Mining sector faces energy transition conundrum

Can the industry balance decarbonisation, ESG rules and mining asset investments?

Julian Kettle

Dump trucks operate in an open pit at the Oyu Tolgoi copper-gold mine, jointly owned by Rio Tinto Group's Turquoise Hill Resources Ltd. unit and state-owned Erdenes Oyu Tolgoi LLC, in Khanbogd, the South Gobi desert, Mongolia, on Saturday, July 23, 2016. Mongolia exported 817,000 tons of copper concentrate in the first half of the year compared with 663,800 tons a year earlier, an increase of 23.1 percent. Photographer: Taylor Weidman/Bloomberg
Copper’s use is fundamental to the electric vehicle story © Bloomberg

The starting gun has been fired. But the shift to cleaner forms of energy is going to be a marathon rather than a sprint, primarily because of huge inertia on both the demand and supply side of the metals equation.

According to Wood Mackenzie’s analysis, the metals and mining industry will need to invest $240bn in base metals and gold over the next five years to meet energy transition and other end-use sector requirements.

More funding, however, is conditional on meeting environmental, social and governance (ESG) guidelines, burdening operators with extra investment. Will investors accept lower returns? I think it’s a conundrum that will cause some head scratching around the industry as public pressure mounts.

The electrification of transport is redefining several metals markets. As we see demand for batteries grow at an unprecedented rate, battery metals — cobalt and nickel — could face a supply crunch by the mid-2020s.

The story is similar for copper. Global wind technologies are expected to require an average of 450,000 tonnes per annum of the metal per year between 2018 and 2022, increasing to 600,000 tonnes per annum out to 2028. Offshore wind turbines will command an increasing share of copper consumption as larger turbines become commonplace. }

Our figures show that more than 20m electric vehicle (EV) charging points are expected to be deployed globally by 2030, consuming over 250 per cent more copper than in 2019. Additionally, copper’s use is fundamental to the EV story, each unit typically consuming anywhere between 50kg and 80kg.

For lithium, the story is somewhat different. With too much, much too soon, and a response to high prices, as well as unfulfilled hype around EVs, there is no need for additional supply until the mid-2030s.

So, where will the required supply come from? Some commentators have suggested substitution as a solution.

Aluminium is the only alternative to copper. However, despite it being lighter and almost three times cheaper, copper wins on size and efficiency. There is no magic bullet, silver or otherwise.

Unless the sector can provide the sufficient and timely supply of critical commodities, while delivering the “necessary” financial returns, meeting the ESG-related performance expected of it while minimising the carbon burden being placed on the planet, metals will rapidly become the disabler rather than enabler of the energy transition story.

The social awakening around the long-term damage plastic has on our environment was sudden and severe. It is undeniable that, when viewed from pit to population, producing metal also produces carbon. As greater transparency is created, and demanded, around what that carbon contribution is, there may be a corresponding reluctance to consume the amount of metal we do.

And will the shifting goalposts of domestic mining and fiscal legislation, along with rising civil challenges, push western investors to prioritise near-term dividends over long-dated cash flows? While governments are increasingly talking about the need to secure critical minerals, the rhetoric has not yet been backed up with strategies that will facilitate investment from those producers who will need to develop resources.

The exception to this is, of course, China. With its long-term perspective, a desire to wean itself off imported oil, access to cheap capital and a willingness to turn a blind eye to ESG issues that others cannot, the country is racing ahead and dominating ownership of the necessary raw materials to create a self-sufficient supply chain.

Julian Kettle is vice-chairman Metals & Mining at Wood Mackenzie, a natural resources consultancy.


The appeal, and the flaws, of cash-based accounting

Earnings are fiction and cash is supposedly fact. But what is the truth?

Every new form of payment, from cheques to contactless cards, is heralded as the end of cash.

Your friend, the one with the fat wad of banknotes, like an old-school bookmaker, knows different.

Cash has unique attributes, he says. It leaves no trace so transactions stay private.

