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Sunday, May 15, 2022
The Turkish Drone that changed the nature of warfare
By Stephen Witt
The New Yorker
The Bayraktar TB2 has brought precision air-strike capabilities to Ukraine and other countries. It’s also a diplomatic tool, enabling Turkey’s rise.
A video posted toward the end of February on the Facebook page of Valerii Zaluzhnyi, the commander-in-chief of Ukraine’s armed forces, showed grainy aerial footage of a Russian military convoy approaching the city of Kherson. Russia had invaded Ukraine several days earlier, and Kherson, a shipbuilding hub at the mouth of the Dnieper River, was an important strategic site. At the center of the screen, a targeting system locked onto a vehicle in the middle of the convoy; seconds later, the vehicle exploded, and a tower of burning fuel rose into the sky. “Behold the work of our life-giving Bayraktar!” Zaluzhnyi’s translated caption read. “Welcome to Hell!”
The Bayraktar TB2 is a flat, gray unmanned aerial vehicle (U.A.V.), with angled wings and a rear propeller. It carries laser-guided bombs and is small enough to be carried in a flatbed truck, and costs a fraction of similar American and Israeli drones. Its designer, Selçuk Bayraktar, the son of a Turkish auto-parts entrepreneur, is one of the world’s leading weapons manufacturers. In the defense of Ukraine, Bayraktar has become a legend, the namesake of a baby lemur at the Kyiv zoo, and the subject of a catchy folk song, which claims that his drone “makes ghosts out of Russian bandits.”
In April, 2016, the TB2 scored its first confirmed kill. Since then, it has been sold to at least thirteen countries, bringing the tactic of the precision air strike to the developing world and reversing the course of several wars. In 2020, in the conflict between Azerbaijan and Armenia over the enclave of Nagorno-Karabakh, Azerbaijan’s dictatorial leader, Ilham Aliyev, used the TB2 to target vehicles and troops, then displayed footage of the strikes on digital billboards in the capital city of Baku.
The TB2 has now carried out more than eight hundred strikes, in conflicts from North Africa to the Caucasus. The bombs it carries can adjust their trajectories in midair, and are so accurate that they can be delivered into an infantry trench. Military analysts had previously assumed that slow, low-flying drones would be of little use in conventional combat, but the TB2 can take out the anti-aircraft systems that are designed to destroy it. “This enabled a fairly significant operational revolution in how wars are being fought right now,” Rich Outzen, a former State Department specialist on Turkey, told me. “This probably happens once every thirty or forty years.”
I spoke with Bayraktar in March, via video. He was in Istanbul, at the headquarters of his company, Baykar Technologies, which employs more than two thousand people. When I asked him about the use of his drones in Ukraine, he told me, “They’re doing what they’re supposed to do—taking out some of the most advanced air-defense systems and armored vehicles in the world.” Bayraktar, who is forty-two years old, has a widow’s peak, soft eyes, and a slightly off-center nose. He was flanked by scale models of new drones, mounted on clear plastic stands, which he displayed to me with the unconcealed pride of an aviation geek. “Any U.A.V. built today to fly, I pilot it myself, because I, like, love it,” he told me. Bayraktar, who has more than two million Twitter followers, uses his account to promote youth-education initiatives, celebrate Turkish martyrs, and post pictures of new aircraft designs. “Some people here consider him like Elon Musk,” Federico Donelli, an international-relations researcher at the University of Genoa, told me.
In May, 2016, Bayraktar married Sümeyye Erdoğan, the youngest daughter of Recep Tayyip Erdoğan, Turkey’s President. Erdoğan is the leader of a political Islamist movement that, the analyst Svante Cornell has written, wishes “to build a powerful, industrialized Turkey that serves as the natural leader of the Muslim world.” Turkey’s arms industry has grown tenfold in the past twenty years, and most of the country’s military equipment is now manufactured locally. “The Bayraktars, and particularly the TB2s, have turned into the flagship of the Turkish defense industry,” Alper Coşkun, a former Turkish diplomat, told me.
Turkey borders Iran, Iraq, Syria, Armenia, Georgia, and the European Union, and it faces Russia across the Black Sea. Donelli told me that the shifting allegiances and complex politics of the region reminded him of Europe in the days before the First World War. “In Bayraktar, they have a kind of genius who can change the historical path of Turkey,” Donelli said.
Erdoğan has held power since 2003. During that time, he has seized control of the courts and the press, amended the Turkish constitution, and advocated for a return to traditional roles for women. Journalists critical of the Erdoğan regime have been beaten with baseball bats and iron rods, and opposition activists have been sentenced to decades in prison. But Turkey’s economy is stagnating, and its inflation rate rose to seventy per cent during the past twelve months. In 2019, Erdoğan’s party lost the mayoralty of Istanbul, which it had held since the nineteen-nineties. The TB2 is a spectacular propaganda machine, and Erdoğan has used its success to promote his vision for Turkish society. As Bayraktar told me, “In this day and age, the biggest change in our lives is driven by technology—and who drives the changes? The ones who create technology.”
Bayraktar and his family live on Baykar’s grounds, which he compared to a university campus, with sports facilities and a park that he called “bigger than Google’s.” While we spoke, his mother, Canan; Sümeyye; and the couple’s four-year-old daughter, also named Canan, were eating dinner in an adjacent room. Bayraktar told me that he was one of the oldest engineers at Baykar, and that many of the firm’s programmers are women. “My software side comes from my mother,” he said.
Bayraktar was born in Istanbul in 1979, the middle of three brothers. His father, Özdemir, the son of a fisherman, graduated from Istanbul Technical University and founded an auto-parts company; Canan, his mother, was an economist and a computer programmer in the punch-card era. The brothers were introduced to machine tools at an early age. “We were working, all throughout our childhood, in the factory,” Bayraktar told me. By the time he was a teen-ager, he was a competent tool-and-die-maker. Özdemir was also an amateur pilot, and as a boy Selçuk would survey Turkey’s splendid geography from the window of his father’s plane. “A small aircraft, it’s like sailing in there,” he told me. “You feel like a bird.” Bayraktar was soon building radio-controlled airplanes from kits, sometimes modifying them with his own designs. “I was hiding my model aircraft under my bed, and working on it secretly,” he said. “I should have been studying for my exams.”
Bayraktar’s radio-controlled aircraft prototypes impressed academic researchers. In 2002, after graduating from Istanbul Technical, he was recruited to the University of Pennsylvania. For his master’s degree, he flew two drones in formation at the Fort Benning Army base, in Georgia. Bayraktar then began a second master’s, at M.I.T., where he pursued the difficult and offbeat goal of trying to land a radio-controlled helicopter on a wall. His adviser, Eric Feron, remembered Bayraktar as a dedicated craftsman and an observant Muslim, with a passion for youth education. He recalled Bayraktar’s enthusiasm when he tutored Feron’s daughter in her mathematics homework, and the time he demonstrated his helicopter to a troop of Girl Scouts. “He was a good pilot,” Feron said. “But I did not understand all that he was after until I got invited to his wedding.”
While Bayraktar was a student, the United States was using Predator drones to strike targets in Afghanistan and Iraq. Bayraktar disapproved of U.S. foreign policy—“I was obsessed with Noam Chomsky,” he told me—and engaged in social activism with other graduate students, most of them foreigners. But he was drawn to the autonomous vehicles. While still enrolled at M.I.T., he began building small prototype drones at the family’s factory in Istanbul.
Özdemir set out to secure government support for Selçuk’s drones. Özdemir was friendly with Necmettin Erbakan, an Islamic nationalist and a vitriolic critic of Western culture. Turkey had been a secular republic since the nineteen-twenties, but Erbakan, a professor of mechanical engineering, believed that by investing in industry and grooming technological talent the country could become a prosperous Islamic nation. In 1996, Erbakan had been elected Turkey’s Prime Minister, but he resigned from the post under pressure from the armed forces, and was banned from politics for threatening to violate Turkey’s constitutional separation of religion and the state. (Erbakan, who had developed connections with the Muslim Brotherhood and Hamas, blamed his ouster on “Zionists.”)
Bayraktar briefed Erbakan on his work, and by the mid-two-thousands Bayraktar was spending his school breaks embedded with the Turkish military. The Bayraktar family also had ties to Erbakan’s protégé, Erdoğan, who was elected Prime Minister in 2002. Bayraktar’s father had been an adviser to Erdoğan when he was a local politician in Istanbul, and Bayraktar recalled Erdoğan visiting the family house.
