Over the past couple of decades, trade has emerged as the major driver of Turkish economic development. Foreign commerce grew from less than $20bn in 1985 to just under $300bn in 2010.

Importantly for the Middle East and North Africa (Mena) region, Turkey has reoriented its trade towards its immediate neighbours, which now account for some 25 per cent of overall business, compared with just over 11 per cent in 1985. Now, economic policymakers want the Mena region to figure far more prominently in the country’s commercial relations, reflecting the growing political importance that Ankara has attached to the Arab world.

Middle East exports from Turkey

Figures reveal a sharp upturn in exports to Mena countries in the past five years. According to Fitch Ratings, exports to the Middle East rose from $9bn in 2005 to $23.1bn in 2010, an increase of more than 150 per cent. The Mena region accounted for 20.2 per cent of Turkey’s exports in 2010, compared to just 12.3 per cent in 2007, according to figures from UK bank RBS.

The AKP government, while pushing the EU story, has also worked hard to diversify trade more generally

Timothy Ash, RBS

As well as Turkish companies shipping increasing cargo volumes to cash-rich Gulf states, investment in the Arab world is also picking up. Foreign direct investment (FDI) in the Mena region rose from $678m in 2001 to $5.5bn in 2010. Goods are not the only thing travelling between the Middle East and Turkey; in 2010, Mena visitors made up 37 per cent of all tourists arriving in Turkey.

With its desire for long-term strategising, Turkey’s government has set a goal of $100bn of annual trade with the GCC by 2023. The motivation is clear: Turkey is the only major manufacturing economy in the region. Manufactured goods accounted for more than 90 per cent of all exports and the Gulf represents an obvious market for its growing slate of products.

Turkey is a major energy importer, consuming $57bn of oil and gas imports a year, which accounts for two-thirds of the current-account deficit. So, there is a compelling need for the country to export more to its neighbours. Energy security, for example backing projects such as proposed oil and gas export pipelines from Iraqi Kurdistan, has become a central plank of policy. All this reinforces the need for closer trade ties with Turkey’s Middle Eastern neighbours.

But there are other drivers for its growing exposure to Mena economies. “The importance of the Middle East has grown in tandem with the problems in the eurozone economies,” says Timothy Ash, head of emerging Europe research at RBS. “The AKP [Justice and Development Party] government, while pushing the EU story, has also worked hard to diversify trade more generally.”

The Arab Uprisings have disrupted some of the trade links, particularly with Syria, the country with which Turkey formed its strongest ties back in the early 2000s. The Istanbul Stock Exchange played a critical role in helping Syrian authorities establish the Damascus Securities Exchange in 2009. About 1,000 trucks went through Syria every day before the uprising against Bashar al-Assad’s regime thwarted much of the cross-border traffic.

A temporary downturn in Turkish road-borne exports is one casualty of the regional unrest, but the Arab uprisings also present Turkey with clear economic opportunities.

The political transformation in nations such as Egypt and Tunisia will support Ankara’s economic objectives. “In Egypt, Turkish exposure was superficial in the past as the regime didn’t have especially good relations with Turkey,” says Sinan Ulgen, a consultant at Istanbul Economics, a Turkish firm that advises on investment. “In order to become a major investor in some of these countries, good relationships at the leadership level are important as they are top-down economies. Turkey will become a much more active player in FDI because the political relationship is on a sounder footing.”

Economic model in Turkey

Political and economic development are taking place in tandem. Not only do economic considerations make a major contribution to Ankara’s regional foreign policy goals, but foreign policy is equally geared to serving Turkish economic ambitions.

Many of the Mena countries in transition may seek to replicate the success of these economic strategies for themselves. The Turkish model may yet serve as a useful reference tool for overhauling housing policies and designing public-private partnerships (PPPs) to overcome severe housing shortages.

