Ukraine tensions may be longer-term boon for Turkish lira

Buying the Turkish lira versus the dollar or the euro might be a counter-intuitive play on any prolonged tensions between Russia and Ukraine on the north side of the Black Sea. Turkey's strategic position and its potential as a conduit for natural gas from Asia to Europe make the turmoil in Ukraine a reason for renewed effort to put the Turkish economy back on an even keel. Over time, that could lead to a rise in the value of the lira.
Such a trade is not for the faint-hearted. A variety of political and economic factors put the lira at the forefront of a broader emerging-market currency sell-off in early 2014. They remain unresolved.
The lira's freefall was arrested on January 28, when the Turkish central bank sharply raised its overnight lending rate to 12 percent from 7.75 percent and its one-week repo rate to 10 percent from 4.5 percent.
That not only made it expensive for speculators to keep selling the lira, by raising the running costs of new positions. It also made being long lira an attractive carry trade.
But getting paid for being long Turkish lira is a separate issue from a geopolitical argument that a prolonged crisis north of the Black Sea might end up helping Turkey.
Historically, western powers have tried to build up Turkey as a counterweight when Russian influence began to spread. Britain and France fought the Crimean War in the 1850s to keep an expanding Tsarist Russia from making gains at the expense of a weak Ottoman Empire.
Sometimes, the impetus for change comes from inside Turkey. After a coup in 1980, a military government clamped down on unrest in Turkey. That shored up the southern flank of Nato just months after the Soviet Union invaded Afghanistan, triggering a global geopolitical crisis.
The days of military take-overs in Turkey may be over, but the strategic importance of the country has arguably increased, particularly given the potential for Turkey to be a conduit for EU gas imports.
The European Union depends on natural gas imported from Russia, which may leave western Europe less inclined to react to developments in Crimea. One way to reduce that dependence is to expand the pipeline network from the Middle East and the Caspian Sea area, to pump gas through Turkey into Europe.
That won't happen overnight, but the longer-term impact may well be a stronger lira.