The era of new alliances

Cold War that marked the WHILE THE

20th century is over, the first steps of the 21st-century’s Cold War have been taken. The U.S. withdrawal from Afghanistan following a 20-year occupation is a milestone. This was followed by the U.S. withdrawal from Iraq, at least in military terms.

On the one hand, Washington is vacating the Middle East; on the other, it has thoroughly started to reveal what the next target is: the Far East.

There were developments two weeks ago that will be candidates for the history books showing that September 2021 was the month when the 21st-century’s Cold War became concrete.

CRISIS IN THE WESTERN ALLIANCE: AUKUS

The critical development was the announcement of the trilateral security pact, AUKUS, by the U.S., Australia, and the UK on September 15. Contrary to expectations, the agreement, which is a product of the U.S. containment policy for China in the Pacific, sparked a crisis in the Western Alliance.

Paris was angered after Australia announced it cancelled an order for diesel-powered submarines from France and instead signed submarine deal for nuclear-powered submarines with the UK and the U.S. within the framework of AUKUS.

In retaliation, France recalled its envoys from Australia and the U.S. for consultations.

It’s interesting that France did not recall the ambassador from the UK. “We already knew that the UK was an opportunist. We don’t need to recall ambassador,” the French Foreign Minister said.

This situation is an indicator of the fact that the UK leaving the EU caused a substantial security crisis. The Western alliance has tried to adjust to the new reality over the last two years but the UK’s tendency to seek out allies beyond the Atlantic, instead of its former partners in the EU, hasn’t been tolerated by Europeans, especially by the French.

The crisis in the Western alliance isn’t just limited to France’s reaction, which has set new diplomatic precedents. For a long time, experts have noted that many NATO member states are disturbed by the fact that Americans came to the table with the Taliban and withdrew from Afghanistan without properly consulting them. In fact, France’s indignation seemed to reflect what many European countries couldn’t say.

But we shouldn’t underestimate the impact of the loss of the arms sale to France. France’s desire to sell the Rafale fighter aircraft to Switzerland has hit some snags. The Swiss now preferrs to purchase the F-35 fighters. This is another strike against Macron in a time when elections are approaching.

IRAN JOINS THE SHANGHAI COOPERATION ORGANIZATION

While the Western alliance bickers over France’s poor manners, an important development played ou on the other front of the Cold War: Iran has officially joined the Shanghai Cooperation •rganization (SC•) led by China and Russia as a full member.

This is a first for Iran, which decided to pursue an independent policy and didn’t join any alliance after the Islamic Revolution in 1979. The Tehran administration was previously an observer in the SCO Now it will also be able to have a voice in decision making mechanisms.

In fact, Iran’s membership to the SCO wasn’t easy. The organization’s member, Tajikistan, which was concerned about Iran’s Afghanistan and Central Asia policies, opposed the Tehran’s inclusion. Apparently, Russia and China wanted to get Iran onside against the West, which has tightened the alliance at least in discourse after Biden took the office in the U.S. When considered from this point of view, it hasn’t been difficult for Moscow to convince Tajikistan, which is seen as its own backyard by Russia.

WHAT WILL TURKEY DO?

While alliances are formed at the international arena and the ranks are closed in the 21st-century, it’s apparent that AK Party, which is making independent policy speeches at meetings in Turkey, is gradually moving toward the West. The government in Ankara has a slim chance to maneuver anyway, not while Russia’s pressure is increasing in Idlib, and Russia is dragging its feet on the highway/railway project connecting Nakhchivan and Azerbaijan, even though it is a party to the Nagorno-Karabakh ceasefire agreement, and as the Ankara-Moscow showdown grows in Libya. In fact, nothing much should be expected from Erdogan-Putin meeting to be held in Sochi. The result of Sochi seems unlikely to be more than the AK Party’s efforts to gain time by taking another step in Syria in the direction desired by Russia. Of course, it all hinges on whether Putin wants to give that time to Ankara…

• This is what I was prepared to write: “Thank God, nothing has changed! Given that very few people think the ‘official’ inflation reflects market realities – most people believe, rightly or wrongly - inflation is at least 30%, the CBRT’s current policy rate is probably the lowest possible.”

• Actually if the Bank wants to conquer inflation or if it aims at stabilizing the currency – which are collinear because the pass-through is quite high - it has better raise the policy rate. This is a fact and it is what economic theory tells us. Unfortunately, the opposite course has been chosen.

• The funding rate at 19% didn’t truly control inflation: it just temporarily kept the balance between holding TRY assets and FX assets, and somehow, with the help of new swap arrangements and some overseas portfolio inflows, prevented currency substitution from getting out of hand.

• Hence, the unexpected 100 basis points cut is unwarranted. The emphasis on the C-core doesn’t match with realities because neither food nor energy price increases are exogenous and/or temporary. The Turkish inflation has entirely different causes and its dynamics differ from U.S. inflation.

•As to the head-on C PI, there is the p os si bility that natural gas price hike sandprice increases lo om large on the horizon. So, how come the head-on inflation will fall even if C-core falls?

• As such the rate cut won’t serve any purpose as regards the credit channel. It isn’ t because rates are high that the credit momentum has been lost. It is because public banks’ lending has dropped after exuberant credit growth last year.

• The real interest rate is clearly negative. It was already negative at 19%, and it is in deeper negative territory at 18%. Market participants don’ t expect any immediate fallin inflation.

• Actually, there is no consensus that once transient factors die off the head-on CPI will fall. This also differs from the U.S. case. So, not even short-run dynamics support this decision. It may jeopardize the fragile balance in the exchange rate market and worsen inflationary expectations.

• There may be other rate cuts ahead. Nevertheless, the converse can also be true.It depends on the market reaction. Inflation will be higher and the diffusion index will possibly reveal a wide-range inflationary spill-over if the CB RT insist son initiating arate cut sequence.