For Turkey’s government, the Iran war has complicated efforts to turn around an economy reeling from one of the worst financial crises in the country’s history.
But even as the conflict has sent Turkey’s fuel prices soaring and forced officials to dip into their precious foreign exchange reserves to defend the lira, it has also presented an opportunity.
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As the war’s fallout reverberates across the Middle East, Ankara has taken the opportunity to promote Turkiye as a model of security and stability for businesses and investors.
While Iranian missiles and drones have caused significant damage to infrastructure in the United Arab Emirates, Saudi Arabia and Qatar, Turkiye, which is protected by NATO air defenses, has been largely untouched by the airstrikes leveled at Tehran.
‘New doors’
Turkish officials have made little secret of their desire to take advantage of the shadow that the conflict – which is officially halted as of Wednesday under a two-week ceasefire between the United States and Iran – has cast on regional trade hubs such as Dubai, Doha and Riyadh.
In remarks earlier this month, Turkish President Recep Tayyip Erdogan, who last month met with 40 global CEOs to discuss ways to boost his country’s competitiveness, described the war as a boon for Ankara’s ambitions to transform Istanbul into one of the world’s leading financial centres.
“Like the pandemic era, we believe wholeheartedly that this global crisis will also open new doors for our country,” Erdogan said in a statement posted on social media.
Turkish Treasury and Finance Minister Mehmet Simsek confirmed shortly afterwards that the government was preparing “radical” incentives to lure foreign capital.
Bilal Bagis, head of the economics department at Fatih Sultan Mehmet Vakif University in Istanbul, said Turkey’s improving economic stability and various fiscal incentives in the wake of the 2018 debt crisis have helped establish the country as a regional hub and “safe haven.”
“A liberal investment climate, ease of entry and new comprehensive stimulus packages will help boost its position,” Bagis told Al Jazeera.
While Ankara has not yet confirmed the measures in the pipeline, they are likely to include tax breaks for companies that sell goods through Turkish entities without importing into the country, said Guni Yildiz, a Turkish-born consultant at Anthesis Group, which has clients in the Gulf.
“So you would have a commodities trader or a logistics company that is booking transactions through Istanbul and getting a meaningful tax benefit for it,” Yildiz told Al Jazeera.
“This is a straight game for the kind of arbitrage business that Dubai has owned for two decades,” he said, adding, “The timing has clearly been shaped by war.”
Turkey’s Treasury and Finance Ministry did not respond to questions about the measures under consideration, but its plans follow a series of recent initiatives aimed at luring foreign investment, including the opening of the Istanbul Financial Center (IFC) in 2023.
The special economic zone provides tax incentives to financial institutions, including 100 percent exemption from corporate tax on export earnings until 2031.
An IFC spokesperson said the district had recently seen “increasing and solid” participation from both foreign governments and private institutions.
“There is a particularly strong strategic focus from Far Eastern institutions,” the spokesperson told Al Jazeera.
“This is not limited to private sector companies; we are also looking at engagement at the government level. We are in close touch with Japan and South Korea, while our discussions with the United Kingdom are ongoing,” the spokesperson said.
“From Istanbul, institutions can reach approximately 1.3 billion people and a $30 trillion economy within a four-hour flight,” the spokesperson said.
‘Mathematics becomes increasingly complex’
Still, Istanbul faces an uphill climb to compete seriously with centers like Dubai.
Istanbul is currently ranked 101st in the latest Global Financial Center Index compiled by Z/Yen Partners in collaboration with the China Development Institute, well behind Dubai (7), Abu Dhabi (21), Doha (48) and Riyadh (61).
Turkey’s economy has suffered from double-digit inflation and a depreciating currency since the beginning of the 2018 crisis. “The lira loses about a fifth of its value against the dollar every year,” Yildiz said.
“For a financial firm that earns in multiple currencies and pays employees in lira-denominated salaries, the math becomes increasingly complex. You are constantly managing FX exposure in a way that you don’t have to do in a pegged-currency jurisdiction like the UAE or Singapore.”
Critics have also accused Erdogan’s administration of economic mismanagement by keeping interest rates low despite inflation fears. But the government says the move is aimed at boosting the economy and ending foreign exchange manipulation.
While IFC has reported growing interest from firms, less than half of its office space is filled, although executives say they expect occupancy to reach 75 percent by the end of this year.
“When we look at surveys of European companies with a subsidiary in Turkey, their main complaints are economic policy unpredictability, political instability, legal uncertainty, high bureaucracy, high inflation and imported inflation,” Meryem Gokten, an economist at the Vienna Institute for International Economic Studies, told Al Jazeera.
“None of these issues can be solved in the short term… Turkiye has not been a financial center yet, and I don’t see it becoming one without addressing these structural issues,” Gokten said.
Selim Koru, a doctoral researcher specializing in public policy at the University of Nottingham, expressed similar skepticism.
“Part of the attraction of Dubai was that it is a kind of tabula rasa. There is no firmly established cultural, legal, political environment there, and foreign parties can have a say in whatever they want,” Koru told Al Jazeera.
“That’s not really the case in Istanbul or anywhere else in Turkey.”
For some analysts, whether Istanbul can directly challenge Dubai is not the right question.
Istanbul Medipol University finance professor Hasan Diner said Turkiye’s bid to attract investment from abroad should be seen as a “gradual situation rather than direct short-term competition”.
“In emerging financial systems, investor confidence is primarily driven by predictability, transparency,” Dinser told Al Jazeera.
“And the credibility of long-term economic policy initiatives like the Istanbul Financial Center represent important strategic steps, whose long-term impact will depend on sustained implementation and institutional alignment,” he said.
