Assessing Geopolitical Risks in Emerging Markets: Implications for Turkish and Middle Eastern Investments

In the volatile landscape of emerging markets, geopolitical alignment often serves as both a catalyst and a constraint for economic growth. Nowhere is this duality more evident than in Turkey, where President Recep Tayyip Erdogan's steadfast support for Hamas has reshaped the country's regional influence while introducing complex risks for investors. This analysis examines how Turkey's geopolitical choices under Erdogan-rooted in ideological and strategic imperatives-impact its economic stability, foreign direct investment (FDI) flows, and creditworthiness, offering a framework for assessing opportunities and risks in the Turkish and broader Middle Eastern markets.

Erdogan's Geopolitical Alignment with Hamas: Motivations and Regional Influence

Erdogan's alignment with Hamas is not merely a foreign policy choice but a cornerstone of his domestic and regional strategy. By framing Hamas as "freedom fighters" and condemning Israeli actions in Gaza as "genocide," Erdogan has positioned Turkey as a moral leader among Muslim-majority nations, resonating deeply with his conservative and Islamist political base, according to the BBC. This alignment has allowed Turkey to assert influence in post-Assad Syria, where it backed the Hayat Tahrir al-Sham (HTS) group, and to mediate in regional conflicts, such as brokering the 2024 Russia-U.S. prisoner exchange, as reported by Forbes. However, this strategy has also strained relations with Israel and drawn scrutiny from Western allies, complicating Turkey's economic and diplomatic calculus.

Despite these tensions, Turkey's support for Hamas persists, evidenced by high-profile meetings between Turkish intelligence chief Ibrahim Kalin and Hamas officials, as reported by Yahoo News. This alignment reflects Erdogan's broader ambition to counterbalance U.S. and Gulf influence in the Middle East, even as Turkey recalibrates its regional strategy in 2024 by strengthening ties with Gulf Cooperation Council (GCC) nations to mitigate economic vulnerabilities, according to the Arab Center.

Economic Implications: FDI, Sanctions, and Investor Confidence

Turkey's economic landscape is marked by a paradox: a strategic location and large domestic market that attract FDI, juxtaposed with macroeconomic instability and geopolitical risks. In 2024, FDI inflows reached $11.3 billion, driven by manufacturing and energy sectors, including a $1 billion investment in onshore wind power and $500 million in lithium battery production, as reported by The Financial Analyst. Yet, the U.S. has imposed sanctions on Turkish entities linked to Hamas fundraising, such as the Turkey-based charity Filistin Vakfi, raising compliance risks for foreign investors, according to Bridges for Peace. These sanctions, coupled with Turkey's role in facilitating Russian sanctions evasion, have heightened concerns about reputational damage and regulatory scrutiny, according to the U.S. State Department.

The 2018 U.S.-Turkey trade spat, which triggered a 35% lira depreciation, underscores the vulnerability of Turkey's economy to geopolitical tensions, as shown in a 2019 study. While the 2024 S&P credit rating upgrade to "BB-" reflects some stability, Turkey's 44.38% inflation rate and 50% central bank interest rate remain headwinds, increasing borrowing costs and deterring long-term investment, according to Farosol's 2025 outlook.

Credit Risk and Borrowing Costs: A Fragile Equilibrium

Geopolitical instability ranks as Turkey's top risk in 2025, with 92% of experts classifying it as high or very high, per a Turkiye Today report. This instability exacerbates sovereign credit risks, as evidenced by widened credit default swap (CDS) spreads-a direct consequence of global investors demanding higher premiums to insure against default, according to a 2024 study. The energy sector, a key driver of Turkey's FDI growth, faces particular challenges. While the Sakarya Natural Gas Field Development Project has attracted 72.8 billion TL in 2025, the sector's reliance on imported technology and raw materials makes it susceptible to international policy shifts and sanctions, per TR Business World.

Real estate, another FDI magnet, has seen $3.6 billion in inflows in 2023, though 2024 data remains sparse, according to the U.S. State Department. However, the sector's appeal as a safe-haven asset during geopolitical crises is tempered by Turkey's depreciating lira and regulatory opacity, which deter risk-averse investors, as argued in a 2025 paper.

Investor Reactions and Market Dynamics

Geopolitical events, such as the October 7, 2023, Hamas-Israel conflict, have had immediate and measurable impacts on Turkey's financial markets. An event-study analysis observed abnormal stock market returns at the 10% significance level on the day of the conflict, reflecting heightened investor anxiety. While gold and real estate have historically served as safe-havens during such crises, Turkey's long-term reputational risks-stemming from its alignment with Hamas and U.S. sanctions-could erode investor confidence over time, the Financial Times reported.

The U.S. has also raised concerns about Turkey's financial links to Hamas, with lawmakers calling for classified briefings on the implications for national security and foreign investment, according to The Hill. These concerns, though not yet translating into broad sanctions, signal a growing risk of regulatory friction that could disrupt investment flows.

Conclusion: Navigating the Geopolitical Tightrope

Turkey's alignment with Hamas under Erdogan underscores the intricate interplay between ideology, regional ambition, and economic pragmatism. While the country's strategic location and economic reforms offer compelling opportunities for investors, the risks-ranging from U.S. sanctions to credit instability-demand rigorous due diligence. For investors, the key lies in balancing Turkey's growth potential with a nuanced understanding of its geopolitical vulnerabilities. As the Middle East continues to evolve, Turkey's ability to recalibrate its foreign policy while stabilizing its economy will be critical in determining its long-term investment appeal.