Massive outflow of capital from Russia – warning or opportunity for Turkey?

Originally appeared on Bosphorus Consulting on 31 March 2014

Russia is currently bracing itself amid massive outflows of investor capital. This has been spurred on to some extent by the recent events in the Crimea but this outflow was being predicted before then (The Financial Times Russia braced for $79bn in outflows”, 24 March 2014). With $650bn of foreign debt and the rouble looking troubled, falling 11pc this year, the Russian government is faced with a dilemma of whether to use its reserves to keep the currency afloat (The Telegraph Capital controls feared in Russia after $70bn flight”, 25 March 2014). In any case, the outlook is currently not good, according to many commentators.

Troublingly, there are many parallels with Turkey’s situation. A high current account deficit and significant amounts of foreign currency debt make the Turkish economy extremely sensitive to any potential downturns, as witnessed with the lira’s freefall earlier this year (See some of our earlier blog posts). With capital flowing out of emerging markets around the world generally, with more outflow in the first months of 2014 than all of 2013 (Bloomberg BusinessWeek Emerging market fund outflows this year surpass 2013 total”, 14 February 2014), weaknesses have the potential to multiply, as in the case of Russia.

With political risk in Turkey seemingly on the rise as well as more murmurs of a downgrade, following Moody’s move to put 10 Turkish banks on review for a downgrade (Bloomberg Moody’s bank rating risk puts sovereign on notice”, 20 March 2014), such a scenario is far from unimaginable for Turkey. However, at the same time, there are ways that Turkish companies can profit from these downturns. For one thing, the outflow from Russia frees up a lot of capital, which could be reinvested in Turkey. More generally speaking, growing investor hesitation towards emerging markets need not necessarily be a problem for all, since companies able to distinguish themselves will be able to clean up.

In order to capitalize on this, Turkish companies need to appear more approachable and reliable, despite whatever may happen in the country’s political arena, seemingly prone to surprises, something which generally deters investors. While Turkey still has a lot to mark it out from other emerging markets, at the same time, at a cursory glance, it can also easily find itself being tarred with the same brush, when negative developments occur, such as corruption and a lack of transparency, that are typical to such markets. Against this backdrop, Turkish companies must work to make themselves more appealing internationally, to grasp the opportunities now presenting themselves.

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