Istanbul has become a favourite destination for Arab tourists from the Gulf.
A long running currency crisis in Turkey has given them an increased purchasing power and
they spend their dollars on everything from luxury handbags to gold covered steaks.
But this is just a fraction of the Gulf capital that has been invested here in recent years.
As Turkey and the region grow closer, how reliant is this country
on money from the Middle East?
Turkey’s relationship with its Gulf neighbors wasn’t always great.
Since the early 2010s, the Middle East had its own version of a cold war,
with most countries divided into two camps.
Turkey sided with Qatar, backing the Muslim Brotherhood in Egypt.
On the other side were Saudi Arabia, the United Arab Emirates and the political establishment
in Egypt, which viewed the regional Islamic movement as an existential security threat.
In 2017, Saudi Arabia, the UAE, Bahrain and Egypt severed ties with Qatar, accusing
the tiny Gulf nation of supporting Islamist terrorism.
Turkey continued to offer its unwavering support.
For a decade, the two camps remained on opposite sides of conflicts in Syria, Somalia, Libya
and the Eastern Mediterranean, fighting over regional influence and dominance.
But all that began to change in 2021, when Turkey launched a charm offensive
in the Middle East and North Africa.
I’ve come to Istanbul, to understand the reasons behind this policy shift, particularly
the economic reasons.
Neither the Turkish central bank nor the president’s investment office responded
to my request for a comment.
The foreign policy that Turkey followed after the Arab Spring have left it in such
a situation where, for instance, in the Eastern Mediterranean, it became a totally alone actor,
where all the others that would perhaps not normally get together, managed to pull their
forces against Turkey.
Senem Aydin Düzgit is a professor of international relations at Sabanci University and an analyst
at Istanbul Policy Center.
Turkey has been trying to make amends and sort of get back to a more rational, pragmatic
and less ideological foreign policy and make friends in the region again.
And I think the sort of attempt to normalize relations with Egypt is a part of that.
Very slow attempts to normalize relations with Israel is a part of that.
Gulf, yes.
But then in the case of the Gulf countries, of course, there is also the financial dimension.
Qatar is Turkey’s closest ally in the Middle East.
It owns shares in Turkey’s stock exchange, as well as assets in banking, retail and real estate.
In 2016, Qatar was the 10th largest foreign direct investor in Turkey.
In 2019, the Gulf nation increased their investments by nearly 500% to $22 billion,
and became the 2nd largest foreign investor in Turkey, leapfrogging Germany and Russia.
Timothy Ash is an emerging markets strategist at BlueBay Asset Management and an associate
fellow at Chatham House.
Turkey obviously has a sizable military, a capable military.
And I think Qatar needed an ally and was willing to write checks.
Turkish troops were sent to be stationed in Qatar at one point.
In contrast, Turkey’s ties with Saudi Arabia were severely strained in the past decade
and reached its lowest point when journalist Jamal Khashoggi was killed in Istanbul in 2018.
At the time, Turkey President Recep Tayyip Erdogan indirectly accused
the Saudis for Khashoggi’s assassination.
In 2011, Saudi Arabia had $1.1 billion invested in Turkey. This plummeted to $225 million a decade later.
However, in 2022, Erdogan flew to Saudi Arabia and publicly embraced the kingdom’s crown prince,
as two countries announced a new era of co-operation.
The UAE was also one of Turkey’s fiercest rivals.
The two regional powerhouses competed for influence for at least a decade.
But in 2021, a high-profile visit by then Crown Prince Sheikh Mohammed bin Zayed Al Nahyan,
took place in Ankara for the first time in 10 years.
Multiple cooperation agreements were signed, including a $10 billion investment fund from the UAE.
To understand these shifts, and sudden twists and turns, you have to look at Turkey's own
domestic environment.
Turkey’s reproachment with regional rivals like the UAE and Saudi Arabia
is not just about sound foreign policy.
There is a huge economic interest as well.
The country’s currency woes began in 2018.
It was then transitioning from a 95-year-old parliamentary system to an executive presidency,
which concentrated all the political power with Erdogan.
The depreciation of the Turkish Lira worsened during a standoff between
Ankara and Washington over the repatriation of an American pastor,
jailed for his alleged involvement
in a failed coup against Erdogan.
The crisis was later resolved.
The Lira, however, continued to fall against the greenback.
While Turkey, under Erdogan — for at least a decade — has been running stop-go economic policies.