It requires no fragile infrastructure to process payments. You can pay for groceries in a power cut or get a drink at the bar when the card machine fails.

Cash is non-negotiable. It is why it is readily accepted.

If gold obsessives are gold bugs, then your friend is a cash bug. There is a version of him in the business of stock-picking. This sort would not dream of using reported earnings as a guide to anything. They are too ripe for manipulation by bosses. But you can’t monkey with hard cash.

You either have it or you don’t. Earnings are fiction; cash is truth.

Or is it? It is foolish to look for the true value of a company in a single measure, whether that is cash balances; the book value of assets on the balance-sheet; or earnings in the profit-and-loss account.

All have flaws.

Book value understates a company’s worth if it is tied up in its brands and know-how (“intangibles”). Reported earnings are pliable. Even cashflow can be manipulated. Indeed cashflow turns out to be more negotiable than your fat-walleted friend thinks.

Cash bugs yearn for the simple economics of the lemonade stand. A venture is sound if it takes in more from sales than it pays out in costs, such as lemons and wages. If more cash comes in than goes out, the business is good. By contrast, earnings are slippery. They are what is left of profits after accounting for “accruals” ie, non-cash revenues and costs.

Some of this reflects sales that have been booked but not yet been paid for. Much of it consists of costs that are not a drain on cash right now, but which surely will be: depreciation of plant and machinery; charges against pension promises; allowances for bad debts; and so on.

The trouble is that it is hard to arrive at a true number for such costs. No one knows the working life of an Apple Mac or an Airbus a380; so how quickly should such assets be written off?

The ultimate cost of a company’s pension scheme depends on assumptions about investment returns. So companies are given a lot of discretion over how they account for such accruals. This leaves lots of scope for the massaging of earnings; hence the appeal of cash-based accounting.

Changes in a company’s cash balance do not tell you much about its operating business. It may have gone up because a company issued a bond or sold an asset.

That is why analysts look instead at “free cashflow”.

This ignores non-cash items in the earnings statement, such as depreciation and amortisation.

But it recognises capital costs, such as spending on buildings, equipment and inventories. It is therefore a decent shorthand measure of the profits a company’s owners can lay claim to—the cash left over after the spending needed to sustain the business.

It sounds like an ideal guide to a firm’s value. But it is not tamper-proof. One way to give free cashflow a boost is to defer payments to suppliers: pay the bills in 90 days, rather than 30 or 60 days. How capital spending is financed—the choice to buy or lease—also matters a lot.

Lumpy asset purchases are a drain on cash when they occur; lease payments are altogether smoother. But as with renting a flat or leasing a car, it is not always clear whether buying will use up more or less cash in the long run.

The Footnotes Analyst, a blog on accountancy, uses Amazon’s accounts to highlight how leases distort cashflow measures.*

The company itself provides three measures of free cashflow in its 2018 accounts. They varied from $8.4bn to $19.4bn, depending on the accounting treatment of leases. A fourth measure, calculated by the Footnotes Analyst, finds that free cashflow was negative to the tune of $3.4bn.

All of these are valid figures. None can be claimed to be the whole truth.

The cashflow statement only gets you so far. As do reported earnings, or the balance-sheet. You need all three to understand a company, says Nathan Cockrell, of Lazard Asset Management, just as you need three co-ordinates (longitude, latitude and altitude) to know where anything is with precision.

To say that cashflow never lies is itself a lie. After all, when your friend with the bulging money clip keeps boasting about how flush he is, you start to wonder if he might actually be skint.


Don’t Jump to Conclusions When America’s Coronavirus Iceberg Emerges

As testing expands, the number of confirmed coronavirus cases will head higher, but care needs to be taken in analyzing any trends in the data

By Justin Lahart

A pathologist holds a nasal swab from a Covid-19 test kit in Lake Success, N.Y. / Photo: Michael Nagle/Bloomberg News .

