anyway, presumably because relations with the U.S. have soured in recent years. The Trump administration imposed sanctions on Turkey in 2018 over the detention of an American pastor by Turkish authorities.

Turkey procured a surface-to-air missile system from Russia 2019, putting fellow NATO members in an awkward spot.

Turkish President Recep Tayyip Erdogan’s government has demanded the extradition of a U.S.-based Muslim cleric accused of involvement in the attempted coup against Erdogan in 2016. Washington has so far refused, creating another bilateral flashpoint.

Should relations worsen further and the U.S. toughen sanctions, Turkey risks not being able to procure U.S. dollars for payment settlements. Just last week, U.S. President Donald Trump signed a bill that blocks banks in China from procuring dollars, in response to the national security law it imposed on Hong Kong.

There is one warning sign that Turkey could very well share the same fate as China. In March, back when the global pandemic rocked global financial markets, the U.S. Federal Reserve opened up liquidity swap lines to a host of central banks facing dollar shortages.

Turkey was conspicuous in its absence from the expanded roster of recipients.

“It’s possible that it fueled the Turks’ anxiety that it cannot rely on the U.S. in an emergency,” Hirayama said.

Ankara is also mindful of a Biden presidency, because Turkish President Erdogan and Trump have crafted a solid friendship over years. The friendship has delayed the culmination of the infamous Halkbank Iran sanctions violations trial, as well as stymieing several bills in the House and Senate aiming to sanction Turkey for a long list of alleged transgressions, such as war crimes in its occupied zones in Syria and the purchase of Russian-made S-400. While Biden has not articulated a Turkey policy, it is believed that he will not stand in the way of courts or the Senate to shield Turkey from negative actions.

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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and www.paraanaliz.com and has contributed to the financial daily Referans and the liberal daily Radikal.