He has been going for growth.
Growth delivers jobs, typically delivers votes.
Normally, when a country is facing a currency crisis, it can use reserves to defend
the currency to provide dollars, it can try and slow growth by increasing interest rates.
He wasn't willing to raise interest rates to slow growth to defend the currency,
which meant the currency had to weaken.
Between 2019 and 2020, Turkey’s Central Bank began selling its foreign reserves
to prevent the Lira’s freefall.
More than $100 billion were spent to keep the Lira afloat.
Right now, Turkey has this huge current account deficits.
But at the same time, it has no inflows but also very large negative reserves.
So, at this point, (Turkey's) central bank, unfortunately, is about to run out of reserves.
Bilge Yilmaz is a Wharton School professor and the chief economist of the Good Party,
part of a six-party alliance competing against Erdogan in the country’s 2023 general elections.
Yilmaz has been touted as a candidate to be Turkey’s new economy minister.
Turkey is spending more than it can and it should, and borrows money from
the so-called friendly countries, in order to finance its short-term capital needs.
They've actually borrowed the money from commercial banks, as well as foreign countries like Saudi Arabia.
In early 2020, ordinary Turks began hearing about a financial term – a swap line.
A swap line is an arrangement between two countries to use their respective currencies
when doing business with each other.
This allows them to avoid using internationally recognized currencies like dollars and euros.
Turkey gives a Gulf state, the equivalent in lira at a particular point in time
on its exchange rate, in exchange of dollars or could even be the local currency of the countries
providing the swap.
It's about sending a message to the broader market, that Turkey has a buffer
of foreign exchange reserves that it can use if it needs to.
But, you know, a $5 billion swap facility from Qatar, when you have gross external financing
needs annually of over $200 billion, $5 billion doesn't really touch the sides, so they needed more.
Between 2020 and 2023, Ankara secured swap deals with Qatar, South Korea,
China and the UAE.
And in March 2023, Saudi Arabia pledged to deposit $5 billion to Turkey’s Central Bank
just two months before the Turkish election.
Six months earlier, President Erdogan had said, “friendly countries were extending the necessary
support, enabling Turkey's central bank to act comfortably in terms of its foreign reserves.”
Shortly after, something odd happened.
The central bank said it found unexplained cash in its balance sheet
and it did not know where that money came from.
The Turkish central bank said that they have $24 billion of net errors and omissions.
What is net errors and omissions to begin with?
Errors and omissions is the bit of the balance of payments that we just don't know,
we can't figure it out.
It’s very volatile, errors and omissions, typically.
One year it can be plus eight, the next year, it can be minus eight. But the highest inflow
ever, I think had been $16 billion previously. This was $24 billion, a huge increase.
Can it be anything?
It can be the man on the street suddenly deciding that the lira is cheap, and he wants to buy lira.
It can be illegal.
Can be Russian money, can be Gulf money.
That's just not recorded.
Responding to criticism, Turkey’s finance minister Nureddin Nebati said the money was
legitimate and the surplus amount could be a result of tourism revenues, as well as cash entering
the country from conflict zones in Russia, Ukraine and Iraq.
Net errors and omissions do happen.
It's not unusual.
What is unusual is the magnitude of it in terms of financing its current account deficit.
The mysterious capital flow into Turkey's Central Bank reached a record high
of $27 billion by the end of the year.
Meanwhile the account deficit exceeded $48 billion.
And the unexplained cash was instrumental in financing almost half of the shortfall.
This kind of unexplained capital flow cannot last forever.
In fact, it has slowed down and actually dried up.
Right now, the deficit is predominantly paid by the reserves that the central bank doesn't have
At the start of 2023, Turkey’s current account deficit reached $10 billion,
the highest level since records began in 1984.
Compared to 2018 when the lira started to nosedive, Turkey is in a less isolated position
in the Middle East thanks to recent efforts to restore ties with former foes.
But while citizens face severe economic hardship due to runaway inflation,
will that be enough to restore Turkey’s fortunes?
Turkey has to solve its chronic problems, structural problems.
Without addressing them, constantly making international concessions to Saudi Arabia,
United Arab Emirates, or Russia isn't going to work, because the amount of concessions
you can make is limited.
Up to the period, around 2011, 2012, Turkey was probably one of the most favored emerging markets
The last 10 years, you've seen the opposite.
Deteriorating living standards and more inequality.
Inflation tends to hurt poor people most.