Index trend
Previous quarterly editions
Expropriation Risk: 57 57 56 56 ►Political Violence Risk:57 57 57 57 ►Terrorism Risk:42 43 45 45 ▲Exchange Transfer and Trade Sanction Risk: 54 54 54 54 ►Sovereign Default Risk:65 56 65 56 ▼
Overall Risk Temperature: 56 (Significant -2) TREND ▼
Special topic: Gray zone aggression
Degree to which the country relies on outbound gray zone action to achieve its strategic objectives1 = Not at all5 = Gray zone action is a core tactic
3
Impact of inbound gray zone attacks on the country1 = Negligible impact5 = Significant impact on economic growth and/or political stability
1
“Dogfights” have periodically occurred between Turkish and Greek fighter planes over the Aegean Sea, where a series of territorial disputes are outstanding. The two countries blame one another. A major crisis broke out when both countries landed forces on disputed islets in 1996.
A military standoff occurred in 2018 – 2019 as Ankara sought to disrupt Cypriot hydrocarbons exploration and carry out its own exploration work in areas of the Mediterranean claimed by Turkey and Cyprus.
Following the outbreak of civil war in Syria, Turkey armed Syrian rebel forces. In 2015, Turkey shot down a Russian fighter plane allegedly infringing its air space and has since occupied parts of northern Syria on grounds of securing its southern border against the forces allied to Turkey’s own armed Kurdish nationalist rebel group, the Kurdistan Workers’ Party (PKK), that have come to dominate the region. Turkey conducts regular cross-border operations and has established a military presence against the PKK in areas of northern Iraq not fully controlled by Baghdad.
In 2020, the Turkish military successfully supported forces loyal to the Tripoli government, an ally in the Mediterranean, in repelling rival forces in Libya. Turkey often makes use of its advanced drone technology in such operations. Assassinations of PKK commanders in Iraqi and Syrian territory are frequently announced.
The private defense company SADAT, which is close to the government, has allegedly supported Islamist/pro-Turkish militias abroad and recruited Syrian mercenaries to operate in line with Turkey’s foreign policies in Africa.
In a separate case of gray zone aggression, Turkey temporarily allowed tens of thousands of the 3 million Syrian refugees in its territory to gather en masse near its border with Greece in 2020, in a bid to pressure the European Union into taking more responsibility for the refugees.
Meanwhile, Turkey accuses regional and Western states, ranging from Sweden to the U.S., of sheltering and supporting the PKK. Ankara has described the failure of the U.S. to extradite Fethullah Gulen, who is held responsible for the 2016 coup attempt, as “political” but stopped short of accusing Washington of supporting the coup.
Foreign powers are sometimes suspected of complicity in cyberattacks in Turkey — for example, after the downing of the Russian jet. Opposition presidential candidate Kemal Kilicdaroglu accused Russia of supporting President Recep Tayyip Erdogan in the 2023 election, including by manipulating social media.
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The broad consensus on private enterprise and foreign investment makes outright expropriation a very distant prospect. Although some companies were seized after the 2016 coup attempt, and complaints arise over land nationalization for infrastructure and housing projects, foreign companies have not been affected.
Nevertheless, the value of foreign as well as local investments can suffer due to pricing policies (for example, in petroleum retailing or pharmaceuticals) or changes in regulations (in 2016, PayPal exited the Turkish market rather than comply with new licensing regulations requiring IT systems to be housed in-country).
In addition, foreign investors may face unfair competition from state enterprises or competitors receiving favorable treatment — for example, in the implementation of industrial policies.
PKK fighters now pose little threat in the mainly Kurdish-populated southeast of Turkey. There are no signs of renewed large-scale civilian Kurdish insurgency. Conversely, Ankara maintains a military presence and conducts land, air and intelligence operations against the PKK in northern Iraq. Additionally, Ankara faces off against the U.S.-allied People’s Protection Units (YPG), seen as an arm of the PKK, in northern Syria, where Turkey has established enclaves.
In Syria, Ankara is also engaged in protecting the opposition stronghold in Idlib from possible government assault. These activities are intended to secure Turkey’s borders and are very unlikely to lead to direct hostilities with Baghdad or Damascus.
The risk has been further reduced by Erdogan’s visit to Iraq in April 2024 and a series of bilateral agreements, as well as by Turkey’s recent (so far unrequited) efforts at rapprochement with Syria. Despite the 50-year stalemate in Cyprus, multiple disputes with Greece and occasional hostile rhetoric, the risk of a military confrontation between Turkey and Greece or Cyprus is minuscule.
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Terrorist incidents have dwindled in recent years. A bomb explosion blamed on the PKK killed six civilians in Istanbul in November 2022. The PKK was also blamed for a non-fatal armed attack and suicide bombing at the Interior Ministry in Ankara in October 2023. In February 2024, a civilian was killed in a shoot-out with members of the remnant leftist DHKP-C (Revolutionary People’s Liberation Party) organization outside an Istanbul court.
Such incidents could recur occasionally. Islamic State (IS) may attack symbolic targets, perhaps including businesses. Alleged IS activists are frequently detained. IS claimed responsibility for a shooting during a church service in Istanbul in January 2024, in which one civilian died.
Turkey has a perennial current-account deficit and substantial foreign debt servicing costs. Despite its 35-year record of free capital movements, the country might therefore introduce currency restrictions in a crisis. However, this risk has been greatly reduced by the return to conventional economic policies since mid-2023.
In its efforts to control runaway inflation, the central bank raised its policy rate from 8.5% to 50% from June 2023. Imports have fallen, and the current account deficit could dip under 2% of GDP in 2024 compared with 4.1% in 2023.
Turkey has been attracting external finance, including bank borrowing, government bond issues, and inflows to the capital and money markets. Domestic demand for foreign exchange as a savings instrument has declined. The volume of lira-denominated “exchange-rate protected” bank accounts carrying state guarantees against exchange rate losses has shrunk.
As of early September 2024, the central bank foreign exchange reserves excluding gold stood at $86.5 billion compared with a low point of $56.5 billion in May 2023. Although consumer prices rose 32% in the first eight months of 2024, the lira has depreciated only slightly to trade at about 34 to the U.S. dollar.
The increased threat of U.S. sanctions against Turkish banks and companies dealing with Russia curbed Turkey’s exports to Russia in late 2023. Western sanctions against Russia have also prevented delivery of German equipment for Turkey’s first nuclear plant, which is being constructed by Russia’s Rosatom.
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There is a modest risk of an eventual sovereign default. The government debt was only 28.5% of GDP in March 2024, according to the Treasury, but persistent fiscal deficits, lira weakness or lower economic growth would increase this ratio. Banks and companies may need support in the future. Moreover, public finances are not fully transparent.
Earthquake reconstruction spending and expansionary policies prior to the May 2023 elections caused the central government budget deficit to rise steeply to 5.2% of GDP in 2023, despite tax increases. In its Medium-Term Program published in September 2024, the administration is now targeting a gradual reduction in this deficit from 4.9% of GDP in 2024 to 2.5% by 2027. A potential social security reform could improve fiscal balances in the longer term as well.