Nobody should be surprised if there is a surge in the number of confirmed cases of the novel coronavirus within the U.S. in the weeks ahead. And nobody should confuse that surge with how rapidly the virus is spreading.

There is a risk that the coronavirus data will be misinterpreted in exactly that way by many investors and Americans at large alike. As a result, they may respond in ways that only intensify some of the problems stemming from the epidemic.

As of Monday, there were 605 confirmed cases in the U.S., according to data collected by Johns Hopkins University. That compares with 101 a week earlier. It is an increase driven not by a jump in the number of people infected with the coronavirus but rather the number of people infected with the virus who have been found. So far they are mostly people who had a known contact with somebody who had already fallen ill, such as residents and staff in the nursing-care facility in Washington state that has been tied to several deaths.

Widespread testing has yet to begin, with state-by-state figures collected by data scientist Jeff Hammerbacher showing that so far 4,384 tests had been conducted through Monday afternoon, and that some states have yet to test a single patient.

But with the Centers for Disease Control and Prevention ramping up shipments of testing kits and large commercial lab companies launching coronavirus-testing services, the capacity to detect the virus is increasing in the U.S. With that increase in testing capacity, many more cases will likely be discovered.

“The more you look, the more you’re likely to find,” says Jennifer Nuzzo, an epidemiologist at the Johns Hopkins Bloomberg School of Public Health. “We have to recognize that isn’t a sign of an expansion.”

Which isn’t to say that the number of people coming down with Covid-19 isn’t growing—just that care needs to be taken when working with the raw case-count figures. The dangers of not understanding the nuances of the data were in full display in early February when many on Wall Street took a slowing in the growth rate in the number of cases in China as a sign that the outbreak was on the verge of being contained there, failing to appreciate that it would become a problem elsewhere.

That was an enormous mistake—one that led to stocks hitting new highs even as epidemiologists and other health experts became increasingly alarmed. It contributed to many people viewing the risks of the virus becoming a problem in the U.S. as lower than it actually was. 
Ms. Nuzzo also worries that differences between how states approach testing could give rise to false perceptions about what the virus is doing within the U.S. One locality might look safer, for example, not necessarily because it is, but because fewer tests have been conducted there than other places. That could lull people there into a false sense of security and lead investors to falsely believe that businesses in some regions will be shielded from disruption.

With hope, investors will now be a little less quick to jump to conclusions based on an incomplete understanding of the data and a little more apt to listen to what epidemiologists are saying.

‘We’re going to have more deaths.’

Coronavirus vs. the flu. Influenza kills more people so everyone is overreacting, right? Wrong — and here’s why

President Trump tweeted on Monday that thousands die of the flu every year, and suggested that life should go on as usual. Not so fast, experts say

By Quentin Fottrell

Some cite influenza as a reason not to be worried about COVID-19, the disease caused by the new coronavirus, but health professionals say that comparison misses some very important points. MarketWatch photo illustration/iStockphoto

Coronavirus. It’s just like the flu, isn’t it?

Hundreds of thousands of people die of the flu every year, and people need to calm down, some say.

Everyone should wash their hands for 20 seconds, elbow bump, stop buying face masks because they don’t protect against the virus, note that airplane air is filtered 20 to 30 times an hour, avoid cruise ships, and just relax — right?

That appears to be the accumulated advice of exasperated Americans on Twitter and Facebook FB, -6.40% in recent days who despair at the long lines at Trader Joe’s and Whole Foods AMZN, -5.28% (where people have been apparently stocking up on oat milk) and the panic buying and empty shelves at Costco COST, -3.00%. “Toilet paper is golden in an apocalypse,” one customer told

Studies, however, suggest the differences between the flu and coronavirus are more nuanced than some people suggest. In fact, health professionals point out important distinctions between the COVID-19 illness and other viral sicknesses like the flu. For a start, there is no vaccine for COVID-19 and it could take many months or years to get one to market. What’s worse, doctors fear the virus will mutate.

