Experts say that Armenia was saved by the fact that it has few ties with Turkey, and that potential damage to the Georgian economy was mitigated by income from tourism " />

How has the fall of the Turkish lira affected the countries of the South Caucasus?

Experts say that Armenia was saved by the fact that it has few ties with Turkey, and that potential damage to the Georgian economy was mitigated by income from tourism

bne IntelliNews 

The Turkish lira continued to fall in the last days of August. This took place against the backdrop of the news about the possible resignation of the deputy head of the national bank of Turkey.

Since last Thursday, the Turkish lira has lost four per cent against the American dollar, and has lost more than 40 per cent of its worth since the beginning of this year.

For Turkey’s neighbours, the lira’s problems have had negative consequences as well, given the tight connections between them in trade and investments.

Turkey has played a very important role in the South Caucasus in the past decade, becoming an investment hub for a number of post-Soviet countries and, thanks to its historical and cultural proximity to the countries, an economic centre for the whole of Southern Europe.

A ‘Golden Triangle’ of sorts has formed between Turkey, Georgia and Azerbaijan in terms of mutual investments and commercial agreements, the most prominent symbol of which is the opening of the Baku-Tbilisi-Kars railway in November of last year.

Prosperous trade with Turkey has made neighbouring countries hostages of Ankara’s problems. However, the crisis in Turkey has had little impact on Armenia – the contacts between these countries are of minimal importance and the volume of trade and investments is equally small.


Because of tight economic connections, the fall of the lira has significantly affected the Georgian lari and the Azerbaijani manat, though Georgia’s dynamic economic growth has allowed it to avoid serious consequences for the most part.

“Prudent macroeconomic policy-making and strong growth in external earnings helped the lari remain immune to the sell-off in regional currencies until early August 2018. However, the TRY’s collapse on 10 August affected the lari through the expectations channel when the currency lost 3.9% in one day against the dollar trading at GEL 2.57,” wrote Tbilisi-based investment bank Galt & Taggart on 13 August in its analysis of the consequences of the crisis. Taking into account the continuing crisis in Turkey, analysts estimate that the lari will continue to fall to 2.7 against the dollar by the end of 2018.

“The problem for all these countries is the lira has fallen so far and so fast that it has altered the terms of trade, forcing the local currencies to adjust as their exports to Turkey become much more expensive and imports from Turkey much cheaper. The same is true for their relations with Russia, another key trading partner, where the drop in the ruble has had the same, but less extreme, effect. The double whammy of these currency shifts is causing limited devaluations across the entire region,” the analysis continued.

The booming tourism industry in Georgia will assay the devaluation pressure somewhat as an independent source of foreign exchange earnings, but this support will wear off in the next month as the tourist season comes to an end. However, Georgia is unlikely to feel as much pain as Turkey or Russia.

Certainly Georgia’s trade account has been more than robust in the first half of this year with double-digit growth in exports (28.5% y/y), growing remittances from Georgians working abroad (18.3% y/y), and impressive tourism inflows (+28.9% y/y) that lead to a 5.7% appreciation of the lari against the dollar. The central bank took advantage of the balmy climate to add an extra USD 87.5 million to its gross international reserves (GIR) of just under USD 3 billion, and this cushion can now be used to soften the devaluation pressures if needed.


Azerbaijan is much more exposed to Turkey’s woes thanks to its hydrocarbon-heavy economy. The government has been on a protracted campaign to diversify the economy, but parts of the non-oil sector remain very small against that of oil, and is more exposed to currency fluctuations.

Moreover, the Turkish crisis will also hit the country’s oil sector, according to Azerbaijani economist Gubad Ibadoglu in comments to Eurasianet.

Socar is one of the biggest investors in Turkey having committed USD 19 billion, but this investment is denominated in lira so the state-owned oil company has been badly wounded by the lira’s loss in value.

At the same time Baku’s sovereign wealth fund, the State Oil Fund of the Republic of Azerbaijan (SOFAZ) has around 0.9% of its holdings in Turkish government bonds, which have also tanked this year, reports Eurasianet.

Finally, Azerbaijan is exposed to the Turkish banking sector via the Turkish subsidiary of Azerbaijan’s Pasha Bank, which issued USD 25 million in new bonds  this June.

You can read the original, full-length article here.

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