The biggest development since our last update was the precipitous decline in the value of the Turkish lira and the consequent spasm in emerging markets. (The lira is down 61 percent on the dollar since the beginning of the year.) In a sense, both of the forecasts we update this week were shaped by the fallout of the currency crunch: the unexpected improvement of Russia-Turkey relations, and a serious threat to the relative stability of South America.

Back in December, we identified the lira’s vulnerability but failed to see the full extent of how it would affect U.S.-Turkey relations. The degradation of that relationship has a host of global implications, including China’s subsequent courtship of the government in Ankara, the growing concern in Europe over potential exposure to the currency crisis and the migration it might portend, and uncertainty over next steps in Syria. Relations are not past a breaking point, but how the U.S. and Turkey work to patch things up will be a key question for the rest of the year.

On to the tracker.

Jacob L. Shapiro, director of analysis

From the Forecast:Russia is primarily interested in limiting an increasingly strong and independent Turkey, especially in the Balkans and the Caucasus.”

Update: This forecast had a strong start. It may seem like eons ago, but in January, there was notable dissension in the ranks of the so-called “Astana Trio” of Turkey, Russia and Iran, which had agreed to carve Syria up into different zones of responsibility and to ensure cease-fires in some parts of them. Except that Iran broke the agreement, and Russia did nothing about it. Angered by the transgression and the Russian inaction, Turkey summoned envoys from both countries to express its displeasure. It also looked to be close to reaching an understanding with the United States on how to deal with Afrin.

By March, the Turkey-Russia relationship was back on track. The Astana group managed to let bygones be bygones and continued to meet to coordinate operations on the ground related to Syria’s future. Turkey even decided to purchase S-400 missiles from Russia, much to the chagrin of the United States. All the while, Russian President Vladimir Putin and Turkish President Recep Tayyip Erdogan continued to say nice things about each other in public and to talk to each other on the phone, with some reports even going so far as suggesting a “secret alliance” over the Syrian war.

The crucible of this seemingly rosy relationship may be Idlib, a strategically located province in Syria and the last remaining rebel stronghold. Outside of the Kurdish-held territories in the north, Idlib is the only place anti-Assad forces still have the upper hand. And they have the upper hand partly because Turkey has supported and funded them, and the Turkish military is deployed to support them. Russia, meanwhile, continues to support the Assad regime – which Turkey views as an enemy. As recently as July 15, Turkey warned Russia that any attempt by the Assad government to recapture Idlib might well jeopardize Turkey-Russia relations.

Russia is justifying its position by saying it must deal with the al-Qaida linked groups in Idlib that are attacking Assad’s positions. This may open up room for a compromise between Moscow and Ankara on the Idlib problem, considering Turkey has problems with some jihadist rebel groups there too. Still, this hardly reflects a Russia that is interested in limiting Turkish strength. If anything, Russia is treating Turkey like an equal in Syria, perhaps paving the way for a long-term Turkish presence in Syria if it means Turkey-Russia relations remain strong. The counterargument is that Russia wants Turkey more involved in Syria. The more attention Turkey pays to the Middle East, the less attention it can spare for the Balkans and the Caucasus. The jury is still out.

Meanwhile, U.S. foreign policy is driving Turkey away from Washington, which Erdogan has blamed for his country’s currency woes. It has levied sanctions against Turkish officials and threatened to issue tariffs on Turkish goods. In fact, the first thing Erdogan did after the U.S. issued the threat was to call Putin to discuss economic cooperation. In the past two weeks, high-level Russia-Turkey meetings have been convened to discuss a new four-way summit on Syria’s future. Russia also recently abolished visa requirements for Turks to enter the country.

This may well be temporary. After all, the United States and Turkey have a volatile relationship, to the say the least, but so do Turkey and Russia. They have some common interests, but there are many more areas on which they disagree. The most important aspect of all this is that Russia-Turkey relations are improving because one of the interests the two sides have in common – trouble with the United States – is pushing the two sides closer together in spite of the areas in which they disagree. If U.S. pressure keeps up, Russia and Turkey may conclude that two weaker powers working together suits both their purposes better than zero-sum competition. In the long term, Russia still needs to find a way to neutralize Turkey as it expands into areas that Russia considers its sphere of influence. Until then, this forecast is in a downward trend.

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From the Forecast: “The continent [South America] as a whole will remain stable relative to other regions of the world.”

Update: South America’s abiding geographic feature is its isolation, which tends to insulate it from major events in the rest of the world. Aside from drug cultivation, commodities and the never-ending disaster that is Venezuela, South America has not much factored into global affairs lately, nor have geopolitical dynamics among South American nations created much in the way of serious risks. That seems to be the case for the rest of the year. We note that though our forecast is mostly on track for now, several recent events cut against it. And if it continues, it could push the forecast off track completely.

The chief culprit is Argentina, where the peso continues to nosedive. Much has been made of the collapse of the Turkish lira, including by us, but far less has been made of the decline in value of the Argentine peso, which like the lira is down more than 60 percent this year. But unlike the lira, it is still depreciating despite central government intervention. Strictly speaking, this isn’t unheard of in Argentina; it undergoes these kinds of currency fluctuations fairly regularly, and we have made the case that Argentina’s recent moves, including an ambitious reform program and a pre-emptive IMF loan, should be seen as prudent planning, not impending doom.

Still, Argentina now faces some big problems. A major drought has disrupted the agriculture sector and hurt the economy. Earlier this month, President Mauricio Macri said inflation might reach 30 percent again by the end of the year. The government has said it will renege on a promise to reduce soymeal and soyoil export taxes for want of more government revenue – a move that is sure to anger farmers. Argentina even imposed a two-day embargo on these exports to prevent farmers from selling before new tax measures came into effect.

Argentina may be the main culprit, but it isn’t the only one. Perhaps more concerning for South America is the recent weakness in commodity markets. Coffee, sugar and copper are just some of the commodities South American economies depend on, commodities whose prices have dipped in recent weeks. Brazil has currency woes of its own to deal with; the real is down 20 percent on the dollar for the year, currently hovering at a two-year low. Chile’s currency is down almost 10 percent on the dollar, and the country’s $184 billion in external debt compared to its paltry $37 billion worth of official reserves has us worried about potential shocks there.

This is to say nothing of the continued degradation of Venezuela, which is starting to spill over into Ecuador and Peru, where new entry requirements have been put in place to try to stem the flow of Venezuelan refugees. Meanwhile, Brazilian military forces already stationed at the border had to intervene at a Venezuelan refugee camp in Brazil to protect it from attack by a local mob.

Overall, there’s not enough evidence to say this forecast is off track. After all, economic uncertainty is a fixture in Argentine politics, commodities prices are inherently mercurial, and the vulnerabilities of countries like Brazil and Chile may not lead to outright calamity. Venezuela continues to survive, even as it appears, time and again, to bottom out. Even together, these events have failed to push our original assessment into negative territory. But at the rate things are going, they very well could.

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