The video examines Istanbul's growing popularity among Arab tourists, especially from the Gulf region, who benefit from Turkey's currency crisis that enhances their purchasing power. This influx is merely a small fraction of the substantial Gulf capital invested in Turkey over recent years. Turkey's evolving relationship with Gulf nations like Saudi Arabia, the UAE, and Qatar highlights the geopolitical shifts and economic interests underpinning these changing dynamics.

Despite historical tensions between Turkey and various Gulf countries due to differing alignments during the Middle Eastern "cold war," economic necessity has spurred reconciliation efforts. Turkey aims to rectify past ideological foreign policy stances, shifting towards pragmatism and fostering economic partnerships to alleviate domestic economic challenges. The video discusses significant investments, like Qatar's remarkable financial commitment to Turkey, and investigates how geopolitics interplays with economic strategies.

Main takeaways from the video:

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Key Vocabularies and Common Phrases:

1. reproachment [rəˌprōʊʃˈmənt] - (noun) - Restoration of harmonious relations between countries. - Synonyms: (reconciliation, settlement, resolution)

Turkey's reproachment with regional rivals like the UAE and Saudi Arabia is not just about sound foreign policy.

2. pragmatic [præɡˈmætɪk] - (adjective) - Dealing with things sensibly and realistically in a way that is practical. - Synonyms: (practical, realistic, sensible)

Turkey has been trying to make amends and sort of get back to a more rational or pragmatic and less ideological foreign policy.

3. charm offensive [tʃɑːrm əˈfɛnsɪv] - (noun) - A strategy to gain favor or support through demonstration of friendliness or flattery. - Synonyms: (charm campaign, diplomacy push, friendly approach)

But all that began to change in 2021 when Turkey launched a charm offensive in the Middle east and North Africa.

4. emerging markets [ɪˈmɜːrdʒɪŋ ˈmɑːrkɪts] - (noun) - Nations with social or business activity in the process of rapid growth and industrialization. - Synonyms: (developing markets, frontier markets, growing economies)

Timothy Ash is an emerging markets strategist at Blue Bay Asset Management and an associate fellow at Chatham House.

5. ideological [ˌaɪdiəˈlɒdʒɪkl] - (adjective) - Based on or relating to a system of ideas and ideals, especially concerning economic or political theory and policy. - Synonyms: (dogmatic, philosophical, theoretical)

Turkey has been trying to make amends and sort of get back to a more rational or pragmatic and less ideological foreign policy.

6. depreciation [dɪˌpriːʃiˈeɪʃən] - (noun) - Reduction in the value of an asset over time. - Synonyms: (devaluation, decline, reduction)

The depreciation of the Turkish lira worsened during a standoff between Ankara and Washington.

7. capital flow [ˈkæpɪtl floʊ] - (noun) - Movement of money for investment, trade, or business production. - Synonyms: (investments flow, monetary movement, cash flow)

The mysterious capital flow into Turkey's central bank reached a record high of $27 billion by the end of the year.

8. swap line [swɒp laɪn] - (noun) - An agreement between two countries to exchange currencies in order to support trading activities. - Synonyms: (currency swap, exchange line, bilateral swap)

In early 2020, ordinary Turks began hearing about a financial term, a swap line.

9. existential [ˌɛɡzɪˈstɛnʃəl] - (adjective) - Relating to existence, especially related to threats to a group's existence. - Synonyms: (essential, crucial, fundamental)

The political establishment in Egypt, which viewed the regional Islamic movement as an existential security threat.

10. unwavering [ʌnˈweɪvərɪŋ] - (adjective) - Steady and resolute, not changing or wavering. - Synonyms: (steadfast, resolute, determined)

Turkey continued to offer its unwavering support.

Can foreign money save Turkey's economy?

Istanbul has become a favorite destination for Arab tourists from the Gulf. A long-running currency crisis in Turkey has given them 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 two thousand tens, 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 had left it in such a situation where, for instance, in the eastern Mediterranean, it became a totally lone actor, where all the others that would perhaps not normally get together managed to pool their forces against Turkey. Senna Maidan Duzgit is a professor of international relations at Sabanji University and an analyst at Istanbul Policy Centre. Turkey has been trying to make amends and sort of get back to a more rational or 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's 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 second largest foreign investor in Turkey, leapfrogging Germany and Russia. Timothy Ash is an emerging markets strategist at Blue Bay 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 Cemal Kashykj was killed in Istanbul in 2018. At the time, Turkey's president Recep Tayyip Erdogan indirectly accused the Saudis for Kashuktchu's assassination. In 2011, Saudi Arabia had $1.1 billion invested in Turkey. This plummeted to $225 million a decade later. However, in 2022, Erdoan flew to Saudi Arabia and publicly embraced the kingdom's crown prince as two countries announced a new era of cooperation.

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 ten 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's 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. Well, Turkey under Erdogan for at least a decade has been running stop-go economic policies. He's 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 deficit, but at the same time has no inflows but also very large negative reserves. So at this point, the central bank, unfortunately, is about to run out of reserves.

Milgaumaz 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 these so-called friendly countries in order to finance its short-term capital needs.

They have 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, a particular point in time of its exchange rate in exchange for the 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. 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 side, 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 elections. Six months earlier, President Erdogan had said friendly countries were extending their 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. It can be Russian money, it can be Gulf money. That's just not recorded.

Responding to criticism, Turkey's finance minister Noured Nebat 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 in emissions 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 had 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, its 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 ten years, you've seen the opposite deteriorating living standards and more inequality. Inflation tends to hurt poorer people most.

Economics, Finance, Politics, Istanbul, Turkey'S Currency Crisis, Gulf Investments, Cnbc International