Bayraktar’s first drone, the hand-launched Mini U.A.V., weighed about twenty pounds. In early tests, it flew about ten feet, but Bayraktar refined the design, and soon the Mini could stay aloft for more than an hour. Bayraktar tested it in the snowy mountains of southeastern Anatolia, surveilling the armed rebels of the P.K.K., a Kurdish separatist movement. Feron recalled his astonishment when he contacted Bayraktar in the mountains. “He has no hesitation to go to the front lines, to really the worst conditions that the Turkish military can go into, and basically be with them, and live with them, and learn directly from the user,” he said. Bayraktar told me he prefers to field-test a drone in an active combat theatre. “It needs to be battle-hardened and robust,” he said. “If this doesn’t work at ten-thousand-feet elevation, at minus-thirty-degrees temperature, then this is just another item that you have to carry in your backpack.”
Bayraktar began developing a larger drone. In 2014, he débuted a prototype of the TB2, a propeller-driven fixed-wing aircraft large enough to carry munitions. That year, Erdoğan, who was facing term limits as Prime Minister, won the Presidential election. A popular referendum had given him control of the courts as well, and he began using his powers to prosecute political enemies. “They arrested not only a quarter of active-duty admirals and generals but also many of Erdoğan’s civil-society opponents,” Soner Cagaptay, who has written four biographies of Erdoğan, told me. Bayraktar dedicated his prototype to the memory of Erdoğan’s mentor, Erbakan. “He gave all his life’s work to changing the culture,” Bayraktar said. (In his posthumously published memoirs, Erbakan asserted that, for the past four hundred years, the world has secretly been governed by a coalition of Jews and Freemasons.)
In December, 2015, Bayraktar oversaw the first tests of the TB2’s precision-strike capability. Using a laser to guide dummy bombs, the drone was able to strike a target the size of a picnic blanket from five miles away. By April, 2016, the TB2 was delivering live munitions. The earliest targets were the P.K.K.—drone strikes have killed at least twenty of the organization’s leaders, along with whoever was standing near them. The strikes also taught Bayraktar to fight for the airwaves. Drones are controlled through radio signals, which opponents can jam by broadcasting static. Pilots can counter by hopping frequencies, or by boosting the amplitude of their broadcast signal. “There’s so many jammers in Turkey, because the P.K.K. had been using drones, too,” Bayraktar said. “It’s one of the hottest places to fly.” Turkey’s remote-controlled counterinsurgency was thought to be the first time a country had conducted a drone campaign against citizens on its own soil, but Bayraktar, citing the threat of terrorism, remains an enthusiastic supporter of the campaign.
That May, he married the President’s daughter. More than five thousand people attended the wedding, including much of the country’s political élite. Sümeyye wore a head scarf and an immaculate long-sleeved white dress from the Paris designer Dice Kayek. By then, the Turkish state had taken on an overtly Islamic character. In the nineteen-nineties, the hijab was banned in universities and public buildings. Now “having a hijab-wearing wife is the surest way to get a job in the Erdoğan administration,” Cagaptay wrote. Bayraktar regularly tweets Islamic blessings to his followers on social media, and both Sümeyye and the elder Canan wear the hijab.
Like Bayraktar, Sümeyye is a second-generation member of Turkey’s Islamist élite, and she graduated from Indiana University in 2005 with a degree in sociology. “She has great ethics,” Bayraktar told me. “She’s a real challenger.” Other people describe her as a fashionable, feminist upgrade on her father’s politics—a Turkish version of Ivanka Trump. “Women have lost significantly under Erdoğan in terms of access to political power,” Cagaptay told me. “When there are women appointed in the cabinet, they have token jobs.”
In June, 2016, terrorists affiliated with ISIS killed forty-five people at the Istanbul airport, and soon a new front was opened in Syria, where Turkey used Bayraktar’s drones to attack the short-lived ISIS caliphate. (The drones were later turned on Syria’s Kurds.) In July, a small group inside the Turkish military staged a coup against Erdoğan. The coup was chaotic and unpopular—the main opposition parties condemned it, a conspirator flying a fighter jet dropped a bomb on the Turkish parliament, and Erdoğan was reportedly targeted by an assassination squad sent to his hotel. Erdoğan blamed the followers of Fetullah Gülen, an exiled cleric and political leader who now lives in Pennsylvania, and purged more than a hundred thousand government employees. (Gülen denies involvement in the coup.) Bayraktar was now part of Erdoğan’s inner circle, and his drones were marketed for export.
Bayraktar is a Turkish celebrity, and his social-media feeds are crowded with patriotic reply guys. When he gives talks to trainee pilots, which he does often, he wears a leather jacket decorated with flight patches; when he tours universities, which he also does often, he wears a blazer over a turtleneck. In our conversation, he referred to concepts from critical gender theory, spoke of Russia’s violations of international law, and quoted Benjamin Franklin: “Those who give up essential freedom for temporary security deserve neither security nor freedom.” But he is also an outspoken defender of Erdoğan’s government. In 2017, Erdoğan held a constitutional referendum that resulted in the dissolution of the post of Prime Minister, effectively enshrining his control of the state. Using politically motivated tax audits to seize independent media outlets, his government sold them in single-bidder “auctions” to supporters, and a number of journalists have been jailed for the crime of “insulting the President.” Erdoğan frequently sues journalists, and Bayraktar has done so, too. He recently celebrated a thirty-thousand-lira fine levied against Çiğdem Toker, who was investigating a foundation that Bayraktar helps run. Bayraktar tweeted, “Journalism: Lying, fraud, shamelessness.”
Bayraktar’s older brother, Haluk, is the C.E.O. of Baykar Technologies; Selçuk is the C.T.O. and the chairman of the board. (Their father died last year.) In addition to being used in Ukraine and Azerbaijan, TB2s have been deployed by the governments of Nigeria, Ethiopia, Qatar, Libya, Morocco, and Poland. When I spoke with Bayraktar, Baykar had just completed a sales call in East Asia, marketing its forthcoming TB3 drone, which can be launched from a boat.
Several news sources have reported that a single TB2 drone can be purchased for a million dollars, but Bayraktar, while not giving a precise figure, told me that it costs more. In any event, single-unit figures are misleading; TB2s are sold as a “platform,” along with portable command stations and communications equipment. In 2019, Ukraine bought a fleet of at least six TB2s for a reported sixty-nine million dollars; a similar fleet of Reaper drones costs about six times that. “Tactically, it’s right in the sweet spot,” Bayraktar said of the TB2. “It’s not too small, but it’s not too big. And it’s not too cheap, but it’s not too expensive.”
Once a fleet is purchased, operators travel to a facility in western Turkey for several months of training. “You don’t just buy it,” Mark Cancian, a military-procurement specialist at the Center for Strategic and International Studies, told me. “You have married the supplier, because you need a constant stream of spare parts and repair expertise.” Turkey has become adept at leveraging this relationship. It struck a defense deal with Nigeria, which included training the country’s pilots on TB2s, in exchange for access to minerals and liquefied natural gas. In Ethiopia, TB2s were delivered after the government seized a number of Gülenist schools. Unlike dealing with the U.S., obtaining weapons from Turkey doesn’t involve human-rights oversight. “There are really no restrictions on use,” Cancian said.
Buyers are also supported by Baykar’s programmers. The TB2, which Bayraktar compares to his smartphone, has more than forty onboard computers, and the company sends out software updates several times a month to adapt to adversarial tactics. “You’ve seen the articles, probably, asking how World War One-performance aircraft can compete against some of the most advanced air defenses in the world,” Bayraktar said. “The trick there is to continuously upgrade them.”
Much of the drones’ battlefield experience has come against Russian equipment. Russia and Turkey have a complicated relationship: Russia is a key trading partner for Turkey, Turkey is a popular holiday destination for Russian tourists, and Russia is overseeing the construction of Turkey’s first nuclear power plant, which, when completed, will supply a tenth of the country’s electricity. In 2017, Turkey angered its allies in NATO when it bought a Russian missile system, triggering U.S. sanctions. Still, both Turkey and Russia are seeking to restore their standings as world powers, and even before the war in Ukraine they were often in conflict.
In the Libyan civil war, Turkey and Russia backed opposing factions, and the TB2 faced off against Russia’s Pantsir-S1, an anti-aircraft system that shoots missiles at planes and can be mounted on a vehicle. At least nine Pantsirs were destroyed; so were at least twelve drones.