Turkish companies have proven their ability to contract and execute billions of dollars’ worth of megaprojects

Hakan Bahceci, Turkish Business Council in Dubai and the Northern Emirates

According to Ulgen, Turkey has developed a relatively successful model in producing affordable mass housing projects for low-income groups based on PPPs. The Mass Housing Authority (MHA) built half a million residential units between 2003 and 2010 without burdening the public purse. Several Middle Eastern countries, including Saudi Arabia, Iraq, Jordan, Syria, Egypt, Kuwait, Yemen and Algeria, have asked the MHA to carry out housing projects in their countries.

If some of the Mena transition states represent a source of future trade and investment growth for Turkey, the Gulf countries account for a major slice of existing commercial ties.

About 500 Turkish companies operate in the UAE alone and investments into that country amount to $6bn, according to the Turkish Business Council in Dubai and the Northern Emirates. The UAE is Turkey’s 19th biggest business partner, with exports worth more than $3.4bn a year and $1.6bn in imports.

UAE trade links to Turkey

Recent deals reveal the extent of Turkey’s business in the UAE. The Rixos group has this year opened its first hotel on Palm Jumeirah and announced its intention to build 12 more hotels in the country.

“We see an increasing number of Turkish brands, and retailers are expanding in the UAE,” says Hakan Bahceci, chairman of the Turkish Business Council in Dubai and the Northern Emirates. “Turkish investment and trade finance banks are getting licences to serve the [growing] number of Turkish firms. Turkish Airlines is involved, with two flights a day to Dubai and four a week to Abu Dhabi. Likewise, Emirates, Etihad, Fly Dubai and Air Arabia have an increasing number of flights to Turkey. Turkish energy companies are also establishing joint ventures for further expansion plans.”

In the Gulf market, such firms are a big draw, with a track record in delivering at competitive prices. “Turkish companies have proven their ability to contract and execute billions of dollars’ worth of megaprojects, from metros to airports and from road construction to high-rise towers,” says Bahceci.

Turkey shares a common history, culture and religion with the UAE, and the two nations have great sympathy for each other, says Bahceci. “Most Turkish companies establish themselves in the UAE not only to operate within the UAE market, but also to expand globally, taking advantage of the UAE’s excellent financial and logistical infrastructure.”

As a quasi-European economy with Asian growth dynamics, Turkey is looking to deepen its economic roots in the Mena region by competing on both price and quality. Although Turkish products struggle to compete with Chinese and Indian competitors on price, they can now match their European competitors on quality and better them on affordability.

“Most Turkish companies are choosing to raise their quality rather than lower their price,” says Serhan Erol, a UAE-based manufacturer and vice-president of the Middle East-Africa-Gulf region committee of the Turkish Business Council. “Turkish companies are starting to buy up some of their European competitors.”

Regulatory tweaks are also encouraging Gulf investment in Turkey. “The law of reciprocity that has just been approved by the Turkish parliament is going to allow foreign investors to buy and sell properties in Turkey freely,” says Bahceci. “This is a golden opportunity for investors from the UAE to invest in reliable projects in Turkey as returns on investments are expected to be significant.”

Previously, only citizens of countries that allowed Turkish citizens to buy property were allowed to own real estate in Turkey. The new legislation removes that barrier. Within a week of the law being enacted, Gulf investors are estimated to have bought $500m of property in Turkey. “Experts are expecting $20bn-worth of Turkish real estate to be sold to Arabs in 2012,” says Erol.

Commercial logic

Turkish business leaders are aware of the political dynamic that has helped support their move into Middle Eastern markets. But they stress that it is commercial logic that is driving expansion, rather than a desire for trade links that support political objectives.

“Companies are acting according to their own benefits. They don’t look for the political benefits,” says Erol. “What’s changed in the last 10 years is that the government in Turkey is now thinking from a business perspective; it is changing its politics to comply with the interests of Turkish companies.”

Even though regional instability is bound to disrupt commerce, the general trend is towards deepening trade ties with Arab nations.

The pragmatic and opportunistic characteristics of Turkish economic policy will stand the country’s ambitious companies in good stead, particularly with the eurozone still in a state of torment. “This idea of Turkey as part of the value chain and promoting itself as a premium brand is something new,” says Ash. “It doesn’t want to be low-end and doesn’t see why it should be.”