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The next steps for Turkey after Erdogan’s stumble in Istanbul

Turkey’s President Recep Tayyip Erdogan will be grappling with the fallout of his party’s (AKP) defeat in the Istanbul mayoral election as he prepares to attend the G20 Summit in Japan later this week (28-29 June). The election was re-run after Erkem Imamoglu of the opposition CHP narrowly won the first poll in March. That result was scrapped on claims of irregularity by the Turkish authorities; Erdogan hasn’t disputed the outcome this time.

Instead, Erdogan has congratulated Imamoglu (who won the mayoral election with a much larger majority than in the original poll) and for now, this should help address concerns about political interference, and is a marked change from the statements made after the local election in March. Although there are still concerns that Erdogan may place incremental limits on the Mayor of Istanbul’s powers, initial statements from the president suggest otherwise. We’ll have to see how things develop over the next few days and weeks. Any such restrictions may undo the effect of Erdogan’s most recent actions and could be seen as negative for Turkish assets. Some reports have also suggested that last weekend’s events may lead to the formation of rival alliances within the AKP.

Nonetheless, the attention now shifts to Erdogan’s planned meeting with US President Donald Trump during the G20 summit. We acknowledge that other issues (Iran tensions, China trade) may be seen as more pressing by the US authorities. Still, assuming the US-Turkey meeting goes ahead, the worst case for Turkish assets may be that there is no agreement between the two countries, with the delivery of military equipment from Russia in July proceeding as planned and the US imposing sanctions on Turkey.

We think it is important to consider this scenario, as comments from various Turkish authorities – including the Minister of Foreign Affairs, Mevlut Cavusoglu – suggest that the S-400 air and missile defence equipment order from Russia cannot be cancelled. Sanctions limitation rather than sanctions avoidance may therefore be the more likely outcome. Such sanctions could be restricted to defence-related companies and may not directly target banks with bonds outstanding.

However, there is a risk that the market reaction may not be as limited, as we saw in the Brunson case. Having said all this, recent events (we are thinking of last year’s interest rate hike and the decision to release Pastor Brunson, as well as reactions to Istanbul’s election results), show that we should not rule out the possibility of a rapid turnaround in Turkey.

Erdogan has said he will now focus on “important domestic and international matters for Turkey”. Besides his meeting with Trump, Erdogan is also expected to meet with Russian President Vladimir Putin in Osaka. This will be closely followed by a trip to China on 2 July to meet Chinese President Xi Jingping, attendance at the Western Balkan Summit in Poland (4-5 July) and a visit to India to meet Prime Minister Narendra Modi.


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