Why? The first known person was reported to have contracted the virus on Dec. 1 in China. Today, it’s spread to nearly 100 countries. Experts advise changing your behavior to limit its spread. Public officials in New York have said people should avoid taking mass transit, if possible. Italy has effectively quarantined its entire population. Israel has closed its land borders with Egypt and Syria.

But some government representatives have urged people not to overreact, and compared COVID-19 to the flue. Ben Carson, a cabinet secretary and a former neurosurgeon, appearing on an ABC DIS, -9.47% morning show on Sunday, said, “This virus is like other viruses. It should be treated the same way. ... We have flu seasons that come up frequently.”

President Trump echoed the sentiments of his secretary of housing and urban development on Twitter TWTR, -2.98% on Monday, noting that “last year 37,000 Americans died” from the flu: “Nothing is shut down, life & the economy go on.”

“It’s a little simple to think the novel coronavirus is just like flu,” Amesh Adalja, a senior scholar at the John Hopkins Center for Health Security and a spokesman for the Infectious Diseases Society of America, told MarketWatch. “We don’t want another flu. This is additive, not in place of. Yes, the flu kills thousands of people every year, but we’re going to have more deaths.”

Recommended:Will coronavirus spread? What we can learn from the misinformation during those critical, early days in China

There are reported to be some 1 billion influenza infections worldwide each year, with up to 45 million cases in the U.S. per year, tens of thousands of U.S. deaths, and 291,000 to 646,000 deaths worldwide. Seasonal flu has a fatality rate of less than 1%; Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, recently said the figure is closer to 0.1%.

Influenza and COVID-19 come from different virus families. COVID-19, also called severe acute respiratory syndrome coronavirus 2 or SARS-CoV-2, is brand new. Influenza has likely been around for more than 2,000 years. Scientists say the “novel influenza A viruses” in humans lead to a pandemic approximately once every 40 years. But, again, flu vaccines exist.

Flu has likely been around for 2,000 years. This coronavirus is 3 months old.
“The flu has been with us since the birth of modern medicine,” said Adalja.

Hippocrates, the Greek physician who was born around 460 BC, mentioned what we now know as the modern influenza virus in his writings, some historians say. He called it the “fever of Perinthus” or the “cough of Perinthus.” Others have debated whether this is flu or some other illness, or a combination of illnesses.

“In the years 1173 and 1500, two other influenza outbreaks were described, though in scant detail. The name ‘influenza’ originated in the 15th century in Italy, from an epidemic attributed to the ‘influence of the stars,’” which, according to historical documents, “raged across Europe and perhaps in Asia and Africa,” a 2016 paper in the Journal of Preventive Medicine and Hygeine reported.

“It seems that influenza also reached the Americas. Scholars and historians debate whether influenza was already present in the New World or whether it was carried by contaminated pigs transported on ships,” it added. “Some Aztec texts speak of a ’pestilential catarrh’ outbreak in 1450-1456 in an area now corresponding to Mexico, but these manuscripts are difficult to interpret correctly and this hypothesis seems controversial.”

There is an advantage to coming down with a virus that has been around for hundreds, if not a couple of thousand, years. We typically have more natural defenses to fight it. “There is population immunity to many strains of the flu,” said Adalja. “There are four other strains of the coronavirus, but the attack rate of this virus is relatively high as there is no immunity to it.”

To put that in perspective: In 2017–2018, the worst flu season on record in the U.S. outside of a pandemic, approximately 80,000 Americans died. The 4 other coronavirus strains that already exist are responsible for around 25% of our common colds, Adalja added. “But it doesn’t seem like there is cross-immunity with this coronavirus as there are with the other coronaviruses.”

“While both the flu and COVID-19 may be transmitted in similar ways, there is also a possible difference: COVID-19 might be spread through airborne transmission, meaning that tiny droplets remaining in the air could cause disease in others even after the ill person is no longer near,” Lisa Maragakis, senior director of infection prevention at Johns Hopkins Medicine in Baltimore, wrote.