Another theatre opened in the Caucasus in 2020, when Azerbaijan attacked the ethnic-Armenian enclave of Nagorno-Karabakh. Last month, I met Robert Avetisyan, the Armenian representative to the United States from Nagorno-Karabakh, at a café in Glendale, California. Avetisyan told me, “During the first several days, Azerbaijan was not successful, in anything, until the Turkish generals took the joysticks.” Armenia has a security alliance with Russia, which provides most of its military equipment, some dating to the Soviet era. For six weeks, TB2 drones bombarded that equipment relentlessly; one independent analysis tallied more than five hundred targets destroyed, including tanks, artillery, and missile-defense systems. “We lost the air war,” Avetisyan said. TB2s also targeted Armenian troops, and footage of these strikes was shared by the Azerbaijani Ministry of Defense. A six-minute compilation of the videos, posted to YouTube midway through the war, shows dozens of variations on the same scene: Armenian soldiers, cowering in trenches or huddled around transport trucks, alerted to their impending death by the hiss of an incoming bomb before a blast sends their bodies hurtling through the air.
Avetisyan sent me a translated statement from Arthur Saryan, a twenty-seven-year-old veteran of the war. Saryan had been standing with a small deployment of soldiers when his unit was hit by a bomb at around two in the morning. “We had no idea that we were the target,” Saryan said. “We heard it only two or three seconds before it hit us.” The bomb created a fireball. “Everyone was burnt. All the bodies were burnt and the cars immediately caught fire.” Six soldiers were killed, and seven were wounded. “It was a horrible scene,” Saryan said.
Bayraktar’s TB2 drones fly slowly, and their propellers should be easy to locate. But in Nagorno-Karabakh the drones seemed to evade enemy reconnaissance, either through radar jamming or through technical incompetence. “A striking feature of the video clips was the utter helplessness of the doomed systems,” the Israeli missile expert Uzi Rubin wrote, after reviewing Azerbaijani footage of precision air strikes. “Some were seen being destroyed with their radar antennas still rotating, searching in vain for targets.” The Azerbaijanis also deliberately triggered enemy radar by flying unmanned crop dusters at Armenian positions. If the Armenian missile launchers took the bait, revealing their location, they were destroyed by TB2s.
Turkey and Azerbaijan share close linguistic and political ties, but the Nagorno-Karabakh conflict represented a new level of coöperation. “There’s such cultural affinity between the Azerbaijanis and the Anatolian Turks—they say, ‘One nation, two states,’ ” Outzen, the former State Department specialist, told me. “Now they’re starting to say, ‘One nation, two states, one army.’ ” This is bad news for Armenia, which is wedged between the two. Turkey has not acknowledged its role in the Armenian genocide of 1915, and the Azerbaijani President, Aliyev, has referred to Armenia as “a territory artificially created on ancient Azerbaijani lands.”
Such claims have led the influential Armenian diaspora to block Western components from being used in Bayraktar’s drones, through both congressional action in the U.S. and pressure on manufacturers. But an analysis of a downed TB2 in Nagorno-Karabakh revealed that the aircraft was using a G.P.S. transponder made by the Swiss manufacturer Garmin. The company issued a statement saying that it had no supply relationship with Baykar, and that the transponder was commercially available. Nevertheless, Bayraktar has sought to reduce his reliance on Western components; in a recent Instagram post, he claimed that ninety-three per cent of the TB2’s components were now manufactured in Turkey. Bayraktar’s development cycle has a D.I.Y. element that can make the Pentagon’s practices seem out of date. “Our services are so culturally tied to a cumbersome acquisition process,” Andy Milburn, a senior fellow at the Middle East Institute, told me. “What he’s doing is so modular, so replaceable.” Feron, Bayraktar’s graduate adviser, recalled the aftermarket modifications that Bayraktar made to store-bought drones. “Sometimes in the aerospace industry they do a lot of simulations, but they never touch the machine,” Feron said. “He’s much more of a builder.”
Last October, Ukraine announced that it was constructing a factory outside Kyiv to assemble Bayraktar’s drones. Shortly afterward, Ukraine released video of a TB2 conducting a strike against an artillery position in the contested eastern region of Donbas. The Air Force colonel who runs Ukraine’s drone program has not revealed his identity, citing security concerns, but in 2019 he travelled to Baykar’s facility in western Turkey for three months of training. “I loved it there,” he told Al-Monitor, an online newsletter.
“The acquisition of certain systems—like the TB2 and the American Javelin anti-tank missile—may actually further incentivize a Russian invasion instead of deterring one,” the military analyst Aaron Stein wrote in a prescient blog post in December. In February, Russia invaded.
The early days of the war looked like a repeat of Nagorno-Karabakh. Publicly available footage suggests that TB2s destroyed at least ten Russian missile batteries and disrupted the Russian supply lines by bombing transport trucks. In the past few weeks, though, the release of strike videos has slowed. This may be due to security concerns, but it’s also possible that the Russians have caught up—the TB2 has no real defense against a fighter jet, and in the lead-up to the invasion the Russian military trained against the drones. In early March, Ukrainian officials announced that they were receiving another shipment from Baykar; by the end of the month, a tally of press releases showed that Russia claimed to have shot down thirty-nine TB2s, which would likely constitute the bulk of the Ukrainian fleet. Ukraine’s President, Volodymyr Zelensky, was initially enthusiastic about the TB2, but in April, at a press conference in a Kyiv subway station, he downplayed the aircraft’s importance. “With all due respect to Bayraktar, and to any hardware, I will tell you, frankly, this is a different war,” he said. “Drones may help, but they will not make the difference.” Still, a couple of weeks before, Alexey Yerkhov, the Russian Ambassador to Turkey, had complained about the sale. “Explanations like ‘business is business’ won’t work, since your drones are killing our soldiers,” Yerkhov said, in remarks addressed to the Turkish government.
In our conversation, Bayraktar condemned Russia’s actions but declined to discuss operational specifics. “Let’s not put any of these countries at risk,” he said. “If any poor Ukrainian was hurt, I would be very sad. I would be responsible on the day of judgment.” Bayraktar’s software upgrades respond to customer feedback, and his designs continue to evolve. His latest production drone, the twin-prop Akinci, can fly to forty thousand feet and can be equipped with jamming countermeasures. In March, he tweeted a picture of the prototype for Baykar’s first jet, the Kizilelma, which resembles an autonomous F-16 without a cockpit. (In addition to the military vehicles, there is also the Cezeri, a human-size quadcopter, which Bayraktar has termed a “flying car.”)
Bayraktar is also investing in autonomy, and told me that he was ahead of the competition in this area. “That’s what our expertise is,” he said. “Push a button, and the aircraft lands.” An autonomous drone might find its way home if its communication links were severed. To develop such systems, Bayraktar will need to retain programming talent, but Erdoğan’s regime is struggling against brain drain. “I, personally, know a whole bunch of people who have left,” Cagaptay said. “In Turkey, they don’t see a future for themselves.”
“Sometimes oppression is worse than death,” Bayraktar told me. He was referring to Ukraine’s efforts to defend itself against the Russian invasion, but, a month after we talked, the Turkish civil-rights campaigner Osman Kavala was sentenced to life in prison, after a politically motivated trial that Amnesty International called a “travesty of justice.” On May 1st, the Ukrainian defense ministry resumed releasing footage from Bayraktar’s drones, showing them striking a pair of Russian patrol boats. Another video released that day showed Ukrainian soldiers, against a backdrop of destroyed Russian vehicles, dancing, laughing, and singing Bayraktar’s name.
The New Yorker
The Bayraktar TB2 has brought precision air-strike capabilities to Ukraine and other countries. It’s also a diplomatic tool, enabling Turkey’s rise.
A video posted toward the end of February on the Facebook page of Valerii Zaluzhnyi, the commander-in-chief of Ukraine’s armed forces, showed grainy aerial footage of a Russian military convoy approaching the city of Kherson. Russia had invaded Ukraine several days earlier, and Kherson, a shipbuilding hub at the mouth of the Dnieper River, was an important strategic site. At the center of the screen, a targeting system locked onto a vehicle in the middle of the convoy; seconds later, the vehicle exploded, and a tower of burning fuel rose into the sky. “Behold the work of our life-giving Bayraktar!” Zaluzhnyi’s translated caption read. “Welcome to Hell!”
