Political Risk in Turkish Markets Amid Imamoglu's Legal Persecution: A Crisis of Institutional Trust

The escalating legal persecution of opposition figures like Ekrem İmamoğlu, Istanbul's mayor and the main challenger to Turkey's ruling party, signals a deepening crisis of institutional trust. Judicial politicization—evident in fabricated charges, prolonged trials, and retroactive sanctions—is destabilizing Turkey's investment climate. For investors, this represents a critical risk to sectors tied to public contracts and financial stability, from construction to banking. Here's why the stakes are rising and what to do about it.

Judicial Harassment as a Systemic Issue

İmamoğlu's case exemplifies a pattern of legal weaponization to silence dissent. Over 90 investigations since 2019—including corruption charges dating back to his tenure as Beylikdüzü mayor, moral damages lawsuits by President Erdoğan, and a retroactive revocation of his university diploma—highlight a strategy to intimidate political rivals. The European Court of Human Rights (ECtHR) has repeatedly ruled such actions violate free speech and due process, yet Turkey's courts continue to operate as an extension of executive power.

This politicization of justice erodes investor confidence in two key ways:
1. Unpredictability of Legal Outcomes: Investors rely on stable frameworks for contracts and dispute resolution. When courts are perceived as tools of political control, sectors like construction (where public tenders dominate) face heightened risks of arbitrary litigation.
2. Capital Flight Risks: Banking sectors are exposed to outflows as foreign investors flee instability. The lira's volatility—already pressured by high inflation and fiscal deficits—is amplified by fears of further judicial overreach.

Sector-Specific Impacts

Construction: A Sector Entangled in Political Favoritism

İmamoğlu's prosecution for a 2015 tender case (now pending for eight years) underscores risks for firms reliant on public contracts. The bid rigging allegations, though baseless, reflect a broader climate where legal disputes can be weaponized to exclude competitors.

The TRY's 15% decline since early 2024 mirrors investor skepticism. Construction firms with government ties face dual risks:
- Litigation Costs: Prolonged trials drain resources.
- Reputation Damage: Association with politically tainted contracts may deter international partners.

Banking: Exposed to Capital Flight and Currency Devaluation

Turkey's banking sector, already grappling with a 39% non-performing loan ratio, is vulnerable to outflows as foreign investors retreat. The lira's instability compounds this, raising borrowing costs and squeezing profitability.

Akbank's 25% drop in share price since 2024 reflects broader sector pessimism. Banks with significant foreign exposure or lira-denominated liabilities face amplified risks if political tensions escalate further.

Investment Implications: Short-Term Caution, Long-Term Uncertainty

1. Short Positions in TRY-Denominated Assets:
   The lira's fragility makes it a prime candidate for shorting. Pairing a short TRY/USD position with a long USD carry trade could capitalize on Turkey's deteriorating twin deficits (fiscal and current account).

2. Avoid Construction Firms Linked to Public Contracts:
   Firms dependent on government tenders face reputational and legal risks. Diversify into export-driven sectors (e.g., automotive) less entangled in domestic political battles.

3. Bank Sector Underweight:
   Reduce exposure to Turkish banks. Opt for regional peers in Gulf markets (e.g., Saudi National Bank) with stronger macro fundamentals and institutional credibility.

4. Long-Term Caution Until Judicial Reforms:
   A sustained recovery in Turkish markets requires visible steps toward judicial independence—such as ending politically motivated trials or complying with ECtHR rulings. Until then, Turkey remains a high-risk, low-reward proposition for foreign capital.

Conclusion: A Crisis Without Quick Fixes

The persecution of İmamoğlu is not an isolated incident but a symptom of a broader erosion of democratic norms. For investors, the message is clear: Turkey's political risks are structural and will persist until there is a credible commitment to judicial neutrality. Until then, the lira and sectors reliant on institutional trust remain vulnerable. Stay defensive, avoid overexposure, and wait for signs of reform before considering entry.

In a world where political stability drives investment, Turkey's current trajectory offers little comfort. The markets are pricing in a crisis—and investors would be wise to heed the warning.