Of course, there are similarities between influenza and COVID-19, the disease caused by the new coronavirus. Both viruses are untreatable with antibiotics, and they have almost identical symptoms — fever, coughing, night sweats, aching bones, tiredness and, in more severe cases of both viruses, nausea and even diarrhea. They can be spread by touching your face, coughing and sneezing.

Also see:U.S. State Department warns passengers NOT to go on cruises — says there’s ‘increased risk of infection’ on cruise ships

Both flu and COVID-19 viruses are not treatable with antibiotics, and they have almost identical symptoms MarketWatch photo illustration/iStockphoto

Worldwide, there were 113,584 COVID-19 cases and 3,996 deaths as of Monday evening, according to data published by the Johns Hopkins Whiting School of Engineering’s Center for Systems Science and Engineering. In the U.S., 22 people have died, and there are approximately 607 confirmed cases. It has spread to nearly 100 countries in just over three months.

While estimates of coronavirus fatality rates vary, they remain far higher than those for the flu. Tedros Adhanom Ghebreyesus, the director-general of the World Health Organization, recently said that COVID-19 has a fatality rate of 3.4%. That’s more than previous estimates of between 1.4% and 2%, although some observers say his estimates were skewed by a higher death rate in China.

Also see:Trump disputes WHO’s coronavirus fatality rate: ‘3.4% is really a false number — now, this is just my hunch’

‘Because there’s no proven therapy or vaccine, as coronavirus spreads it threatens to put a much greater burden on health systems than flu does.’— Antigone Barton, ScienceSpeaks
COVID-19 rates may fall closer to those of the flu, assuming many more people are infected. JAMA released this paper analyzing data from the Chinese Center for Disease Control and Prevention on 72,314 COVID-19 cases in mainland China last month, the largest such sample of this kind. The sample’s overall case-fatality rate was 2.3%, in line with the earlier estimates.

Fatality rates varied dramatically depending on the age of the individual. No deaths occurred in those 9 and younger, but cases in those aged 70 to 79 carried an 8% fatality rate, and those aged 80 years and older had a fatality rate of 14.8%. The rate was 49% among critical cases, and elevated among those with pre-existing conditions, to between 5.6% and 10.3%, depending on the condition.

Other differences between coronavirus and flu lie in what we don’t know. Adults with the flu, which has an average incubation period of two days, can infect others 24 hours before symptoms develop and 5 to 7 days after becoming sick. Novel coronavirus has a median incubation period of 5.1 days, longer than that other human coronaviruses (3 days) that cause the common cold.

Coronavirus appears to be transmitted with ease to around 2.3 people by each person infected in the community and those who are asymptomatic, said Antigone Barton, editor of ScienceSpeaks. “Because there’s no proven therapy or vaccine; as coronavirus spreads, it threatens to put a much greater burden on health systems than flu does, and greater than most or many are prepared for.”

How COVID-19 is transmitted

Shelton the Charlatan

Like most of US President Donald Trump's earlier picks for the US Federal Reserve Board, Judy Shelton has no business even being considered for the job, let alone winning the support of self-respecting conservatives. But in the Trump era, up is down, and quackery is the new expertise.

J.Bradford DeLong

delong217_Sarah SilbigerGetty Images_judyshelton

BERKELEY – Back in September 1994, the Nobel laureate economist Milton Friedman actually wrote about one of US President Donald Trump’s current nominees to serve on the Federal Reserve’s seven-member Board of Governors.

“In a recent Wall Street Journal op-ed piece,” Friedman observed, “Judy Shelton started her concluding paragraph: ‘Until the US begins standing up once more for stable exchange rates as the starting point for free trade …’” Stopping there, Friedman noted that, “It would be hard to pack more error into so few words.”

