A Syrian opposition fighter takes a selfie as fighters walk through Syria in front of Turkish troops near the Syrian border at Hassa, Hatay province, on January 22, 2018. Photo: AFP/Bulent Kilic

Turkey’s “Olive Branch” incursion against Kurdish positions in Northern Syria this week looked bad for Washington. It’s worse than it looks: Turkey cemented a new set of strategic and economic relationships after defying the United States, its erstwhile main ally. Ankara now has financial backing from China and Qatar and the strategic acquiescence of Russia and Iran. Most of all, it has the financial backing to pursue its regional ambitions.

Turkey reportedly killed several hundred Kurdish and allied Arab fighters this week, reducing an American-supported force that had done most of the fighting against ISIS in Syria. US-Turkish relations are at an all-time nadir, but Turkey’s financial markets remain unruffled. Washington has hard words for Turkey, but no sticks and stones.

Money is the decisive variable for Turkish President Recep Tayyip Erdogan, whose domestic position depends on his ability to hand out economic benefits in the traditional style of third-world dictators. During 2016, Erdogan spurred Turkish banks to increase their lending to business and consumers, and set in motion a credit boom that inevitably led to a bigger trade deficit.

Import booms driven by credit-fueled demand have been the undoing of Turkish markets in the past. This time is different. Turkish stocks have risen during the past month, right through the week of the “Olive Branch” offensive, and the cost of hedging the Turkish currency’s exchange rate has remained relatively low. The US-traded Turkish equity ETF, TUR, has climbed back to just below its high point of last August, while the cost of options on the Turkish lira (or implied volatility) remains at the low end of the range.

The correlation of forces, as the defunct Soviet Union liked to call it, has shifted since last August, when the US and Turkey entered a diplomatic standoff over two relatively minor issues. Turkey arrested a Turkish national employed by America’s embassy in Ankara, and the US suspended the issuance of entry visas to Turkish citizens in retaliation. Meanwhile federal prosecutors in New York tried and convicted a vice-chairman of Turkey’s Halkbank with close ties to the Erdogan government. Turkish stocks plunged and the cost of currency hedging jumped in response.

With the attack on the American-allied Kurdish YPG militia in the northern town of Afrin last week, Turkey undertook a major military action in open defiance of Washington, and the markets didn’t notice. On the contrary, Turkish stocks rallied right through the offensive. Money is Erdogan’s scarcest strategic resource, and the continued flow of capital into Turkish markets is an important gauge of Turkey’s power.

On Jan. 24, Donald Trump used the harshest language that a US president has ever directed against a NATO ally, expressing “concern about destructive and false rhetoric coming from Turkey, and about United States citizens and local employees detained under the prolonged State of Emergency in Turkey,” and warning Turkey “to deescalate, limit its military actions, and avoid civilian casualties and increases to displaced persons and refugees.” Turkish stocks were unchanged.

In the background to the Syrian incursion, Turkey flaunted its ties to its most important sources of money, namely Qatar and China. Qatar is the largest foreign investor in Turkey with more than $20 billion in commitments, with another $19 billion in the pipeline for 2018. Meanwhile Turkey has become the guarantor of the Qatari royal family’s security, with a new military base in the tiny country. Turkey backed Qatar during last year’s Gulf States boycott, airlifting food after Saudi Arabia closed its border.

Qatar meanwhile has started to buy large quantities of Chinese arms, especially missiles that could be directed against Saudi Arabia, and has brought People’s Liberation Army personnel to train its armed forces, a relationship put on display at a December military parade in the Qatari capital of Doha. That is noteworthy given the presence of America’s largest air force installation in the region, the Al Udeid Air Base, the principal US hub for US operations in Iraq and Afghanistan.

Turkey meanwhile has reached a strategic accommodation with Russia over the future division of Syria: Turkey will abandon Sunni rebels whom it supported in the past in return for Russia’s forbearance while Turkey reduces Kurdish forces friendly to the United States. According to a Jan. 22 TASS press summary, Kirill Semenov, the head of the Islamic Research Center of the Institute of Innovative Development, explained: “Turkey’s operation in Afrin could have only happened as a result of agreements with the Russian side, particularly taking into account the fact that the Turkish air force used the Syrian air space.

Moscow’s permission should have been obtained to avoid incidents. Moscow had no commitments to the Kurds. The fact that the Russian military deployed observers in the area of Afrin earlier was a move for a further bargain with Ankara. Back then Turkey’s operation was not beneficial for Moscow, while now it can fault the United States for funneling weapons to the Kurds, turning them into an instrument of the American influence.”

China’s One Belt, One Road project acts like a magnetic field on the region: All of the players are lining up towards China, where Turkey and Iran see their economic future. China’s direct investment in Turkey remains relatively small, but Turkey will be a key node in China’s One Belt, One Road initiative. China is building new railway links to Turkey via Iran, and the Bank of China is financing infrastructure projects inside Turkey. China’s second-largest telecom equipment provider ZTE plans to make Turkey its regional technology hub.

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