The Bayraktar TB2 is a flat, gray unmanned aerial vehicle (U.A.V.), with angled wings and a rear propeller. It carries laser-guided bombs and is small enough to be carried in a flatbed truck, and costs a fraction of similar American and Israeli drones. Its designer, Selçuk Bayraktar, the son of a Turkish auto-parts entrepreneur, is one of the world’s leading weapons manufacturers. In the defense of Ukraine, Bayraktar has become a legend, the namesake of a baby lemur at the Kyiv zoo, and the subject of a catchy folk song, which claims that his drone “makes ghosts out of Russian bandits.”
In April, 2016, the TB2 scored its first confirmed kill. Since then, it has been sold to at least thirteen countries, bringing the tactic of the precision air strike to the developing world and reversing the course of several wars. In 2020, in the conflict between Azerbaijan and Armenia over the enclave of Nagorno-Karabakh, Azerbaijan’s dictatorial leader, Ilham Aliyev, used the TB2 to target vehicles and troops, then displayed footage of the strikes on digital billboards in the capital city of Baku.
The TB2 has now carried out more than eight hundred strikes, in conflicts from North Africa to the Caucasus. The bombs it carries can adjust their trajectories in midair, and are so accurate that they can be delivered into an infantry trench. Military analysts had previously assumed that slow, low-flying drones would be of little use in conventional combat, but the TB2 can take out the anti-aircraft systems that are designed to destroy it. “This enabled a fairly significant operational revolution in how wars are being fought right now,” Rich Outzen, a former State Department specialist on Turkey, told me. “This probably happens once every thirty or forty years.”
I spoke with Bayraktar in March, via video. He was in Istanbul, at the headquarters of his company, Baykar Technologies, which employs more than two thousand people. When I asked him about the use of his drones in Ukraine, he told me, “They’re doing what they’re supposed to do—taking out some of the most advanced air-defense systems and armored vehicles in the world.” Bayraktar, who is forty-two years old, has a widow’s peak, soft eyes, and a slightly off-center nose. He was flanked by scale models of new drones, mounted on clear plastic stands, which he displayed to me with the unconcealed pride of an aviation geek. “Any U.A.V. built today to fly, I pilot it myself, because I, like, love it,” he told me. Bayraktar, who has more than two million Twitter followers, uses his account to promote youth-education initiatives, celebrate Turkish martyrs, and post pictures of new aircraft designs. “Some people here consider him like Elon Musk,” Federico Donelli, an international-relations researcher at the University of Genoa, told me.
In May, 2016, Bayraktar married Sümeyye Erdoğan, the youngest daughter of Recep Tayyip Erdoğan, Turkey’s President. Erdoğan is the leader of a political Islamist movement that, the analyst Svante Cornell has written, wishes “to build a powerful, industrialized Turkey that serves as the natural leader of the Muslim world.” Turkey’s arms industry has grown tenfold in the past twenty years, and most of the country’s military equipment is now manufactured locally. “The Bayraktars, and particularly the TB2s, have turned into the flagship of the Turkish defense industry,” Alper Coşkun, a former Turkish diplomat, told me.
Turkey borders Iran, Iraq, Syria, Armenia, Georgia, and the European Union, and it faces Russia across the Black Sea. Donelli told me that the shifting allegiances and complex politics of the region reminded him of Europe in the days before the First World War. “In Bayraktar, they have a kind of genius who can change the historical path of Turkey,” Donelli said.
Erdoğan has held power since 2003. During that time, he has seized control of the courts and the press, amended the Turkish constitution, and advocated for a return to traditional roles for women. Journalists critical of the Erdoğan regime have been beaten with baseball bats and iron rods, and opposition activists have been sentenced to decades in prison. But Turkey’s economy is stagnating, and its inflation rate rose to seventy per cent during the past twelve months. In 2019, Erdoğan’s party lost the mayoralty of Istanbul, which it had held since the nineteen-nineties. The TB2 is a spectacular propaganda machine, and Erdoğan has used its success to promote his vision for Turkish society. As Bayraktar told me, “In this day and age, the biggest change in our lives is driven by technology—and who drives the changes? The ones who create technology.”
Bayraktar and his family live on Baykar’s grounds, which he compared to a university campus, with sports facilities and a park that he called “bigger than Google’s.” While we spoke, his mother, Canan; Sümeyye; and the couple’s four-year-old daughter, also named Canan, were eating dinner in an adjacent room. Bayraktar told me that he was one of the oldest engineers at Baykar, and that many of the firm’s programmers are women. “My software side comes from my mother,” he said.
Bayraktar was born in Istanbul in 1979, the middle of three brothers. His father, Özdemir, the son of a fisherman, graduated from Istanbul Technical University and founded an auto-parts company; Canan, his mother, was an economist and a computer programmer in the punch-card era. The brothers were introduced to machine tools at an early age. “We were working, all throughout our childhood, in the factory,” Bayraktar told me. By the time he was a teen-ager, he was a competent tool-and-die-maker. Özdemir was also an amateur pilot, and as a boy Selçuk would survey Turkey’s splendid geography from the window of his father’s plane. “A small aircraft, it’s like sailing in there,” he told me. “You feel like a bird.” Bayraktar was soon building radio-controlled airplanes from kits, sometimes modifying them with his own designs. “I was hiding my model aircraft under my bed, and working on it secretly,” he said. “I should have been studying for my exams.”
Bayraktar’s radio-controlled aircraft prototypes impressed academic researchers. In 2002, after graduating from Istanbul Technical, he was recruited to the University of Pennsylvania. For his master’s degree, he flew two drones in formation at the Fort Benning Army base, in Georgia. Bayraktar then began a second master’s, at M.I.T., where he pursued the difficult and offbeat goal of trying to land a radio-controlled helicopter on a wall. His adviser, Eric Feron, remembered Bayraktar as a dedicated craftsman and an observant Muslim, with a passion for youth education. He recalled Bayraktar’s enthusiasm when he tutored Feron’s daughter in her mathematics homework, and the time he demonstrated his helicopter to a troop of Girl Scouts. “He was a good pilot,” Feron said. “But I did not understand all that he was after until I got invited to his wedding.”
While Bayraktar was a student, the United States was using Predator drones to strike targets in Afghanistan and Iraq. Bayraktar disapproved of U.S. foreign policy—“I was obsessed with Noam Chomsky,” he told me—and engaged in social activism with other graduate students, most of them foreigners. But he was drawn to the autonomous vehicles. While still enrolled at M.I.T., he began building small prototype drones at the family’s factory in Istanbul.
Özdemir set out to secure government support for Selçuk’s drones. Özdemir was friendly with Necmettin Erbakan, an Islamic nationalist and a vitriolic critic of Western culture. Turkey had been a secular republic since the nineteen-twenties, but Erbakan, a professor of mechanical engineering, believed that by investing in industry and grooming technological talent the country could become a prosperous Islamic nation. In 1996, Erbakan had been elected Turkey’s Prime Minister, but he resigned from the post under pressure from the armed forces, and was banned from politics for threatening to violate Turkey’s constitutional separation of religion and the state. (Erbakan, who had developed connections with the Muslim Brotherhood and Hamas, blamed his ouster on “Zionists.”)
Bayraktar briefed Erbakan on his work, and by the mid-two-thousands Bayraktar was spending his school breaks embedded with the Turkish military. The Bayraktar family also had ties to Erbakan’s protégé, Erdoğan, who was elected Prime Minister in 2002. Bayraktar’s father had been an adviser to Erdoğan when he was a local politician in Istanbul, and Bayraktar recalled Erdoğan visiting the family house.
Bayraktar’s first drone, the hand-launched Mini U.A.V., weighed about twenty pounds. In early tests, it flew about ten feet, but Bayraktar refined the design, and soon the Mini could stay aloft for more than an hour. Bayraktar tested it in the snowy mountains of southeastern Anatolia, surveilling the armed rebels of the P.K.K., a Kurdish separatist movement. Feron recalled his astonishment when he contacted Bayraktar in the mountains. “He has no hesitation to go to the front lines, to really the worst conditions that the Turkish military can go into, and basically be with them, and live with them, and learn directly from the user,” he said. Bayraktar told me he prefers to field-test a drone in an active combat theatre. “It needs to be battle-hardened and robust,” he said. “If this doesn’t work at ten-thousand-feet elevation, at minus-thirty-degrees temperature, then this is just another item that you have to carry in your backpack.”
