President Erdogan’s unorthodox economic policies continue to devalue the Turkish lira, precipitating a two-decade high of inflation and a low in net international reserves.
Ankara’s ongoing balancing act over Russia’s war in Ukraine, its heavy-handed attempt to extract concessions for unblocking NATO enlargement, and its efforts to improve relations with Middle Eastern and African countries signal a further shift away from the West.
The authoritarian president squarely focuses on shoring up public support for the 2023 election.
Implications for International Business
The risk of sovereign default or the introduction of capital controls spook investors, even as the lira’s weakening depresses asset prices, thus providing investment opportunities.
Russian financial inflows into Turkey and the potential for U.S. and EU sanctions create compliance risks and burdens for Western companies.
Ankara’s economic outreach to the Middle East and Africa helps to make the country a regional hub for multinational companies active in those regions.
State of Play Economic Headwinds Spell Trouble for Erdogan
Ahead of Turkey’s June 2023 presidential and parliamentary elections, President Erdogan has kicked off a long campaign. As his plan to turn the economy around by lowering interest rates has so far backfired, he is set to fuel polarization at home and pursue adventurist policies abroad to regain disgruntled voters. Already, his unorthodox policy to keep Turkey’s benchmark lending rate at 14% has led to the lowest real interest rate globally, of minus 60%, due to sky-rocketing inflation halving the Turkish lira’s value over the past year. Ankara’s foreign and security policy moves exacerbate the country’s macro risk. Another attack on Washington’s Kurdish partners fighting the Islamic State in northern Syria could trigger the reintroduction of US sanctions first implemented following an earlier cross-border military operation in October 2019. Similarly, taking steps to annex Northern Cyprus or acting on threats against Greek islands in the Aegean would expose Ankara to further EU measures last extended in November 2021 for Ankara’s unauthorized gas drilling in the Eastern Mediterranean. Finally, Turkey’s ongoing balancing act between Russia and Ukraine and its 40-day opposition to Finland’s and Sweden’s respective NATO membership bids have further strained relations with the West.
Key Issues Turkey’s Foreign Policy Estranges Its Western Allies
In power for nearly two decades, Erdogan is keener than ever to act internationally without restraints from NATO allies and transatlantic values. Such a geostrategic reorientation serves two interlinked ideological purposes. While Erdogan continues to challenge the Western-led international order abroad, he hopes to hasten the religious-political transformation of Turkish society at home. The Turkish president sees the US withdrawal from Afghanistan and Russia’s invasion of Ukraine as developments underlining Turkey’s geostrategic importance. To him, they constitute opportunities to bolster his leadership credentials by taking unilateral action in the Aegean and Syria and extracting concessions from the West, such as the lifting of various arms sales restrictions, particularly for the transfer of F-16 fighters.
Perceived opportunities abroad and an unprecedented fall in voter support for Erdogan’s Islamist-rooted Justice and Development Party at home exacerbate risks of an adventurist foreign and security policy to create a rally-round-the-flag effect. While nationalist policies may offer some remedy for the growing economic grievances of the Turkish electorate, they are sure to further alienate Western allies. The Turkish security establishment, which has a growing recognition of the threat posed by an expansionist Russia, would prefer a turn away from Moscow for a realignment with the West, but they do not have sufficient leverage to shape Erdogan’s course of action. The political elite is also increasingly frustrated by the country’s economic downturn, in part triggered by its drift away from the West. But, Erdogan appears more interested in using this crisis to cash in by attracting Russian capital, extracting deals from the West, and continuing his balancing act between the Kremlin and NATO.
Turkey Eyes Economic Opportunities in the East and the South
Erdogan’s recognition of Turkey’s growing isolation in the Eastern Mediterranean and the Middle East as well as his pressing need for trade with and investment from these regions have led to a significant policy change toward the East and South. Ankara felt threatened by its exclusion from the East Mediterranean Gas Forum in 2019 and by deepening diplomatic and security cooperation between Cyprus, Egypt, Greece, Israel, and the Gulf states. Therefore, Turkey has begun to mend ties with Egypt, Israel, Saudi Arabia, and the UAE over the past year, including visits at the highest levels and some initial attempts at diplomatic and security cooperation. On the economic front, Ankara’s normalization initiatives have not only led to these countries easing some of their recent trade restrictions against Turkey but also a $5 bn swap deal with the UAE and a Saudi-Turkish declaration of a “new era of cooperation”. The political price Erdogan had to pay for this rapprochement was to distance himself from Islamist movements in the region, such as the Muslim Brotherhood and Hamas. He also had to strengthen counter-terrorism cooperation with Israel, especially against Iran, and stop holding the Saudi leadership accountable for Jamal Khashoggi’s murder. In Erdogan’s view, this is a small cost if the diplomatic and economic dividends of normalization help him reverse the Turkish economy’s meltdown and win the elections next year. Once having pocketed a renewed five-year mandate, he could reorient his regional policies again.
Meanwhile, Ankara is also actively looking for additional economic and political opportunities in Africa, aiming to open its room for maneuver beyond the confines of the Western world. Turkish companies have a growing footprint and logistical capacity in the continent, including a 14-year concession to rehabilitate and operate Somalia’s Mogadishu port. Turkey’s volume of trade with sub-Saharan Africa reached the $10 bn milestone in 2021. If the Turkish government stopped seeing the West as an adversary as it does now despite forming an alliance through NATO, Turkish companies’ knowhow, and Ankara’s political influence.