Index trend
Previous Quarterly Editions
Expropriation Risk: 57 ► Political Violence Risk: 57 ► Terrorism Risk: 45 ► Exchange Transfer and Trade Sanction Risk: 54 ► Sovereign Default Risk: 56 ▼
Overall Risk Temperature: 56 (Significant -2) ▼
Special topic:
Turkey is well integrated into the liberal international order. It adopted multiparty politics and joined NATO and the Council of Europe after World War II. Since 1959, it has sought membership in the European Union (EU). It liberalized its economy extensively in the 1980s and entered a customs union with the EU in 1996.
The last of three relatively brief periods of military rule ended in 1983. The political influence of the military was eliminated in the early 2000s, although some officers unsuccessfully attempted a coup in 2016. Nevertheless, democracy, respect for human rights and the rule of law have been weak. A semi-authoritarian “presidential system” was adopted through changes in the constitution in 2017.
President Recep Tayyip Erdogan has sometimes acted assertively and independently of the West. Turkey has established a buffer zone in northern Syria and constantly conducts military operations in Iraq on grounds of combating armed Kurdish nationalists. Ankara has not joined Western sanctions against Russia. The president has threatened to abandon moribund EU membership negotiations and Cyprus talks — but has not gone ahead.
Some intellectuals and entrepreneurs believe that Turkey’s adherence to the liberal order has improved its security, economic growth, governance and commitment to democracy; however, political leaders and public opinion mostly regard the international order as unfair and contrary to Turkey’s interests. Islamists/conservatives, nationalists and the left all think that Turkey was treated as a frontline outpost in the Cold War and is now used by Europe as an external barrier against migration. They believe Turkey has become dependent on foreign capital and imports. Major powers are also perceived to have collectively sided against Turkey in its maritime disputes with Greece, over Cyprus, the Kurdish question and Armenian “genocide” claims.
Concern about Western bias against Muslims and the West’s cultural impact on Turkey is common. This is particularly the case among conservatives and Islamists, including the president. Left-wing secularists see the West as collaborating with conservatives and Islamists to keep Turkey backward.
Ankara does not oppose the international order head-on despite becoming a member of the Shanghai Cooperation Organization and applying to join BRICS (an intergovernmental organization comprising Brazil, Russia, India, China, South Africa, Egypt, Ethiopia, Iran and the United Arab Emirates). On a day-to-day basis, it is taken as given; however, Turkey has sometimes chosen not to comply with the liberal international order, for example, in Syria and Iraq, over human and gender rights and by retaining certain trade barriers. Erdogan has campaigned to reform the United Nations Security Council, publishing books in Turkish and English with the slogan “The world is greater than five.”
If the international order were to collapse, constraints on Turkey’s foreign and defense policies would weaken, and the scope for unilateral action vis-a-vis Greece and Cyprus, Iraq and Syria would increase. Similarly, Turkey would become freer to determine its trade policies, which could imply more protectionism for developing its industries and technologies. In parallel, the economy might become less liberal and more managed. Environmental policies might also suffer due to weaker constraints (Turkey is already lagging in combating climate change).
However, all these trends could be mitigated by the need to consider bilateral relations when pursuing strategic aims and determining trade policies — particularly with Europe and with other regional powers such as Iran, Egypt and Russia. Meanwhile, access to foreign capital and export markets could become more difficult. Any collapse in the international order also favors the trend toward more authoritarian governance, further damaging human rights, the rule of law, freedom of speech and the predictability of decision making.
Expropriation Risk 57 (Significant) TREND ►
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. Complaints also still arise over land nationalization for infrastructure and housing projects. Public tenders, industrial policies, tax or anti-trust investigations, regulatory decisions, state bank loans, and land allocation or privatization decisions may favor pro-government businesses. State enterprises may create unfair competition.
Political Violence Risk 57 (Significant) TREND ►
Kurdistan Workers’ Party (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. It also faces off against the U.S.-allied People’s Protection Units, 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 unlikely to lead to direct hostilities with Damascus — despite cold relations — or Baghdad. In January, Erdogan defended the Iraq operations vigorously after 21 Turkish soldiers had been killed there in swift succession. In March, the president hinted at additional operations this summer. Following intense diplomacy, Baghdad is reportedly willing to cooperate. Turkey may also extend its Syria enclaves, particularly if the U.S. or Russian influence and presence wanes.
Terrorism Risk 43 (Medium low) TREND ►
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 attack 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 Revolutionary People's Liberation Party/Front 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 random shooting during a church service in Istanbul in January 2024; one civilian died.
Exchange Transfer and Trade Sanctions Risk 54 (Medium) TREND ►
Turkey has a 35-year record of free capital movement but might introduce restrictions in a crisis. Since mid-2023, policy tightening and a realistic currency policy have reduced this risk. The central bank raised its policy rate from 8.5% to 45% between June and December 2023 and took other measures to encourage savings and control credit. Further steps are likely as inflation reached 67.1% in February. In March, the policy rate was raised further to 50% as part of a strong response to February’s 67.1% inflation figure and the pressure on the Turkish lira (TRY), trading at over TRY32 to the U.S. dollar ahead of the local government elections on March 31.
The lira may yet see further volatility, given that Turkey has a current account deficit of 4.4% of GDP in 2023 (but now falling), low foreign exchange reserves of $80.5 billion on March 1 (gross excluding gold), foreign debt servicing costs and domestic demand for foreign exchange as a savings instrument. The state guarantees $73 billion worth of lira-denominated “exchange-rate protected” bank accounts against exchange rate losses.
The increased threat of U.S. sanctions against Turkish banks and companies dealing with Russia curbed Turkey’s exports to Russia significantly from late 2023 onward.
Sovereign Default Risk 56 (Significant) TREND ▼
There is a modest risk of an eventual sovereign default. The government debt was only 29.5% of GDP as of year-end 2023, but persistent fiscal deficits, lira weakness and lower economic growth would increase this ratio. Banks and companies may need support in the future. Moreover, public finances are not fully transparent.
The central government budget deficit rose steeply to 5.2% of GDP in 2023, and a 6.4% deficit is projected for 2024, despite tax increases last July. These deficits reflect earthquake spending and expansionary policies before the May 2023 elections.