Bayraktar began developing a larger drone. In 2014, he débuted a prototype of the TB2, a propeller-driven fixed-wing aircraft large enough to carry munitions. That year, Erdoğan, who was facing term limits as Prime Minister, won the Presidential election. A popular referendum had given him control of the courts as well, and he began using his powers to prosecute political enemies. “They arrested not only a quarter of active-duty admirals and generals but also many of Erdoğan’s civil-society opponents,” Soner Cagaptay, who has written four biographies of Erdoğan, told me. Bayraktar dedicated his prototype to the memory of Erdoğan’s mentor, Erbakan. “He gave all his life’s work to changing the culture,” Bayraktar said. (In his posthumously published memoirs, Erbakan asserted that, for the past four hundred years, the world has secretly been governed by a coalition of Jews and Freemasons.)
In December, 2015, Bayraktar oversaw the first tests of the TB2’s precision-strike capability. Using a laser to guide dummy bombs, the drone was able to strike a target the size of a picnic blanket from five miles away. By April, 2016, the TB2 was delivering live munitions. The earliest targets were the P.K.K.—drone strikes have killed at least twenty of the organization’s leaders, along with whoever was standing near them. The strikes also taught Bayraktar to fight for the airwaves. Drones are controlled through radio signals, which opponents can jam by broadcasting static. Pilots can counter by hopping frequencies, or by boosting the amplitude of their broadcast signal. “There’s so many jammers in Turkey, because the P.K.K. had been using drones, too,” Bayraktar said. “It’s one of the hottest places to fly.” Turkey’s remote-controlled counterinsurgency was thought to be the first time a country had conducted a drone campaign against citizens on its own soil, but Bayraktar, citing the threat of terrorism, remains an enthusiastic supporter of the campaign.
That May, he married the President’s daughter. More than five thousand people attended the wedding, including much of the country’s political élite. Sümeyye wore a head scarf and an immaculate long-sleeved white dress from the Paris designer Dice Kayek. By then, the Turkish state had taken on an overtly Islamic character. In the nineteen-nineties, the hijab was banned in universities and public buildings. Now “having a hijab-wearing wife is the surest way to get a job in the Erdoğan administration,” Cagaptay wrote. Bayraktar regularly tweets Islamic blessings to his followers on social media, and both Sümeyye and the elder Canan wear the hijab.
Like Bayraktar, Sümeyye is a second-generation member of Turkey’s Islamist élite, and she graduated from Indiana University in 2005 with a degree in sociology. “She has great ethics,” Bayraktar told me. “She’s a real challenger.” Other people describe her as a fashionable, feminist upgrade on her father’s politics—a Turkish version of Ivanka Trump. “Women have lost significantly under Erdoğan in terms of access to political power,” Cagaptay told me. “When there are women appointed in the cabinet, they have token jobs.”
In June, 2016, terrorists affiliated with ISIS killed forty-five people at the Istanbul airport, and soon a new front was opened in Syria, where Turkey used Bayraktar’s drones to attack the short-lived ISIS caliphate. (The drones were later turned on Syria’s Kurds.) In July, a small group inside the Turkish military staged a coup against Erdoğan. The coup was chaotic and unpopular—the main opposition parties condemned it, a conspirator flying a fighter jet dropped a bomb on the Turkish parliament, and Erdoğan was reportedly targeted by an assassination squad sent to his hotel. Erdoğan blamed the followers of Fetullah Gülen, an exiled cleric and political leader who now lives in Pennsylvania, and purged more than a hundred thousand government employees. (Gülen denies involvement in the coup.) Bayraktar was now part of Erdoğan’s inner circle, and his drones were marketed for export.
Bayraktar is a Turkish celebrity, and his social-media feeds are crowded with patriotic reply guys. When he gives talks to trainee pilots, which he does often, he wears a leather jacket decorated with flight patches; when he tours universities, which he also does often, he wears a blazer over a turtleneck. In our conversation, he referred to concepts from critical gender theory, spoke of Russia’s violations of international law, and quoted Benjamin Franklin: “Those who give up essential freedom for temporary security deserve neither security nor freedom.” But he is also an outspoken defender of Erdoğan’s government. In 2017, Erdoğan held a constitutional referendum that resulted in the dissolution of the post of Prime Minister, effectively enshrining his control of the state. Using politically motivated tax audits to seize independent media outlets, his government sold them in single-bidder “auctions” to supporters, and a number of journalists have been jailed for the crime of “insulting the President.” Erdoğan frequently sues journalists, and Bayraktar has done so, too. He recently celebrated a thirty-thousand-lira fine levied against Çiğdem Toker, who was investigating a foundation that Bayraktar helps run. Bayraktar tweeted, “Journalism: Lying, fraud, shamelessness.”
Bayraktar’s older brother, Haluk, is the C.E.O. of Baykar Technologies; Selçuk is the C.T.O. and the chairman of the board. (Their father died last year.) In addition to being used in Ukraine and Azerbaijan, TB2s have been deployed by the governments of Nigeria, Ethiopia, Qatar, Libya, Morocco, and Poland. When I spoke with Bayraktar, Baykar had just completed a sales call in East Asia, marketing its forthcoming TB3 drone, which can be launched from a boat.
Several news sources have reported that a single TB2 drone can be purchased for a million dollars, but Bayraktar, while not giving a precise figure, told me that it costs more. In any event, single-unit figures are misleading; TB2s are sold as a “platform,” along with portable command stations and communications equipment. In 2019, Ukraine bought a fleet of at least six TB2s for a reported sixty-nine million dollars; a similar fleet of Reaper drones costs about six times that. “Tactically, it’s right in the sweet spot,” Bayraktar said of the TB2. “It’s not too small, but it’s not too big. And it’s not too cheap, but it’s not too expensive.”
Once a fleet is purchased, operators travel to a facility in western Turkey for several months of training. “You don’t just buy it,” Mark Cancian, a military-procurement specialist at the Center for Strategic and International Studies, told me. “You have married the supplier, because you need a constant stream of spare parts and repair expertise.” Turkey has become adept at leveraging this relationship. It struck a defense deal with Nigeria, which included training the country’s pilots on TB2s, in exchange for access to minerals and liquefied natural gas. In Ethiopia, TB2s were delivered after the government seized a number of Gülenist schools. Unlike dealing with the U.S., obtaining weapons from Turkey doesn’t involve human-rights oversight. “There are really no restrictions on use,” Cancian said.
Buyers are also supported by Baykar’s programmers. The TB2, which Bayraktar compares to his smartphone, has more than forty onboard computers, and the company sends out software updates several times a month to adapt to adversarial tactics. “You’ve seen the articles, probably, asking how World War One-performance aircraft can compete against some of the most advanced air defenses in the world,” Bayraktar said. “The trick there is to continuously upgrade them.”
Much of the drones’ battlefield experience has come against Russian equipment. Russia and Turkey have a complicated relationship: Russia is a key trading partner for Turkey, Turkey is a popular holiday destination for Russian tourists, and Russia is overseeing the construction of Turkey’s first nuclear power plant, which, when completed, will supply a tenth of the country’s electricity. In 2017, Turkey angered its allies in NATO when it bought a Russian missile system, triggering U.S. sanctions. Still, both Turkey and Russia are seeking to restore their standings as world powers, and even before the war in Ukraine they were often in conflict.
In the Libyan civil war, Turkey and Russia backed opposing factions, and the TB2 faced off against Russia’s Pantsir-S1, an anti-aircraft system that shoots missiles at planes and can be mounted on a vehicle. At least nine Pantsirs were destroyed; so were at least twelve drones.
Another theatre opened in the Caucasus in 2020, when Azerbaijan attacked the ethnic-Armenian enclave of Nagorno-Karabakh. Last month, I met Robert Avetisyan, the Armenian representative to the United States from Nagorno-Karabakh, at a café in Glendale, California. Avetisyan told me, “During the first several days, Azerbaijan was not successful, in anything, until the Turkish generals took the joysticks.” Armenia has a security alliance with Russia, which provides most of its military equipment, some dating to the Soviet era. For six weeks, TB2 drones bombarded that equipment relentlessly; one independent analysis tallied more than five hundred targets destroyed, including tanks, artillery, and missile-defense systems. “We lost the air war,” Avetisyan said. TB2s also targeted Armenian troops, and footage of these strikes was shared by the Azerbaijani Ministry of Defense. A six-minute compilation of the videos, posted to YouTube midway through the war, shows dozens of variations on the same scene: Armenian soldiers, cowering in trenches or huddled around transport trucks, alerted to their impending death by the hiss of an incoming bomb before a blast sends their bodies hurtling through the air.
