Economic relationships between Turkey and the Middle East have significantly increased in the past 30 years, beginning when Turkish contractors started bidding for infrastructure projects in the region, and continuing after the country liberalised its economy, encouraging foreign trade.

Over the last decade, the volume of exports from Turkey to the Middle East increased 11-fold and the volume of imports from the region multiplied 12 times. Foreign trade with the Middle East and North Africa (Mena) region is worth about $60bn and, according to the government’s plans for the centennial of the Turkish Republic, the figure is expected to rise to about $200bn by 2023. The Gulf is an important trading partner for Ankara, rivalling the EU, especially in terms of exports.

To tighten the economic relationship between Turkey and the Middle East, and to profit from the advantage of a common historical heritage and shared local culture, Turkey is also enhancing its diplomatic ties in the region. In the past five years, mutual trade and cooperation agreements in areas such as tax and customs have been signed with several Middle East states.

Strategic partnership

As an example, the Turkish and Japanese governments have developed a strategic partnership to rebuild northern Iraq. In 2003, construction activity by Turkish investors in that region was valued at $242m, but due to this partnership initiative, the value had risen to $1.43bn by 2008.

Turkish companies are now building houses, roads, bridges, hospitals, schools and military areas, and Iraq is one of the top export destinations for this type of business. The most common language spoken in the northern Iraqi cities of Erbil and Kirkuk is said to be Turkish due to the thousands of Turkish investors and workers in the region and the huge oil and gas finds that are exported to and through Turkey, with additional pipelines under construction. In the Mediterranean, the Israelis and Southern Cypriots have now realised that without Turkey they would not be able to conveniently export their own new energy finds to the European and global markets.

At the start of May, two large schemes raised $69bn-worth of direct investments into Turkey in one day: the tender for the new Istanbul airport raised $47bn (including taxes), while the country’s second Nuclear Power Plant, to be built by a group headed by Japan’s Mitsubishi Heavy Industries and France’s Areva, is expected to raise $22bn.

The foreign direct investment inflow from Mena countries to Turkey last year was $1.17bn from a total inflow of $10bn. In 2012, just over 30 per cent of the 3,031 new firms with international capital established in Turkey had Middle East shareholders. This is even higher than the percentage of companies with EU shareholders and is an indicator of the developing influence of the Middle East.

The Turkish Capital Markets Board is working hard to regulate Islamic finance transactions to facilitate increased demand for sharia-compliant products in the country. With its robust growth, Ankara has attracted the interest of the Arab investment community, particularly in the Gulf. Investors have been drawn by the widening range of investment products, from a debut sovereign sukuk bond issue last September to foreign currency-denominated eurobonds from both banks and corporates.

The market share of sharia-compliant lenders is also rising in Turkey. According to recent statistics published by the Turkish Statistics Institute, these banks held 6 per cent of the banking sector in mid-2011. Nine Arabic banks hold shares in Turkish lenders, eight of which are majority stakeholders.

Construction of an international financial centre (IFC) is under way in Istanbul, and the government wants it to improve the economy by bringing funds into the country, allowing local firms to obtain finance more easily and bringing the domestic insurance sector closer to foreign financial markets.

As part of its commitment to legislative reform and to improving Turkey’s business climate, the cabinet has sent legislation to parliament for the formation of the Istanbul Arbitration Centre (IAC). Ankara wants the IAC to become a major dispute-resolution centre for investors, particularly in the IFC, and a centre for resolving commercial disputes in the region.

Safe haven

Turkey’s deputy prime minister believes Istanbul can fill the gap between the financial centres of London, Frankfurt and Dubai and become a regional powerhouse. Turkey’s geographical position, its strong cultural links with the Middle East, its stable economic growth and a young, highly skilled workforce, make it an ideal safe haven for both investors and refugees from political turmoil.

Cairo has already lost some of its global standing to Istanbul, as was shown when Japan’s Nikkei Index relocated its Middle East offices to Turkey. There is no doubt that, following the Arab unrest, Istanbul benefited from its position as a strong, stable economy outside the EU, and from its safe haven status for investors in the Eastern Mediterranean, North Africa and Central Asia region.