The battle for Istanbul, the rerun of the mayoral election which will take place on June 23, will be as decisive for the future of Turkey as the battle of Stalingrad in 1943 was for the Second World War, or the siege of Kobani in 2014 was for the war against the Islamic State.

In April the Financial Times pointed out that the drive to rerun the Istanbul election was a risk for President Erdoğan. In the online debate I mentioned the Turkish proverb, a hungry dog will break into the oven, as it is apparent that President Erdoğan and his AK party will stop at nothing to regain control of the city. Two days later the Financial Times also indicated the lengths to which he was prepared to go.[1]

In what former Minister of State Kürşat Tüzmen has called “creative accounting”,  Turkey’s central bank had bolstered its foreign currency reserves through short-term borrowing from local banks. In the month before local elections, despite a warning from President Erdoğan that they would pay “a very heavy price”, Turks had drawn on their lira deposit accounts and bought over $10 billion, so that foreign currency accounts held by Turkish residents increased to €173 billion.

The Financial Times estimated that the central bank’s forex reserves, which had been depleted in defence of the lira, had sunk to less than $16 billion. Consequently, in a process which could be called robbing Peter to pay Paul, the central bank had swapped liras for dollars to pump up its net reserves to $28 billion.

President Erdoğan railed against the Financial Times, Reuters and Bloomberg, and “manipulative impositions” in the forex market. An investigation was also launched against JPMorgan for advice to dump the lira. Nevertheless, three weeks later Turkey’s finance minister, Berat Albayrak, addressed 400 investors at a conference in Washington hosted by JPMorgan and presented an economic reform package, which left the investors unimpressed. As one of them commented, it was “one of the worst performances from a finance minister I have seen.”

After the decision to rerun Istanbul’s mayoral election, which President Erdoğan has declared “an important step toward strengthening our democracy”, there has been a new run on the lira. The lira has already fallen 15 pct.against the dollar since the beginning of the year; last year it fell 28 pct. According to the Financial Times, the central bank has again resorted to short-term borrowing from local banks to pad out its official reserves, which face this new assault on the lira.[2] An FT analysis shows that the central bank’s net foreign reserves, excluding swaps, are still around $15 billion.

Reuters reports that Turkish state banks last week sold around $4.5 billion in support of the lira and that there was also a rally in Turkish bonds. However, this was driven by buying by local pension funds but not offshore buyers. On Thursday the central bank abandoned the benchmark rate of 24 pct. and began to lend to banks at a higher rate of 25.5 pct.

President Erdoğan has said Turkey will not surrender to economic terrorism just as it does not bow down to armed and political terrorism. In an echo of the claim that it was “the interest rate lobby” that was behind the Gezi Park uprising in 2013, pro-government daily Hürriyet has claimed that US multinational banks JPMorgan and Citibank are using Bloomberg, Reuters and Financial Times in a perception operation directed against Turkey.

Nevertheless, there are certain undeniable facts. First and foremost, that $177 billion in short-term debt falls due in the next 12 months. This, combined with the fact that major Turkish companies are unable to meet their commitments, indicates an urgent need for a rescue package. However, President Erdoğan has ruled out an application to the IMF, which for him would be like the Holy Roman Emperor’s walk to Canossa. Turkey’s allies, Russia, Iran and Venezuela are hardly in a position to help.

In addition, leading US senators have made it clear that if Turkey accepts delivery of the S-400, this will lead to the imposition of sanctions under the Countering America’s Adversaries Through Sanctions Act. Turkey’s sabre-rattling in the Eastern Med is countered by the introduction in Congress of the Eastern Mediterranean Security and Energy Partnership bill. Nor does the final assault on Idlib augur well for Turkey’s relations with Russia.

In short, what President Erdoğan has provoked in Istanbul is a new presidental election, the outcome of which, win or lose, will have an irrevocable influence on Turkey’s future.