Political Instability and Investor Risk in Turkey: The CHP Crisis and Democratic Backsliding

The unfolding crisis within Turkey’s Republican People’s Party (CHP) is not merely a domestic political drama but a stark signal of broader democratic erosion and systemic risk for investors. As the CHP faces judicial annulments of its leadership elections, internal schisms, and government crackdowns, the implications for Turkey’s political stability—and by extension, its financial markets—have grown increasingly dire. This analysis examines how the CHP’s turmoil reflects a deepening authoritarian trend under President Recep Tayyip Erdoğan, the resulting volatility in equity and currency markets, and the long-term risks for emerging-market investors.

A Judicial Campaign Against the Opposition

The CHP’s legal woes began with the annulment of its Istanbul provincial congress in October 2023, which led to the removal of provincial chair Özgür Çelik and the appointment of a court-appointed trustee, Gürsel Tekin. The CHP leadership, however, expelled Tekin and other trustees, defying judicial authority and stoking accusations of institutional chaos [1]. This pattern has since escalated: in March 2025, Istanbul Mayor Ekrem İmamoğlu—a CHP stalwart and potential presidential candidate—was arrested on corruption charges widely seen as politically motivated. His detention triggered nationwide protests and a wave of arrests, with critics arguing that the judiciary is being weaponized to neutralize political rivals [2].

The government insists these actions are procedurally sound, but the CHP and international observers paint a different picture. European Parliament rapporteur Nacho Sánchez Amor has warned that the court rulings “threaten to dismantle Turkish multi-party democracy,” while the CHP’s own leader, Özgür Özel, has accused the government of “systematically eroding democratic norms” [3]. The erosion of judicial independence is further underscored by the annulment of İmamoğlu’s academic degree from a northern Cyprus institution—a move critics see as an attempt to delegitimize his political career [4].

Investor Sentiment and Market Volatility

The CHP’s crisis has sent shockwaves through Turkey’s financial markets. Following the Istanbul congress annulment in September 2024, the BIST100 index plummeted over 5%, reflecting investor anxiety over political instability and weak governance [5]. The Turkish lira has also suffered, depreciating 14.5% against the U.S. dollar in the wake of İmamoğlu’s arrest in March 2025, marking the worst performance since the 2008 global financial crisis [6].

Foreign investors, who hold $127 billion in Turkish assets, are particularly wary. Timothy Ash, an analyst at WestLB, notes that the CHP’s legal battles and the government’s crackdown have created a “toxic mix of uncertainty,” deterring long-term investments and pushing local investors to hedge with foreign currencies [7]. The Central Bank’s ability to cut interest rates—a critical tool for economic stabilization—is now constrained by fears of further political turmoil, exacerbating borrowing costs for businesses and households [8].

Democratic Backsliding and Geopolitical Complicity

Turkey’s democratic decline is not occurring in isolation. The European Union and the United States, despite public concerns, have adopted a muted response to Erdoğan’s consolidation of power. The EU’s reliance on Turkey for NATO operations and its role in countering Russian influence have limited its ability to condemn the erosion of civil liberties and press freedom [9]. This geopolitical balancing act has emboldened the government, with the judiciary increasingly used to suppress dissent under anti-terrorism laws [10].

The CHP’s defiance—while admirable—has also contributed to instability. By rejecting court orders and holding an emergency congress on September 21, 2025, the party risks further legal clashes and internal fragmentation. Former CHP MP Barış Yarkadaş has criticized Özel for targeting loyal members while ignoring corruption scandals in CHP-run municipalities, highlighting the party’s own governance challenges [11]. Such infighting weakens the opposition’s ability to present a unified front, prolonging the crisis and deepening investor skepticism.

Long-Term Implications for Emerging Markets

For investors, the CHP crisis underscores a broader trend: the increasing confluence of political repression and market instability in emerging economies. Turkey’s experience mirrors cases like Poland and Hungary, where democratic backsliding has led to capital flight and currency crises. The risk here is twofold: short-term volatility from political shocks and long-term erosion of institutional credibility.

Asset allocators must weigh these risks carefully. While Turkey’s strategic location and young population offer long-term potential, the current environment favors defensive strategies. Diversification away from Turkish equities and lira-denominated assets is prudent, with a focus on sectors less sensitive to political risk, such as technology or export-oriented industries. However, even these sectors face headwinds as the government’s economic policies become increasingly erratic.

Conclusion

The CHP’s legal and leadership crisis is a microcosm of Turkey’s democratic decline and the risks it poses to investors. As the government continues to weaponize the judiciary and suppress dissent, the country’s financial markets remain vulnerable to sharp corrections. While the CHP’s defiance may rally domestic support, it also deepens institutional instability. For emerging-market investors, the lesson is clear: in an era where political repression and market volatility are increasingly intertwined, vigilance and adaptability are paramount.

Source:
[1] Türkiye's CHP to Hold Emergency Congress Sept. 21 Amid Turmoil [https://www.dailysabah.com/politics/turkiyes-chp-to-hold-emergency-congress-sept-21-amid-turmoil/news]
[2] Turkey's Latest Legal Crackdown Hits Opposition, Markets [https://www.usnews.com/news/world/articles/2025-09-03/turkish-authorities-order-new-detentions-of-opposition-officials]
[3] Turkish Main Opposition Party Strokes Chaos by Defying Judiciary [https://www.dailysabah.com/politics/turkish-main-opposition-party-stokes-chaos-by-defying-judiciary/news]
[4] Turkey's Shifting Sands: Opposition in Crisis, Journalists Silenced [https://globalvoices.org/2025/07/03/turkeys-shifting-sands-opposition-in-crisis-journalists-silenced-and-rights-under-siege/]
[5] Court Annuls Istanbul Congress of Turkey’s Main Opposition CHP [https://www.tekedia.com/forum/topic/court-annuls-istanbul-chp-congress-ousts-provincial-chair-amid-political-tensions/?srsltid=AfmBOoqRy97UtTUX4axmFw1Vw_l6MisNnaQTVvbtRU0qSV6KB5Vf7ahB]
[6] Protests Are the Last Thing Keeping Turkey’s Democracy Alive [https://www.economist.com/europe/2025/03/24/protests-are-the-last-thing-keeping-turkeys-democracy-alive]
[7] Reflections from Istanbul - by Timothy Ash [https://timothyash.substack.com/p/reflections-from-istanbul]
[8] Foreign Investors on Edge Over Fate of Turkey’s Opposition Leader [https://www.middleeasteye.net/news/foreign-investors-edge-over-turkey-opposition-leaders-fate]
[9] REPORT on the 2023 and 2024 Commission Reports on Türkiye [https://www.europarl.europa.eu/doceo/document/A-10-2025-0067_EN.html]
[10] BTI 2024 Türkiye Country Report [https://bti-project.org/en/reports/country-report/TUR]
[11] Türkiye's CHP to Hold Emergency Congress Sept. 21 Amid Turmoil [https://www.dailysabah.com/politics/turkiyes-chp-to-hold-emergency-congress-sept-21-amid-turmoil/news]