“A system of pegged exchange rates, such as the original [International Monetary Fund] system or the European Monetary System,” Friedman went on to explain, “is an enemy to free trade. It is no accident that the 1992 collapse of the EMS coincided with the agreement to remove controls on the movement of capital.”

In Friedman’s view, the idea that monetary policymakers should turn away from the internal balance and focus instead on preventing market-driven exchange-rate movements was a recipe for disaster. Such an approach would require all economies to abandon free trade and return to managed trade, thereby beggaring not just their neighbors but also themselves.

More than two decades later, Shelton’s views are no less erroneous or incoherent. Her arguments about monetary policy do not follow any consistent thread, because she is merely a political weathervane, pointing in whatever direction is most convenient for securing her next job.

Last year, she warned that the Fed should be careful not to do anything to curb stock prices, telling CNBC, “More than half of American households are invested through mutual funds or pension funds in this market. I don’t want the Fed to pull the rug out from under them.”

And yet, in 2016, when unemployment was higher and the case for easy money stronger, she chastised the Fed for “appeasing financial markets” with loose monetary policies. Given this volte-face, it is not unreasonable to conclude that Shelton’s support for monetary-policy easing depends not on economic fundamentals but on who is in the White House.

Similarly, back in 2011, when there were lots of unemployed Americans who could be put to work producing exports, Shelton argued against policies that would weaken the dollar. “Let’s not compromise our currency in a misguided attempt to boost US job growth,” she advised in a commentary for the Wall Street Journal. “America’s best future is forged through sound finances and sound money.”

But nowadays, the same person who wrote those words sees compromising the currency as an added bonus from the interest-rate cuts she wants the Fed to pursue in response to monetary-policy loosening by the European Central Bank. In fact, she now believes that US monetary policy should be eased “as expeditiously as possible.” Never mind her warning in 2009 that “loose monetary policy … leads to internal bankruptcy … whole nations have foundered on this path.”

Given this history of flimflam, Catherine Rampell of the Washington Post was absolutely correct earlier this month when she called Shelton “an opportunist and a quack.” Rampell also notes that, “Senate Republicans seem to know this,” even if they “still may be too craven to oppose her nomination, for fear of crossing Trump.”

For example, Kevin Cramer of North Dakota has said that while he likes the idea of having someone on the Fed Board who will challenge the status quo, he “wouldn’t want five members like [Shelton].”

More worryingly, Thom Tillis of North Carolina apparently does not think that Shelton’s bizarre advocacy of the gold standard matters, because that issue is already off the table. Tim Scott of South Carolina agrees, arguing that Shelton’s past “controversial statements” are “not relevant.”

Putting on a slightly braver face, Pat Toomey of Pennsylvania told Shelton at her confirmation hearing that he is worried about her recent statements in support of devaluing the dollar. “We don’t get to control other countries’ monetary behavior,” Toomey warned. “I think that is a very, very dangerous path to go down.”

Likewise, Richard Shelby of Alabama has indicated that he is “troubled by some of [Shelton’s] writings,” and John Kennedy of Louisiana admits that, “Nobody wants anybody on the Federal Reserve that has a fatal attraction to nutty ideas.”

Nonetheless, the Wall Street Journal editorial board has decided to defend Shelton’s nomination, particularly her belief that “monetary policies that ignore exchange-rate stability wreak political and economic havoc.”

In effect, it is choosing her error-packed words over Friedman’s commonsense arguments about the proper goals of monetary policymaking.

Trump, of course, wants Shelton on the Fed Board so that he can threaten Fed Chair Jerome Powell by holding her out as a ready replacement. If we have learned anything over the past three years, it is that congressional Republicans’ furrowed brows and rhetoric of “concern” are worthless.

Kennedy, after expressing his reservations about “nutty ideas,” went on to stipulate that, “I’m not saying that’s the case here.” And Mike Crapo of Idaho has gone so far as to praise Shelton for her “deep knowledge of democracy, economic theory, and monetary policy.”