Avetisyan sent me a translated statement from Arthur Saryan, a twenty-seven-year-old veteran of the war. Saryan had been standing with a small deployment of soldiers when his unit was hit by a bomb at around two in the morning. “We had no idea that we were the target,” Saryan said. “We heard it only two or three seconds before it hit us.” The bomb created a fireball. “Everyone was burnt. All the bodies were burnt and the cars immediately caught fire.” Six soldiers were killed, and seven were wounded. “It was a horrible scene,” Saryan said.
Bayraktar’s TB2 drones fly slowly, and their propellers should be easy to locate. But in Nagorno-Karabakh the drones seemed to evade enemy reconnaissance, either through radar jamming or through technical incompetence. “A striking feature of the video clips was the utter helplessness of the doomed systems,” the Israeli missile expert Uzi Rubin wrote, after reviewing Azerbaijani footage of precision air strikes. “Some were seen being destroyed with their radar antennas still rotating, searching in vain for targets.” The Azerbaijanis also deliberately triggered enemy radar by flying unmanned crop dusters at Armenian positions. If the Armenian missile launchers took the bait, revealing their location, they were destroyed by TB2s.
Turkey and Azerbaijan share close linguistic and political ties, but the Nagorno-Karabakh conflict represented a new level of coöperation. “There’s such cultural affinity between the Azerbaijanis and the Anatolian Turks—they say, ‘One nation, two states,’ ” Outzen, the former State Department specialist, told me. “Now they’re starting to say, ‘One nation, two states, one army.’ ” This is bad news for Armenia, which is wedged between the two. Turkey has not acknowledged its role in the Armenian genocide of 1915, and the Azerbaijani President, Aliyev, has referred to Armenia as “a territory artificially created on ancient Azerbaijani lands.”
Such claims have led the influential Armenian diaspora to block Western components from being used in Bayraktar’s drones, through both congressional action in the U.S. and pressure on manufacturers. But an analysis of a downed TB2 in Nagorno-Karabakh revealed that the aircraft was using a G.P.S. transponder made by the Swiss manufacturer Garmin. The company issued a statement saying that it had no supply relationship with Baykar, and that the transponder was commercially available. Nevertheless, Bayraktar has sought to reduce his reliance on Western components; in a recent Instagram post, he claimed that ninety-three per cent of the TB2’s components were now manufactured in Turkey. Bayraktar’s development cycle has a D.I.Y. element that can make the Pentagon’s practices seem out of date. “Our services are so culturally tied to a cumbersome acquisition process,” Andy Milburn, a senior fellow at the Middle East Institute, told me. “What he’s doing is so modular, so replaceable.” Feron, Bayraktar’s graduate adviser, recalled the aftermarket modifications that Bayraktar made to store-bought drones. “Sometimes in the aerospace industry they do a lot of simulations, but they never touch the machine,” Feron said. “He’s much more of a builder.”
Last October, Ukraine announced that it was constructing a factory outside Kyiv to assemble Bayraktar’s drones. Shortly afterward, Ukraine released video of a TB2 conducting a strike against an artillery position in the contested eastern region of Donbas. The Air Force colonel who runs Ukraine’s drone program has not revealed his identity, citing security concerns, but in 2019 he travelled to Baykar’s facility in western Turkey for three months of training. “I loved it there,” he told Al-Monitor, an online newsletter.
“The acquisition of certain systems—like the TB2 and the American Javelin anti-tank missile—may actually further incentivize a Russian invasion instead of deterring one,” the military analyst Aaron Stein wrote in a prescient blog post in December. In February, Russia invaded.
The early days of the war looked like a repeat of Nagorno-Karabakh. Publicly available footage suggests that TB2s destroyed at least ten Russian missile batteries and disrupted the Russian supply lines by bombing transport trucks. In the past few weeks, though, the release of strike videos has slowed. This may be due to security concerns, but it’s also possible that the Russians have caught up—the TB2 has no real defense against a fighter jet, and in the lead-up to the invasion the Russian military trained against the drones. In early March, Ukrainian officials announced that they were receiving another shipment from Baykar; by the end of the month, a tally of press releases showed that Russia claimed to have shot down thirty-nine TB2s, which would likely constitute the bulk of the Ukrainian fleet. Ukraine’s President, Volodymyr Zelensky, was initially enthusiastic about the TB2, but in April, at a press conference in a Kyiv subway station, he downplayed the aircraft’s importance. “With all due respect to Bayraktar, and to any hardware, I will tell you, frankly, this is a different war,” he said. “Drones may help, but they will not make the difference.” Still, a couple of weeks before, Alexey Yerkhov, the Russian Ambassador to Turkey, had complained about the sale. “Explanations like ‘business is business’ won’t work, since your drones are killing our soldiers,” Yerkhov said, in remarks addressed to the Turkish government.
In our conversation, Bayraktar condemned Russia’s actions but declined to discuss operational specifics. “Let’s not put any of these countries at risk,” he said. “If any poor Ukrainian was hurt, I would be very sad. I would be responsible on the day of judgment.” Bayraktar’s software upgrades respond to customer feedback, and his designs continue to evolve. His latest production drone, the twin-prop Akinci, can fly to forty thousand feet and can be equipped with jamming countermeasures. In March, he tweeted a picture of the prototype for Baykar’s first jet, the Kizilelma, which resembles an autonomous F-16 without a cockpit. (In addition to the military vehicles, there is also the Cezeri, a human-size quadcopter, which Bayraktar has termed a “flying car.”)
Bayraktar is also investing in autonomy, and told me that he was ahead of the competition in this area. “That’s what our expertise is,” he said. “Push a button, and the aircraft lands.” An autonomous drone might find its way home if its communication links were severed. To develop such systems, Bayraktar will need to retain programming talent, but Erdoğan’s regime is struggling against brain drain. “I, personally, know a whole bunch of people who have left,” Cagaptay said. “In Turkey, they don’t see a future for themselves.”
“Sometimes oppression is worse than death,” Bayraktar told me. He was referring to Ukraine’s efforts to defend itself against the Russian invasion, but, a month after we talked, the Turkish civil-rights campaigner Osman Kavala was sentenced to life in prison, after a politically motivated trial that Amnesty International called a “travesty of justice.” On May 1st, the Ukrainian defense ministry resumed releasing footage from Bayraktar’s drones, showing them striking a pair of Russian patrol boats. Another video released that day showed Ukrainian soldiers, against a backdrop of destroyed Russian vehicles, dancing, laughing, and singing Bayraktar’s name.
Saturday, May 07, 2022
RBI MPC Announcement
On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (May 4, 2022) decided to:
Increase the policy repo rate under the liquidity adjustment facility (LAF) by 40 basis points to 4.40 per cent with immediate effect.
Consequently, the standing deposit facility (SDF) rate stands adjusted to 4.15 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 4.65 per cent.
The MPC also decided to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth. These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.
The main considerations underlying the decision are set out in the statement below
Assessment
Global Economy
2. Since the MPC’s meeting in April 2022, disruptions, shortages and escalating prices induced by the geopolitical tensions and sanctions have persisted and downside risks have increased. The International Monetary Fund (IMF) has revised down its forecast of global output growth for 2022 by 0.8 percentage point to 3.6 per cent, in a span of less than three months. The World Trade Organization has scaled down projection of world trade growth for 2022 by 1.7 percentage points to 3.0 per cent.
Domestic Economy
3. Domestic economic activity stabilised in March-April with the ebbing of the third wave of COVID-19 and the easing of restrictions. Urban demand appears to have maintained expansion but some weakness persists in rural demand. Investment activity seems to be gaining traction. Merchandise exports recorded double digit expansion for the fourteenth consecutive month in April. Non-oil non-gold imports also grew robustly on the back of improving domestic demand.
4. Overall system liquidity remained in large surplus. Bank credit rose (y-o-y) by 11.1 per cent as on April 22, 2022. India’s foreign exchange reserves declined by US$ 6.9 billion in 2022-23 (up to April 22) to US$ 600.4 billion.
5. In March 2022, headline CPI inflation surged to 7.0 per cent from 6.1 per cent in February, largely reflecting the impact of geopolitical spillovers. Food inflation increased by 154 basis points to 7.5 per cent and core inflation rose by 54 bps to 6.4 per cent. The rapid rise in inflation is occurring in an environment in which inflationary pressures are broadening across the world. The IMF projects inflation to increase by 2.6 percentage points to 5.7 per cent in advanced economies in 2022 and by 2.8 percentage points to 8.7 per cent in emerging market and developing economies.
