Previous Quarterly Editions
Expropriation Risk: 52 53 53 56 ▲Political Violence Risk:51 51 51 51 ►Terrorism Risk:45 44 42 40 ▼Exchange Transfer and Trade Sanction Risk: 45 45 45 45 ►Sovereign Default Risk:47 47 47 56 ▲
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Geopolitical alignmentEast 1 2 3 4 5 West
Alignment five years agoEast 1 2 3 4 5 West
Degree of contestationSettled 1 2 3 Contested
Turkey is a member of NATO and has an association agreement and customs union with the European Union. EU accession talks started in 2005. Western countries are home to millions of Turks, as well as Kurds, and are the main source of foreign investment and finance. In 2021, the European Union accounted for 41% of Turkey’s exports, the U.K. 6%, and North America 7%. Asia, excluding the Near and Middle East, accounted for 8% and the Commonwealth of Independent States countries 6%.
Even so, Turkey has differences with the U.S. and the European Union over human rights, the Cyprus sovereignty issue, Turkey’s territorial disputes with Greece, ties with Iran, the Kurdish question, the Syria crisis, visa requirements, amongst other factors. At times, Turkey has faced arms embargos. The EU accession talks are moribund. Fethullah Gulen, the alleged mastermind of the 2016 coup attempt in Turkey, resides in the U.S.
Turkey’s President Recep Tayyip Erdogan, an Islamist, has followed more assertive/independent foreign policies and in recent years developed closer ties with Russia as a counterweight to the West. Turkey’s purchase of a Russian missile defence system in 2017 led to U.S. sanctions and Turkey’s ejection from the F-35 fighter jet project. It remains unclear if U.S. Congress will permit the sale of older F-16 fighter aircraft to Turkey.
While supporting Ukraine’s territorial integrity Turkey has not neither sanctioned Russia nor incurred retaliation. Russia provided 10% of Turkey’s imports in 2021, mainly oil and gas, with this figure expected to rise significantly for 2022. Nearly 20% of Turkey’s foreign visitors were Russian.
Turkey’s business relations with China are weaker, although China provided 12% of Turkey’s imports last year. China’s repressive policies towards Muslims Uighurs in Xinjiang in China are a latent obstacle to political ties.
In September 2022, Erdogan attended a Shanghai Cooperation Organisation summit for the first time. Attending as a special guest, he met Russian President Vladimir Putin and China’s President Xi Jinping in Samarkand, Uzbekistan.
Even under another government, Ankara might continue to seek greater self-sufficiency and independence. However, a weakened Russia and/or an economic crisis requiring international financial support could force it back into a tighter Western orbit.
Though some companies linked to Gulen were seized after the coup attempt, the Erdogan administration favours private enterprise and foreign investment, making outright expropriation unlikely. However, public tenders, industrial policies, tax or anti-trust investigations, regulatory decisions, state bank loans and land allocation or privatisation decisions could all be used to favour pro-government businesses.
State enterprises play an important role in some sectors. Energy and pharmaceuticals prices are controlled. The unorthodox low-interest rate policies followed by the government since late 2021, which as of August 2022 caused the lira to depreciate and resulted in 80.2% consumer price inflation, increase the possibility of further price controls.
Financial institutions could conceivably face difficulties as a result of the current regulatory environment and may be taken over by the authorities subsequently. The government aims to control the media and regulate social media. The judiciary is not independent.
Opposition parties also favour a free-market economy but the largest, the Republican People’s Party (otherwise known as CHP), has said it will nationalise some public-private-partnership projects and power distribution.
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Kurdistan Workers’ Party (or PKK) fighters now pose little threat in the mainly Kurdish-populated south-east of Turkey, and there are no signs of renewed large-scale civilian Kurdish insurgency. However, military operations continue against the PKK in northern Iraq.
With crucial presidential and parliamentary elections due in June 2023, Erdogan has threatened further military intervention to expand Turkey’s northern enclaves in Syria and weaken Syria’s People’s Protection Units (or YPG), seen as an arm of the PKK. However, U.S. support for the YPG and broad international opposition will likely deter him. Ankara also recently hinted at a rapprochement with Damascus. Likewise, Turkey is unlikely to combat an eventual assault by Damascus on the last Syrian opposition stronghold in Idlib.
Political and military tensions between Greece and Turkey have risen. Again, Erdogan has implicitly threatened military action, possibly as an election ploy. Any action would likely be symbolic and short-lived, with the European Union and U.S. likely to step in.
Cost-of-living protests have been limited. There have been substantial increases in pensions and some salaries for some groups, and economic growth has persisted, with GDP rising by 7.5% and 7.6% year-on-year in the first two quarters of 2022.
Moreover, the opposition is concentrating on next year’s elections. Mass civil unrest is possible if the elections are perceived as rigged.
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Turkey has experienced few terrorist incidents in recent years, either from Kurdish nationalists targeting security forces or civilians or from Islamist extremists targeting Western interests, places of entertainment, or tourists. Arrests of alleged Islamic State activists continue to be reported.
In mid-September, the lira was worth 18.30 to the U.S. dollar compared with 13.00 at the end of 2021, Further depreciation seems likely in view of inflation, the large public and private sector foreign debt (USD451.2 billion, or 57% of GDP as of March 2022), limited foreign exchange reserves, the administration’s low-interest rate policies, and global monetary tightening.
Despite stronger tourism revenues, the current account deficit is set to reach 4-5% of GDP this year from 1.7% in 2021, reflecting the high cost of energy imports. The TRY1.3 trillion held in lira-denominated bank deposits carrying state guarantees against exchange rate losses (known as KKMs) indicates potential additional domestic demand for foreign currency. Although the lira has been fully convertible for three decades, its weakness and the abandonment of orthodox monetary policy suggest controls on foreign exchange transactions may be considered.
A risk of Western sanctions against Turkish banks or companies dealing with Russia persists, in the context of the sanctions introduced on Russia after the start of the Russia/Ukraine crisis earlier this year.
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The modest risk of an eventual sovereign default has increased slightly. The government debt edged up to 42.6% of GDP in March 2022. Higher public sector deficits of 6.4% and 4% of GDP are officially anticipated for 2022 and 2023.
Meanwhile, the cost of servicing foreign-currency debt has risen, economic activity and tax revenues may slow, the state gas company BOTAS and the returns on KKMs are being subsidised, extensive guarantees have been provided to public-private partnership infrastructure projects, and tax cuts and/or increases in pay, pensions and many other expenditures are likely before the elections.
In the longer term, besides transparency issues, economic mismanagement might persist and/or bank or corporate bailouts be required.