If Republican senators are going to save the country from yet another Trump misstep, they will need to find their long-lost spines. I’m not holding my breath.

J. Bradford DeLong is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau of Economic Research. He was Deputy Assistant US Treasury Secretary during the Clinton Administration, where he was heavily involved in budget and trade negotiations. His role in designing the bailout of Mexico during the 1994 peso crisis placed him at the forefront of Latin America’s transformation into a region of open economies, and cemented his stature as a leading voice in economic-policy debates.

Erdogan Talks Tough but Proceeds With Caution

By: Hilal Khashan

Shortly after Recep Tayyip Erdogan became prime minister of Turkey in 2003, his minister of foreign affairs, Ahmet Davutoglu, said Turkey would embark on a “zero problems policy” with its neighbors. His remarks came after Turkey had pursued European Union membership for years to no avail.

Even before Erdogan’s Justice and Development party, or AKP, rose to power, Turkish prime ministers in the 1990s realized that Turkey stood no chance of becoming part of the European Community. In 1997, Turkish Prime Minister and leader of the Islamist Welfare Party Necmettin Erbakan founded the Organization for Economic Cooperation, which included eight Muslim countries, after seemingly giving up on EU membership.

Even secularist prime ministers like Mesut Yilmaz and Tansu Ciller gave up hope of ever joining the bloc, and their skepticism appears well founded. In 2002, former French President Valery Giscard d’Estaing said many European politicians privately believed that “Turkey must never be allowed to join the EU.”

Turkish leaders have instead chosen to pursue stronger relations with Turkey’s Middle East neighbors. In 2009, Bashar Assad said he considered Turkey Syria’s best friend; Erdogan responded by recognizing Assad as a brother. In 2010, Libyan leader Moammar Gadhafi awarded Erdogan his international prize for human rights.

After the 2011 Arab uprisings, Erdogan believed that Turkey’s moment had arrived with the rise of Islamists, especially the Muslim Brotherhood, in Egypt, Tunisia and Syria. He believed his country was on a path to economic success in the Middle East. When things didn’t go as he planned, however, Erdogan refused to adapt his policy toward the region.

He continued to behave as if Turkey had regained its Ottoman grandeur. In 2014, he built a $615 million presidential palace, and in 2018, he acquired a $500 million presidential plane as a donation from Qatar. Former friends turned into adversaries, save for a couple of exceptions like blockaded Qatar and Libya’s beleaguered Government of National Accord in Tripoli.

Erdogan’s neo-Ottomanism alienated him from Egypt after the overthrow of Muslim Brotherhood-backed President Mohammed Morsi in 2013. Turkey’s ambitious objectives also alarmed United Arab Emirates leaders, who feared the rise of political Islam, and Saudi leaders, who did not forget the destruction of the first and second Saudi states in the 19th century at the hands of the Ottomans and their allies.

But perhaps the most significant challenge to Turkey’s plan to boost its position in the Middle East came from Russia, a major economic partner for Turkey. The two countries support opposing sides in the conflicts in Syria and Libya, though their engagement in these conflicts is driven by very different goals.

Russia’s Libya policy is pragmatic and driven by economic interest. After Gadhafi’s regime collapsed in 2011, Russia lost contracts worth $10 billion. Western support for the GNA fell well short of what the UAE, Egypt and the Saudis were giving to Khalifa Haftar, the leader of the opposition Libyan National Army – and Russian President Vladimir Putin seized on the potential opportunity to win lucrative post-conflict contracts by offering Haftar much-needed support.

Mercenaries from the Kremlin-associated Wagner Group played a decisive role in pushing GNA forces to the gates of Tripoli. However, had the GNA prevailed against Haftar and promised Russia significant reconstruction deals, Putin could have switched alliances and instead supported the GNA.

After all, unlike Greece, Cyprus and Egypt, Russia does not have a real issue with the GNA’s maritime deal with Turkey, which revamped existing economic zones in the Mediterranean. So even though the Turkish SADAT security group has sent some 2,400 members of the pro-Ankara Syrian National Army to fight alongside the GNA, the divide between Russia and Turkey is not over Libya.

