LONDON- Turkey's ability to sustain its military campaign in Syria may depend in part on what happens far away from the battlefield: in the foreign exchange market.
The lira has long been a pinball of geopolitics and lightning rod for relations between Ankara and its Western allies, specifically Washington.
Renewed pressure on the currency and attempts to stabilise it could further endanger Turkey's lean foreign currency reserves, leaving the country potentially with little room to defend the lira if sanctions tightened. That in turn could hurt the already fragile economy and undermine President Tayyip Erdogan's ability to stand up to international pressure against his offensive in Syria.
Last year, a standoff with the United States was an aggravating factor in a 30% fall in the lira, prompting an economic recession in the country which is heavily dependent on imports as well as foreign investors flows.
By one measure, Turkey has about $36 billion in foreign exchange reserves, a number that is barely enough to defend a sustained assault on its currency.
"A shrinking pool of central bank reserves, large foreign currency rollover needs, and other economic vulnerabilities will limit Turkey's room for maneuver in Syria," said Karl Schamotta, director of foreign exchange strategy and structured products at Cambridge Global Payments in Toronto.
State-owned banks are reported to have helped prop up the pressured lira in recent weeks. According to one estimate, $2 billion were funnelled into markets on a single day this week to defend the currency. Nonetheless, it tumbled 1.5% in the initial days of the invasion nine days ago before recovering some ground.
"Net reserves are negligible in Turkey," said Tatha Ghose, forex and emerging market analyst at Commerzbank in London.
"We assume that the Turkish central bank has no real reserve resources to fight lira weakness if and when it arises," Ghose said. Even countries such as Russia and China, with their much greater reserves, have found their forex firepower eroded quickly once pressure mounted, he added.
Turkey's central bank declined to comment.
The deal to pause military operations in Syria has come as a respite for Turkish assets. The government has also tried to make it harder for investors to short the lira. Traders reported some Turkish banks were curbing lira supplies to overseas counterparts.
Yet, the relief is likely to be temporary. White House sanctions on a number of Turkish ministers and officials remain in place, a U.S. court case in which state lender Halkbank is accused of taking part in a scheme to evade U.S. sanctions on Iran continues, and a host of European countries have taken steps to limit arms sales to their NATO ally.
And with a U.S. congressional push for more sanctions going ahead full steam - including in a worst case scenario potential curbs on Turkey's sovereign debt - many investors fear the market euphoria may be short-lived.
The lira's history is littered with examples of tension with Washington dramatically amplifying exchange rate moves, while inflationary pressure - and its implications for central bank efforts to lower interest rates - are ever present.
Yet having just emerged from a 2018 economic crisis and a near 50% collapse in the lira's exchange rate fuelled by a stand-off between Washington and Ankara over U.S. pastor Andrew Brunson, markets are trying to gauge just how much of a financial buffer the country has to stave off a repeat.
Foreign reserves are crucial to a country's ability to support its currency as well as meet its import bills and external debt repayments.
Questions over its forex reserves roiled markets in the spring after a report that short-term borrowed money - or swaps - had become a substantial part of Ankara's war chest.
Some investors and economists are puzzled about the best way to measure net reserves and how the central bank accounts for swaps in its calculations.
While the latest central bank data showed net forex reserves were slightly below $37 billion, Oxford Economics/Haver calculated that actual usable forex reserves, taking into account beefed up gold reserves and commercial banks' forex requirements, stood at just $29 billion as of the end of August.
S&P Global Ratings, said on Wednesday Turkey's net foreign exchange reserves were "limited", adding that "under a stress scenario, the public and private sectors may even be forced to compete for foreign-exchange liquidity."
Much like in previous turmoil, economists say Ankara's focus has been on immediate damage control. The Istanbul bourse slapped a temporary short selling ban on some bank stocks, and traders reported some Turkish banks were curbing lira supplies to overseas counterparts. State lenders were reported to sell dollars to prop up the lira.
Investors expressed doubt about how effective efforts to stem a lira slide could be this time round.
"If it comes down to trying to support the currency via intervention Turkey will not be successful," said Jon Harrison, managing director emerging markets macro strategy at TS Lombard.
He said while initial U.S. sanctions had been soft, the domestic pressure was ramping up on President Donald Trump to be tough on Turkey.
"They know they don't have the reserves to maintain the lira at a particular level and if they do they would only be able to do that for a few days."
The strength of domestic demand for hard currency has become a gauge of faith in the authorities' ability to manage the lira and the country's finances. As households and businesses have shifted savings into hard currency, dollarisation has climbed to record highs, providing little reassurance.
One saving grace for Turkey is its current account balance. Following years of hefty current account deficits, last year's lira crisis tipped the country into recession - but it also closed that gap, reducing the need for foreign currency inflows to stabilise the exchange rate, at least in the short term.
Nevertheless, as the country has to import nearly all of its fuel and gas as well as lots of machinery, steel and vehicles, its reserves are also a gauge of its ability to cover its foreign buying in the event of a crisis or seizures of its overseas finances.
The International Monetary Fund estimates Turkey's reserve import cover ratio stands at about five months - above the fund's three months safe minimum though well below the around 15 months enjoyed by fellow emerging markets such as Russia, China and Brazil.
Turkey's foreign debt liabilities are also under scrutiny: Over the next 12 months, some $180 billion of debt is maturing of which some $75 billion faces a higher rollover risk. The rest is made up of trade credits as well as lira and forex deposits by non-residents, according to the Institute of International Finance.
More pressure on the lira could hurt companies' ability to pay back or roll over those dues, analysts said. Any potential sanctions restricting dollar funding for companies would be a game changer, said Nikolay Markov, senior economist at Pictet Asset Management.
"If that happened, Turkish companies might face liquidity shortages, which would then require the central bank to step in," said Markov.
While it remained unclear how long Turkey's military mission in Syria will continue, it was also the potential for escalation that concerned to many investors.
"It is the speed at which things can unravel which is scary for Turkey," said Nafez Zouk at Oxford Economics.
(Reporting by Karin Strohecker and Tom Arnold; Additional reporting by Jonathan Spicer in Istanbul and Saqib Ahmed; Editing by Hugh Lawson and Daniel Wallis) ((email@example.com; +442075427262; Reuters Messaging: firstname.lastname@example.org))