TIRANA, Aug.15 – A potential escalation of the diplomatic crisis between the United States and Turkey triggering an apparent slowdown in one of the world’s fastest growing economies could have implications for the Western Balkans and Albania where Turkey has been using its soft power to increase its influence in a region it controlled for centuries under the Ottoman Empire.

Relations between the world’s largest economy and Turkey have been sharply deteriorating in the past few weeks over Turkey’s refusal to extradite a US pastor who is imprisoned there, leading to higher U.S. tariffs on Turkish aluminum and steel that saw the Turkish lira plunge by more than 20 percent against the U.S. dollar, the main foreign currency in Turkey.

Turkey responded to the US sanctions this week by issuing retaliatory tariffs on several key imports from the US such as passenger cars, alcohol and tobacco.

The main concern in Turkey is that the Turkish lira has lost about a third of its value against the US dollar during this year, significantly increasing the cost of living in Turkey at a time when inflation rate remains in double-digit territory.

Turkey’s economy managed to grow by 7 percent in the first half of this year, but some international analysts say the expansion was fuelled by foreign currency debt, mainly denominated in US dollar and that Turkey doesn't have large enough reserves to rescue the economy when things go wrong.

NATO member Turkey has been one of the world’s fastest growing economies in the past few years and has also been looking to expand its influence in the Western Balkans, a region it ruled for centuries until the early 20th century collapse of the Ottoman Empire.

The escalation of the diplomatic spat between the US and Turkey follows Turkey's repeated insistence that the U.S. extradite Fethullah Gulen, a Pennsylvania-based Turkish cleric whom president Recep Tayyip Erdogan accuses as the mastermind behind the failed July 2016 coup to topple him. Turkey is also outraged at US support in Syria for Kurdish fighters, whom THE Turkish government considers terrorists.

Relations between the two NATO allies have also been strained by Turkey's rapprochement with Russia.

The US and the EU have also expressed concern over Turkey's rising influence in the Western Balkans, a region aspiring to join the EU but where only Serbia and Montenegro are currently holding accession talks.

Possible implications for Albania

Turkey is a major player in Albania, a NATO ally and a strategic partner and one of the top trading partners and foreign investors.

The U.S. is Albania’s top strategic partner, but trade and investment links between the two countries are quite modest and hampered by what the U.S. State Department describes as rampant corruption in the country.

However, a potential economic crisis there is not expected to have any major implications for Albania, where private Turkish companies run key businesses in the banking, energy sector and telecommunication sector.

Trade exchanges between Albania and Turkey are at about 50 billion lek (€395 mln) annually, representing 6 percent of Albania's total but overwhelming dominated by Albanian imports from Turkey, according to INSTAT, the Albanian statistical office.

Meanwhile, the stock of Turkish foreign direct investment to Albania was at €534 million in early 2018, making Turkey the sixth largest foreign investor in the country.

The recession in Italy and Greece, Albania’s main trading partners and top investors and the hosts of 1 million Albanian migrants, in the aftermath of the 2008-2009 global financial crisis, had a sharp negative effect on Albania through lower trade, investment and remittance flows.

Turkish companies in Albania include BKT bank, the country’s largest commercial bank and Albtelecom, both of which part of Turkey-based Calik Holding, Kurum steelmaker which has been struggling to escape bankruptcy, and several investment in hydropower.

BKT, which hold more than a quarter of assets in Albania’s banking, has only modest exposure to Turkish government lira-denominated securities.

Spillover impacts from a possible economic crisis in Turkey could also affect their subsidiaries in Albania and planned investment such as the Vlora airport in southern Albania and the establishment of the Air Albania national airline with the support of the Turkish Airlines, where the Turkish government holds a 49 percent stake.

Last month, Fitch ratings agency downgraded Turkey to ‘BB’ from ‘BB+’ and attached an outlook negative, citing a widening current account deficit, a jump in inflation and the impact of the plunging lira.

However, international financial institutions predict the Turkish economy will grow by more than 4 percent over the next couple of years.

Turkey is one of the top travel destinations for Albanians with more than 100,000 Albanians visiting it last year, taking advantage of the its affordable all-inclusive package holidays.

Turkey’s rising popularity is also related to cultural affinity due to Albania having been under Ottoman occupation for 500 years until the early 20th century and a series of popular Turkish soap operas aired on Albanian TV.

Turkish officials have been repeatedly asking Albania to dismantle education and health institutions linked to what it calls the Fethullah Terrorist Organization (FETO) allegedly run by U.S.-based Islamic cleric Fethullah Gulen whom it accused of masterminding the failed July 2016 coup to topple Turkey’s president Recep Tayyip Erdogan.