Turkey Resides in a Complicated Neighborhood…

Istanbul literally is both in Europe and Asia which underscores just how complicated the neighborhood around Turkey is. To its south is Syria and Iraq; to the east is Iran; to the north across the Black Sea is Russia and Ukraine with Europe to the west. Almost 100 years to the month, the Greek, Armenian, and French armies were expelled from the country, and the current Republican political system was established, bringing to a close the Ottoman monarchy rule of over 620 years. Current events made my recent trip to this most extraordinary country even more confounding.

It was somewhat unsettling to see massive tankers navigate the narrow Bosporus strait, which bisects Istanbul, on their way to/from the Black Sea and the Ukrainian war zone. Because of the Montreaux Convention, which effectively affords Turkey significant control over which military vessels can access the Black Sea (civilian vessels are granted “complete freedom” during peacetime), global attention is now directed to this important waterway as the west wrestles with how to best assist Ukraine and secure safe passage of its agricultural products to the rest of the world.

With 84.7 million people, Turkey ranks as the 18th most populous country with nearly three-fourths of the population being ethnic Turks and another 20% of Kurdish descent. While a secular country, it is estimated that more than 80% of Turks adhere to Islamic faith. Importantly, Turkey is a member of North Atlantic Treaty Organization (NATO) but its application to join the European Union, which was submitted initially in 2005, has stalled with an uncertain outcome. While the reasons for this are numerous, the significant purges that followed a failed coup in 2016 have been unsettling for many EU members. All of this is further exacerbated by the recurring political and often bloody unrest by members of the Kurdish population seeking independence. 

Turkey has also created friction recently with many of its NATO colleagues, offering significant resistance to the admission of Finland and Sweden to this military alliance. Just last week, President Erdogan rejected trilateral talks with those two countries given his stated concerns over their support of the Kurds, whom he considers terrorists. Oh, and in May, President Erdogan stated that he no longer recognizes the current president of Greece given a dispute over the procurement of U.S. jet fighters.

To make matters worse, there will be Turkish national elections sometime in the next twelve months and after nearly two decades of rule, there now appears to be a credible opposition coalition forming to President Erdogan. The Republican People’s Party (CHP) has successfully consolidated a number of the smaller opposition parties and last year won a series of important municipal elections in Istanbul and Ankara (capital city). The wildcard in these forthcoming elections will be the Kurdish Democratic Party (HDP) which secured 12% of the popular vote in the last election and is currently not affiliated with either the ruling party (Justice and Development Party) and or the CHP.

The economic situation is quite perilous now. According to a recent Financial Times analysis, the Turkish economy is estimated to be $790 billion but is struggling with extraordinary inflation, which was 73.5% in May 2022 – the highest in the G20. Quite troubling, food inflation is running at nearly 100% which will undoubtedly generate social turmoil. The Turkish lira declined by 44% in 2021 and is down another 22% year-to-date. GDP growth in 2021 was greater than 11% but has collapsed to be just 1.2% in 1Q22. In response, President Erdogan quixotically decided to lower the interest rate on deposits which is now only 16%.

On top of all of this, Turkey is confronted with an unprecedented refugee crisis which has placed inconceivable demands on its public health infrastructure. It is estimated that there are at least 3.8 million refugees in country which equates to about 4.5% of the population. As a point of comparison, the most recent analysis by the Center for Immigration Studies estimates that there are 11.35 million illegal immigrants in the U.S. which is approximately 3.4% of the U.S. population.

This is a staggering burden on a country that provides free access to basic healthcare and educational services, notwithstanding that it is believed that over 98% of these refugees reside in camps and temporary housing. In fact, many of these refugees participate in the Refugee Medical Assistance short-term health insurance program. Given who Turkey’s neighbors are, it is unlikely that the flow of refugees will diminish as two of the top three countries (Syria, Afghanistan) that account for the most refugees are in relatively close proximity.

Turkey has a universal healthcare system and spends approximately 6.3% of GDP on healthcare services. While this compares unfavorably to the average 38-member Organisation for Economic Co-operation and Development (OECD) of 9.3%, this is believed to be due primarily to the relative youth of the population which is on average 32.4 years old. Over 75% of healthcare expenditures are covered by public sector funding. Unfortunately, average life expectancy is 78.6 years which is quite a bit below the European Union average of 81 years. As with many emerging economies, obesity and air pollution are significant public health concerns; it is believed that 29.5% of the Turkish population is obese. Medical tourism is a big business in Turkey, generating over $1 billion in revenues over 662k patients (2019 estimates), a majority of which is attributed to plastic surgery.

Fortunately, after a particularly brutal winter for Covid infections, Turkey has seen a dramatic reduction in cases, in large measure due to very effective vaccination efforts and notwithstanding the notable absence of masking. It is estimated that 88.6% of the population has received at least two doses. Sadly though, total deaths attributed to Covid now number 99k.

While reliable data are hard to come by, the Turkish venture capital community appears relatively robust and experiencing somewhat of a renaissance. According to Tracxn, there are currently 5,767 start-ups and 103 venture capital firms (either local firms or international firms with a presence in country). There was a significant spike in 2020 annual investment activity to $383 million (0.25% of U.S.), which was nearly a tripling from 2019’s pace. Notwithstanding a recent significant staff reduction, some notable Turkish unicorns include Getir, an omnipresent yellow and purple clad instant delivery service, which has raised nearly $770 million and is now valued close to $12 billion.

As exciting as the local innovation scene appears to be, it is quite clear that the pressing geopolitical issues are likely to set the economic agenda for the foreseeable future. President Erdogan just announced an initiative to construct 100k homes in northern Syria to “induce” one million of the refugees to head home. The Victory Party, a fringe ultra-nationalist political movement, is pressing to forcibly remove all refugees. As toxic as the political discourse in the U.S. is today, it may be worse in Turkey making it hard to envision a smooth path forward before many of these fundamental issues are resolved.  

Sadly, it was very disappointing to see Eclipse, Roman Abramovich’s 533-foot long super yacht, in the Gocek harbor, which served as a stark reminder of the country’s deeply problematic human rights record (Syria, Azerbaijan, etc.) and its frustrating straddle to appease Russian leadership in its unjustified war with Ukraine.

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