Political Risk and Capital Flight in Turkey: The Impact of Legal Actions on Investor Confidence

Turkey's political landscape has long been a double-edged sword for foreign investors. While the country's strategic location, young population, and robust legal frameworks for foreign investment offer allure, escalating political instability-particularly high-profile legal actions against opposition leaders-has increasingly eroded investor confidence. Recent developments underscore a troubling pattern: judicial interventions targeting opposition figures correlate with sharp capital outflows and market volatility, raising critical questions about the sustainability of Turkey's economic stability.

A Judicial Climate of Uncertainty

In October 2025, an Ankara court dismissed a high-profile lawsuit challenging the leadership of Turkey's main opposition party, the Republican People's Party (CHP). The case, which alleged bribery and procedural irregularities in CHP's 2023 leadership election, was ruled "without basis," with the court noting that the party's chairman, Özgür Özel, had since been reelected, according to a report by Evrim Ağacı. While CHP leaders hailed the ruling as a rare display of judicial independence, the broader context remains grim. Over the past year, more than 500 individuals-including 16 mayors from CHP-controlled municipalities-have been detained under charges ranging from espionage to vote manipulation, according to the same report. These actions, framed by the government as efforts to uphold legal order, are widely perceived as politically motivated crackdowns.

Investor Sentiment and Market Reactions

The ripple effects of such legal actions are starkly visible in Turkey's financial markets. According to a Bloomberg report, foreign investors sold $110 million in Turkish assets in a single day following the October 2025 court decision, part of a broader trend of capital flight, the report noted. Since March 2025, net foreign outflows have reached $2 billion, exacerbating pressure on the Borsa Istanbul Stock Exchange, which has seen sharp declines amid heightened uncertainty, according to the same report.

A telling example emerged in late 2024, when new investigations into Istanbul Mayor Ekrem İmamoğlu and his campaign manager triggered a selloff in local bonds and equities, according to Evrim Ağacı. As one analyst noted, "The political crackdowns have created a dicey environment for foreign direct investors, making it harder to commit to long-term projects," according to the Bloomberg report. This sentiment is echoed in data from the Turkish Central Bank, which recorded a 50% drop in foreign portfolio investments between 2023 and 2024, according to the Bloomberg report.

FDI Trends and Structural Challenges

Foreign direct investment (FDI) inflows into Turkey have also contracted significantly. In 2024, FDI stood at $11.3 billion, a fraction of the $22 billion recorded in 2007, according to the Bloomberg report. This decline is attributed to a combination of political risks and macroeconomic instability, including rising inflation and policy unpredictability. While Turkey's legal framework for FDI-encompassing protections like expropriation guarantees and access to international arbitration-remains robust, according to ICLG's 2023 analysis, its effectiveness is undermined by the politicization of legal institutions.

The government's handling of NATO membership requests from Finland and Sweden further illustrates this inconsistency. By leveraging geopolitical ties to advance domestic political agendas, Turkey has signaled to investors that even its international commitments may be subject to sudden shifts, according to a Reuters report. Compounding this issue, the lack of ratification for recent bilateral investment treaties (BITs) with African nations suggests a fragmented approach to foreign policy, deterring capital inflows from emerging markets, according to ICLG's 2023 analysis.

The Paradox of Legal Frameworks and Political Realities

Turkey's participation in international agreements like the Washington Convention (1987) and the New York Convention (1991) theoretically provides a safety net for investors, according to ICLG's 2023 analysis. However, the repeated targeting of opposition leaders-often through opaque legal processes-has created a credibility gap. As one investor put it, "The laws exist, but the political climate makes it impossible to trust their enforcement," according to the Bloomberg report. This erosion of trust is particularly damaging for capital-intensive industries, where long-term predictability is essential.

Conclusion: A High-Risk Environment for Capital

The interplay between political risk and capital flight in Turkey paints a sobering picture for foreign investors. High-profile legal actions against opposition leaders, while framed as legal necessities, have become tools of political suppression. These actions not only destabilize domestic institutions but also trigger immediate market reactions, from asset sales to FDI declines. For Turkey to rekindle investor confidence, it must address the root causes of this instability-starting with the depoliticization of its judiciary. Until then, the country risks remaining a high-volatility market where even the most robust legal frameworks cannot offset the fallout of political brinkmanship.