Outlook
6. Heightened uncertainty surrounds the inflation trajectory, which is heavily contingent upon the evolving geopolitical situation. Global commodity price dynamics are driving the path of food inflation in India, including prices of inflation sensitive items that are impacted by global shortages due to output losses and export restrictions by key producing countries. International crude oil prices remain high but volatile, posing considerable upside risks to the inflation trajectory through both direct and indirect effects. Core inflation is likely to remain elevated in the coming months, reflecting high domestic pump prices and pressures from prices of essential medicines. Renewed lockdowns and supply chain disruptions due to resurgence of COVID-19 infections in major economies could sustain higher logistics costs for longer. All these factors impart significant upside risks to the inflation trajectory set out in the April statement of the MPC.
7. As regard the outlook for domestic economic activity, the forecast of a normal southwest monsoon brightens the prospects for kharif production. The recovery in contact-intensive services is expected to be sustained, with the ebbing of the third wave and the growing vaccination coverage. Investment activity should get an uplift from robust government capex, improving capacity utilisation, stronger corporate balance sheets and congenial financial conditions. On the other hand, the worsening external environment, elevated commodity prices and persistent supply bottlenecks pose formidable headwinds, along with volatility spillovers from monetary policy normalisation in advanced economies. On balance, the Indian economy appears capable of weathering the deterioration in geopolitical conditions but it is prudent to continuously monitor the balance of risks.
8. Against this background, the MPC is of the view that while economic activity is navigating the vortex of forces confronting the world with resilience on the strength of underlying fundamentals and buffers, the risks to the near-term inflation outlook are rapidly materialising, as reflected in the inflation print for March and the developments thereafter. In this milieu, the MPC expects inflation to rule at elevated levels, warranting resolute and calibrated steps to anchor inflation expectations and contain second round effects. Accordingly, the MPC decided to increase the policy repo rate by 40 basis points to 4.40 per cent. The MPC also decided to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.
9. All members of the MPC – Dr. Shashanka Bhide, Dr. Ashima Goyal, Prof. Jayanth R. Varma, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra and Shri Shaktikanta Das – unanimously voted to increase the policy repo rate by 40 basis points to 4.4 per cent.
10. All members, namely, Dr. Shashanka Bhide, Dr. Ashima Goyal, Prof. Jayanth R. Varma, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra and Shri Shaktikanta Das unanimously voted to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.
11. The minutes of the MPC’s meeting will be published on May 18, 2022.
12. The next meeting of the MPC is scheduled during June 6-8, 2022.
Increase the policy repo rate under the liquidity adjustment facility (LAF) by 40 basis points to 4.40 per cent with immediate effect.
Consequently, the standing deposit facility (SDF) rate stands adjusted to 4.15 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 4.65 per cent.
The MPC also decided to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth. These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.
The main considerations underlying the decision are set out in the statement below
Assessment
Global Economy
2. Since the MPC’s meeting in April 2022, disruptions, shortages and escalating prices induced by the geopolitical tensions and sanctions have persisted and downside risks have increased. The International Monetary Fund (IMF) has revised down its forecast of global output growth for 2022 by 0.8 percentage point to 3.6 per cent, in a span of less than three months. The World Trade Organization has scaled down projection of world trade growth for 2022 by 1.7 percentage points to 3.0 per cent.
Domestic Economy
3. Domestic economic activity stabilised in March-April with the ebbing of the third wave of COVID-19 and the easing of restrictions. Urban demand appears to have maintained expansion but some weakness persists in rural demand. Investment activity seems to be gaining traction. Merchandise exports recorded double digit expansion for the fourteenth consecutive month in April. Non-oil non-gold imports also grew robustly on the back of improving domestic demand.
4. Overall system liquidity remained in large surplus. Bank credit rose (y-o-y) by 11.1 per cent as on April 22, 2022. India’s foreign exchange reserves declined by US$ 6.9 billion in 2022-23 (up to April 22) to US$ 600.4 billion.
5. In March 2022, headline CPI inflation surged to 7.0 per cent from 6.1 per cent in February, largely reflecting the impact of geopolitical spillovers. Food inflation increased by 154 basis points to 7.5 per cent and core inflation rose by 54 bps to 6.4 per cent. The rapid rise in inflation is occurring in an environment in which inflationary pressures are broadening across the world. The IMF projects inflation to increase by 2.6 percentage points to 5.7 per cent in advanced economies in 2022 and by 2.8 percentage points to 8.7 per cent in emerging market and developing economies.
Outlook
6. Heightened uncertainty surrounds the inflation trajectory, which is heavily contingent upon the evolving geopolitical situation. Global commodity price dynamics are driving the path of food inflation in India, including prices of inflation sensitive items that are impacted by global shortages due to output losses and export restrictions by key producing countries. International crude oil prices remain high but volatile, posing considerable upside risks to the inflation trajectory through both direct and indirect effects. Core inflation is likely to remain elevated in the coming months, reflecting high domestic pump prices and pressures from prices of essential medicines. Renewed lockdowns and supply chain disruptions due to resurgence of COVID-19 infections in major economies could sustain higher logistics costs for longer. All these factors impart significant upside risks to the inflation trajectory set out in the April statement of the MPC.
7. As regard the outlook for domestic economic activity, the forecast of a normal southwest monsoon brightens the prospects for kharif production. The recovery in contact-intensive services is expected to be sustained, with the ebbing of the third wave and the growing vaccination coverage. Investment activity should get an uplift from robust government capex, improving capacity utilisation, stronger corporate balance sheets and congenial financial conditions. On the other hand, the worsening external environment, elevated commodity prices and persistent supply bottlenecks pose formidable headwinds, along with volatility spillovers from monetary policy normalisation in advanced economies. On balance, the Indian economy appears capable of weathering the deterioration in geopolitical conditions but it is prudent to continuously monitor the balance of risks.
8. Against this background, the MPC is of the view that while economic activity is navigating the vortex of forces confronting the world with resilience on the strength of underlying fundamentals and buffers, the risks to the near-term inflation outlook are rapidly materialising, as reflected in the inflation print for March and the developments thereafter. In this milieu, the MPC expects inflation to rule at elevated levels, warranting resolute and calibrated steps to anchor inflation expectations and contain second round effects. Accordingly, the MPC decided to increase the policy repo rate by 40 basis points to 4.40 per cent. The MPC also decided to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.
9. All members of the MPC – Dr. Shashanka Bhide, Dr. Ashima Goyal, Prof. Jayanth R. Varma, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra and Shri Shaktikanta Das – unanimously voted to increase the policy repo rate by 40 basis points to 4.4 per cent.
10. All members, namely, Dr. Shashanka Bhide, Dr. Ashima Goyal, Prof. Jayanth R. Varma, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra and Shri Shaktikanta Das unanimously voted to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.
11. The minutes of the MPC’s meeting will be published on May 18, 2022.
12. The next meeting of the MPC is scheduled during June 6-8, 2022.
RIL Results overview : Q4 2021-22
Consolidated EBITDA - 125,687 Cr Rs which is a 5 year CAGR of 17.7%
Net profit at 67,845 Cr Rs up 26% YoY
Reliance Retail - Revenue/EBITDA - 27%/26% YoY Gain
EBITDA - 12,423 Cr
Customer Base - 193mn
Digital Services
EBITDA - 40,268 Cr
Revenue/EBITDA - 11%/18% YoY Gain
ARPU @ 167 Rs
Jio Fiber now the largest broadband service in India since its launch in two years
Data traffic - 91.4bn GB up 46% YoY
O2C and Oil/Gas
EBITDA - 58,179 Cr Rs
EBITDA up almost 40% YoY
O2C contributed to 52% of incremental EBITDA
Debt position
Gross Debt - 266,305 Cr
Gross Cash - 231,490 Cr
Net Debt - 34,815 cr
Net profit at 67,845 Cr Rs up 26% YoY
Reliance Retail - Revenue/EBITDA - 27%/26% YoY Gain
EBITDA - 12,423 Cr
Customer Base - 193mn
Digital Services
EBITDA - 40,268 Cr
Revenue/EBITDA - 11%/18% YoY Gain
ARPU @ 167 Rs
Jio Fiber now the largest broadband service in India since its launch in two years
Data traffic - 91.4bn GB up 46% YoY
O2C and Oil/Gas
EBITDA - 58,179 Cr Rs
EBITDA up almost 40% YoY
O2C contributed to 52% of incremental EBITDA
Debt position
Gross Debt - 266,305 Cr
Gross Cash - 231,490 Cr
Net Debt - 34,815 cr
Monday, May 02, 2022
Divestment in India
On October 8, 2021, the Cabinet Committee on Economic Affairs approved the bid placed by Tata Sons Private Limited to acquire the government’s entire stake in Air India. The transaction is expected to be completed by December 2021. In the Union Budget for 2021-22, the central government pegged the receipts from disinvestment at Rs 1.75 lakh crore. In the Budget speech, Finance Minister Nirmala Sitharaman announced that the government will complete the disinvestment of Air India, Bharat Petroleum Corporation Limited, and IDBI Bank in 2021-22. In light of this, we look at the trends in disinvestment receipts of the central government over the years.
