Common Lira on August 10, 2018

Today, the markets are all aflutter over tensions between the US and Turkey. Various peccadilloes over the last several years have grown into some pretty major problems. So much so, and you can decide for yourself where to cast blame, the Administration declared some pretty stiff trade tariffs on Turkish metals. Frankly, you could have seen this coming with your eyes closed.

Interestingly enough, I have read some analysis on how Washington’s ham-fisted approach with Ankara will push the Turks straight into the Russian’s proverbial arms. If this is indeed the case, you better get your parka because hell is about to freeze. Unless, of course, those two can permanently put aside, quite literally, centuries of strife, warfare, and general acrimony just to make Donald Trump angry.

To be sure, the two countries have been playing much more nicely in recent decades, but all you have to do is look at a map to figure out Russia’s endgame. It has been the same since May 29. 1453: the control of the Turkish Straits. As long as Turkey, or previously the Ottoman Empire, has a foothold in Europe (East Thrace), it controls the Bosporus, the Sea of Marmara, and the Dardanelles.

As such, Russia’s southern border is effectively landlocked although it borders the Black Sea. This, then, bottles up Moscow’s Black Sea Fleet, giving the bear little room for action in the Mediterranean. If folks don’t think this is all that important, a lot of people have died because of Russia’s geographical limitations…namely access to a warm water port which another power can’t neutralize on a whim.

To that end, the Russians and Turks have fought no fewer than 12 named conflicts over the years. Although World War I was officially the last, tensions between the two remained during most of the 20th Century largely due to something called the ‘Montreaux Convention Regarding the Regime of the Straits.’ While I am not an expert on the intricacies of the treaty, a decent layman’s understanding would be: an agreement signed in 1936 which basically gave Turkey control over the Straits, and allowed the Soviets some minor concessions and basically fee reign in the Black Sea (which is a dubious asset or advantage).

Stalin must have thought himself in a position of relative weakness in 1936 to acquiesce to such a thing, because he started complaining about it pretty soon thereafter…with the tensions reaching a fever pitch between 1946-1953. These ended only with Uncle Joe’s death, and the new powers that be in the Kremlin decided to focus their attentions elsewhere. To this day, the Montreaux Convention remains in effect, thereby effectively bottling up Russia in that section of the world, or at least bottling it up at the whims of the Turks.

At the end of the day, Ankara and Moscow can have common allies and enemies, but Putin, like just about every other Russian dictator or tsar before him, wants completely unfettered access to the Mediterranean. Frankly, control of East Thrace would be ideal, but diplomatically impossible at this time.

Erdogan knows this, or should, and knows ‘his’ control of the Turkish Straits is one of his country’s biggest bargaining chips or trump cards (no pun intended…seriously). Why would he give that proverbial ace in the hole away, when it would mean the wrath of the remainder of NATO, and not just the Trump Administration? Perhaps NATO’s wrath isn’t that troublesome to Ankara? After all, Erdogan wants to know where his so-called allies were during the 2016 coup attempt. Maybe giving Putin free access to the Mediterranean is a small price to pay for thumbing the Turkish nose at the West? Perchance a known adversary is better than a fickle friend?

Could be. So, how is the US to respond?

Clearly, the Trump Administration isn’t terribly worried about the Turks. Future US Administrations will likely take the same path. Access to the Mediterranean? The Turkish Straits? While important to the region, US foreign policy is going through a massive change, and will continue to evolve over the coming decades.

After all, it seems US foreign policy has had a few things, or a combination, in common since the end of World War II. Arguably chief among many would be: 1) focused on stopping the spread of communism, particularly of the Russian variety (my apologies to Korean War veteran, and Sino-Viet relations are beyond bizarre/complicated); 2) was Eurocentric in nature, and; 3) preoccupied with allowing for the free flow of crude oil to the thirsty US economy…essentially freedom and policing of the seas.

What has changed?

First things first, the Cold War ended, and the US effectively won. While Russia is still a major power, it is not the power the Soviet Union was in either relative or absolute terms. Second, where is the economic growth, and therefore political might, in the 21st Century? Europe? South America? Africa? Or Asia? If you answered anything other than the latter, you would be less correct than you might have been otherwise. Finally, according to the US Energy Information Administration: “In 2017, U.S. net imports (imports minus exports) of petroleum from foreign countries were equal to about 19% of U.S. petroleum consumption. This was the lowest percentage since 1967.” What’s more, and get this, 40% of our foreign crude oil comes from Canada, with another 7% from Mexico. Freedom of the seas? Hmm.

Basically, many of the guiding forces of US foreign policy over the last 50 years are either non-existent or nowhere near as important as they once were. Far from being isolationist, US foreign policy will shift to reflect the realities of the 21st Century global economy. This means the remainder of Europe will have to deal with the Turks and Russians increasingly on its own. NATO? Maybe, but the jury is still out on that.

While that would be an unthinkable thing to say when I was growing up, let me ask you a question: would you want your son, daughter, grandson, granddaughter, niece, nephew, neighbor, etc., to fight and die for Albania, Montenegro, Bulgaria, Croatia, and a few others most Americans couldn’t find on a map? Even Turkey? Well?

In the end, the markets are all bent out of shape today about Turkey. To be sure, over analysis and mental gymnastics can lead down a slippery slope. Whew…all sorts of economic contagion in Europe and power to Putin and all of it. It is a nightmare, just awful. No wonder investors are worried. However, at the end of the day and at the bottom of that slippery slope, the Administration’s position on Turkey reflects the reality of America’s changing foreign policy stance…Ankara likely needs Washington more than the other way around, and one of Erdogan’s largest bargaining chips (bottling up Russia), arguably, isn’t as big as it once was.

Will this alter the markets? Will it cause the Fed to behave differently in September? Will it throttle the resurgence in US economic growth? Alter 2019 capital spending plans and budgets? Right now, I would have to answer in the negative. After all, this is the most I thought about Turkey in literally years, and certainly the most I have written about it. I imagine I could say something pretty similar about most people.

…although we all should have seen it coming.