Rather, it’s over Syria.

In Syria, Turkey’s vital national interests do not sit well with either Russia or the United States.

The lingering issue between the U.S. and Turkey pertains to the fate of Syrian Kurds. In October 2019, U.S. President Donald Trump warned Erdogan against pushing the Kurds too hard. In a letter addressed to Erdogan, Trump said he did not “want to be responsible for destroying the Turkish economy” should Turkey refuse to protect the Kurds during an offensive in northern Syria.

Erdogan understands geopolitics and knows he cannot go far in challenging U.S. regional policy without compromising Turkey’s national interest, which vehemently opposes cross-border linkages between Kurds in Turkey and Syria. The U.S. seems to have come to terms with Turkey on this sensitive issue.

Similarly, Erdogan understands Turkey’s history with Russia and is wary about military escalation. After all, the Ottoman Empire’s decline in the Balkans and North Africa was ushered in by the Russian Empire’s victory at the Battle of Stavuchany in 1739 and the subsequent Russo-Turkish wars in the 19th century. In 1853, Russian Czar Nicholas I named the Ottoman Empire the “sick man of Europe.”

Erdogan does not want a military confrontation with Russia or the Russian-backed Syrian army.

Rather, he wants a political deal with Russia, even though he does not trust Putin. Turkey’s involvement in Syria is not popular at home, even within the AKP. And Erdogan also knows that Russia does not want to get bogged down in another drawn-out war, as it did in Afghanistan during the 1980s, which is why Moscow’s participation in the Syrian conflict has been limited to providing air support to the Assad regime.

But Turkey lacks real options to stop the fighting in Idlib. Erdogan will fight in Idlib only to the extent that Putin allows him. He realizes that he has to settle for the establishment of a demilitarized zone along the border to accommodate refugees fleeing Idlib, and he is not willing to jeopardize Turkish interests elsewhere for the sake of victory in northern Syria. Turkey’s economic prosperity is not contingent on seizing Idlib, but it is reliant on cooperation with Russia.

More than 7 million Russian tourists visit Turkey every year. Turkey’s nuclear energy program depends heavily on Russian technical expertise and support. The TurkStream natural gas pipeline, which runs from Russia to Turkey, is vital for the country’s economic development. Erdogan wouldn’t allow his anger over Russia’s violation of the Sochi and Astana agreements, which called for de-escalation in Idlib, to obstruct his vision for Turkey. The Syrian regime’s territorial gains following its offensive in Idlib that started in April 2019 and resumed in December are irreversible.

The Turkish army can still control the border area, allowing Syrian Arabs to form a buffer zone between themselves and the Kurds. Assad is amenable to such a move because Idlib’s population is not central to his model for a post-conflict Syria.

Putin did not launch Russia’s intervention in Syria to try to end the conflict. Instead, he wanted to make Russia the dominant military power and decisive political player in Syria – and he has succeeded in doing so. Just like in Libya, Russia has economic interests in Syria. In 2018 and 2019, Russian rail transport, agriculture, heavy equipment, hydrocarbons and construction companies were key participants in the Damascus International Fair. And Turkey likewise has economic interests there. It has an opportunity to join in Syria’s reconstruction if it can come to an accommodation with the Syrian regime, which is only a matter of time.

Turkey’s opposition to the Syrian government has therefore become counterproductive.

Turkey is an ascending regional power that needs to make peace with its neighbors and focus on economic development instead of aggrandizing power. Russia, however, aspires to play a leading role in the construction of a new security order in the Middle East.

Nostalgic about its Soviet past, Russia refuses to accept its status as a regional power and wants to engage the U.S. as its equal.

So while Erdogan uses a lot of rhetoric about trying to restore Turkey's former glory, his approach to the Middle East will be more pragmatic.