Since 2010, barring two years (2017-18 and 2018-19), the central government’s actual receipts from disinvestment have consistently fallen short of the budget estimate. In 2017-18, 37% of the disinvestment receipts were raised from the strategic disinvestment of Hindustan Petroleum Corporation Limited (HPCL), and 24% were raised from the listing of various central public sector enterprises (CPSEs). In 2018-19, government raised Rs 45,080 crore from exchange-traded funds and also concluded the sale of REC Limited.
So far, in the current financial year, the central government has raised only 5% of the disinvestment target that was set in the Budget (Rs 9,111 crore, excluding receipts from the sale of Air India and its subsidiaries). The Standing Committee on Finance has noted that the disinvestment process usually takes a long time with some entities even undergoing a fourth iteration. In as many as 21 cases, cleared by the Union Cabinet since 2015-16, the central government is yet to conclude strategic disinvestment transactions.
Strategic disinvestment involves sale of a substantial portion of the government’s shareholding in a CPSE (up to 50% or more) along with transfer of management control.
In the last six financial years, all the transactions where the government sold more than 51% of its shareholding in CPSEs, along with transfer of management control, have involved another CPSE picking up the government’s stake. In 2017-18, the government raised Rs 36,915 crore from the sale of HPCL to the state-owned Oil and Natural Gas Corporation Limited. Similarly, in 2018-19, the government received Rs 14,500 crore from the sale of REC Limited to Power Finance Corporation Limited which is another state-owned company in the power sector.
Several strategic disinvestment transactions have been in the pipeline for a long time. For instance, sale of Bharat Petroleum Corporation Limited, approved in November 2019, is yet to be concluded.
Exchange-traded funds have brought the maximum disinvestment receipts for the government The government uses various methods for disinvestment. In the last six years, the most significant modes of disinvestment have been exchange-traded funds (ETFs), offer-for-sale (OFS), strategic disinvestment, buybacks, and initial public offer (IPO).
An ETF is a basket of stocks. The government has two primary ETFs: (i) CPSE-ETF and (ii) Bharat 22 ETF. Between 2015-16 and 2020-21, the government raised the maximum disinvestment receipts from ETFs.
OFS involves the sale of government’s shareholding in listed CPSEs in the stock market. However, even this has involved CPSEs buying significant stake in other government companies. For instance, in 2015, Life Insurance Corporation of India (LIC) picked up 45% of a 10% OFS in Coal India Limited. In March 2013, LIC bought 71% of 5.82% stake sale in Steel Authority of India Limited.
New Public Sector Enterprise (PSE) Policy aims to privatise CPSEs across sectors
According to the new PSE policy, the central government has divided most sectors into strategic and non-strategic.
In strategic sectors, the government will maintain a bare minimum presence. The remaining entities will be considered for privatisation, merger, subsidiarisation or closure. Sectors categorised as strategic include: (i) atomic energy, space and defence, (ii) transport and telecommunication; (iii) power, petroleum, coal and other minerals, and (iv) banking, insurance, and financial services.
CPSEs in non-strategic sectors will be either privatised or closed.
Certain sectors such as development financing/refinancing institutions, major port trusts, and CPSEs providing support to vulnerable groups have been kept out of the framework.
Sources: Department of Investment and Public Asset Management; Union Budget documents; 25th Report of the Standing Committee on Finance, March 16, 2021; Annual Report (2018-19), Department of Investment and Public Asset Management; New Public Sector Enterprise (“PSE”) Policy for Atmanirbhar Bharat, Department of Investment and Public Asset Management, February 4, 2021; “LIC picked up 71% of shares divested by govt in SAIL on Friday”, The Economic Times, March 26, 2013; “In Coal India stake sale LIC bought almost 50% of shares on offer”, The Economic Times, February 2, 2015; PRS.
Since 2010, barring two years (2017-18 and 2018-19), the central government’s actual receipts from disinvestment have consistently fallen short of the budget estimate. In 2017-18, 37% of the disinvestment receipts were raised from the strategic disinvestment of Hindustan Petroleum Corporation Limited (HPCL), and 24% were raised from the listing of various central public sector enterprises (CPSEs). In 2018-19, government raised Rs 45,080 crore from exchange-traded funds and also concluded the sale of REC Limited.
So far, in the current financial year, the central government has raised only 5% of the disinvestment target that was set in the Budget (Rs 9,111 crore, excluding receipts from the sale of Air India and its subsidiaries). The Standing Committee on Finance has noted that the disinvestment process usually takes a long time with some entities even undergoing a fourth iteration. In as many as 21 cases, cleared by the Union Cabinet since 2015-16, the central government is yet to conclude strategic disinvestment transactions.
Strategic disinvestment involves sale of a substantial portion of the government’s shareholding in a CPSE (up to 50% or more) along with transfer of management control.
In the last six financial years, all the transactions where the government sold more than 51% of its shareholding in CPSEs, along with transfer of management control, have involved another CPSE picking up the government’s stake. In 2017-18, the government raised Rs 36,915 crore from the sale of HPCL to the state-owned Oil and Natural Gas Corporation Limited. Similarly, in 2018-19, the government received Rs 14,500 crore from the sale of REC Limited to Power Finance Corporation Limited which is another state-owned company in the power sector.
Several strategic disinvestment transactions have been in the pipeline for a long time. For instance, sale of Bharat Petroleum Corporation Limited, approved in November 2019, is yet to be concluded.
Exchange-traded funds have brought the maximum disinvestment receipts for the government The government uses various methods for disinvestment. In the last six years, the most significant modes of disinvestment have been exchange-traded funds (ETFs), offer-for-sale (OFS), strategic disinvestment, buybacks, and initial public offer (IPO).
An ETF is a basket of stocks. The government has two primary ETFs: (i) CPSE-ETF and (ii) Bharat 22 ETF. Between 2015-16 and 2020-21, the government raised the maximum disinvestment receipts from ETFs.
OFS involves the sale of government’s shareholding in listed CPSEs in the stock market. However, even this has involved CPSEs buying significant stake in other government companies. For instance, in 2015, Life Insurance Corporation of India (LIC) picked up 45% of a 10% OFS in Coal India Limited. In March 2013, LIC bought 71% of 5.82% stake sale in Steel Authority of India Limited.
New Public Sector Enterprise (PSE) Policy aims to privatise CPSEs across sectors
According to the new PSE policy, the central government has divided most sectors into strategic and non-strategic.
In strategic sectors, the government will maintain a bare minimum presence. The remaining entities will be considered for privatisation, merger, subsidiarisation or closure. Sectors categorised as strategic include: (i) atomic energy, space and defence, (ii) transport and telecommunication; (iii) power, petroleum, coal and other minerals, and (iv) banking, insurance, and financial services.
CPSEs in non-strategic sectors will be either privatised or closed.
Certain sectors such as development financing/refinancing institutions, major port trusts, and CPSEs providing support to vulnerable groups have been kept out of the framework.
Sources: Department of Investment and Public Asset Management; Union Budget documents; 25th Report of the Standing Committee on Finance, March 16, 2021; Annual Report (2018-19), Department of Investment and Public Asset Management; New Public Sector Enterprise (“PSE”) Policy for Atmanirbhar Bharat, Department of Investment and Public Asset Management, February 4, 2021; “LIC picked up 71% of shares divested by govt in SAIL on Friday”, The Economic Times, March 26, 2013; “In Coal India stake sale LIC bought almost 50% of shares on offer”, The Economic Times, February 2, 2015; PRS.
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