Turkey's Judicial Crackdown: A Brewing Storm for Investors

The arrest of Istanbul Mayor Ekrem Imamoglu on corruption charges in March 2025 marked a turning point in Turkey's political landscape, signaling an intensifying crackdown on the opposition Republican People's Party (CHP). This campaign—coupled with parallel detentions of mayors, municipal officials, and journalists—has raised profound questions about the rule of law, investor confidence, and the stability of Turkish assets. For investors, the erosion of judicial independence and the government's overt politicization of legal processes now pose material risks to equity markets, the Turkish lira (TRY), and foreign direct investment (FDI).

Judicial Politicization: The New Normal

The arrests of opposition figures—including mayors of earthquake-ravaged Adiyaman, pro-CHP Izmir, and tourism-dependent Antalya—are framed by the government as anti-corruption efforts. Yet critics argue they are politically motivated tactics to destabilize the CHP ahead of the 2028 elections. Key indicators of judicial bias include:
- Targeted Prosecutions: Charges of "organized crime" and "bid-rigging" are disproportionately applied to CHP-aligned officials, with trials proceeding swiftly against opposition figures while delayed for government allies.
- Erosion of Legal Safeguards: The revocation of Ekrem Imamoglu's academic degree—a disqualification mechanism under Turkish law—exemplifies the weaponization of bureaucracy to disqualify rivals.
- Pressure on Media and Civil Society: Over 2,000 arrests during protests, fines on dissenting media outlets, and the expulsion of foreign journalists (e.g., BBC's Mark Lowen) amplify fears of a shrinking civic space.

This environment creates profound uncertainty for investors. As the Council of Europe's Parliamentary Assembly noted, the crackdown risks "undermining the very foundations of democracy," a sentiment increasingly shared by global institutions like the IMF and OECD.

Impact on Foreign Direct Investment (FDI)

FDI inflows have already begun to dwindle. Turkey's inward FDI fell by 40% in 2024, and the trend is accelerating. Multinationals in sectors like construction, energy, and tourism—critical to Turkey's economy—are now reevaluating exposure amid concerns over:
- Contractual Risks: The targeting of municipal officials raises questions about the fairness of public tenders and enforcement of agreements.
- Currency Volatility: The TRY's 16% plunge in March 2025 (post-Imamoglu arrest) highlights how political instability amplifies exchange-rate risk.
- Geopolitical Exposure: Sanctions risks, compounded by Turkey's military actions in Syria and Libya, further deter capital.

Equity Markets: A Bipolar Outlook

Turkey's BIST 100 index has seen heightened volatility, with sectors tied to government loyalty outperforming those facing scrutiny.

• Winners: Firms with close ties to Erdogan's inner circle—such as construction giants like Enka (ENKD) or energy firms like Tüpraş (TPRS)—may benefit from state-backed projects and contracts. These companies often operate in sectors insulated from foreign competition, like infrastructure.
• Losers: Consumer discretionary and financial stocks (e.g., GarantiBank (GARAN)) face headwinds from inflation (now at 40%) and declining consumer confidence.

Investment Playbook: Navigating the Turbulence

1. Short the Turkish Lira:
   The TRY's fragility, exacerbated by political uncertainty and a current account deficit, makes it a prime candidate for short positions. Investors can use currency ETFs (e.g., DBV) or forward contracts to capitalize on depreciation.

2. Overweight Erdogan-Loyal Firms:
   Selectively invest in companies with strong government linkages. For example, Kolin (KOLN), a defense contractor, and Sisecam (SISE), a chemicals giant with state-backed projects, may offer insulation from broader market selloffs.

3. Hedge with Emerging Market Debt ETFs:
   Allocate to broad EM debt funds (e.g., EMB) to offset Turkey-specific risks while maintaining exposure to higher-yielding assets.

4. Avoid Unhedged Equity Exposure:
   The BIST 100's beta to geopolitical events is high. Investors should limit direct holdings without currency hedging or consider inverse ETFs like TUR (if available).

Conclusion: A Risk-Reward Crossroads

Turkey's political crackdown is a stark reminder that authoritarian backsliding can have immediate economic consequences. While the government's strategy may temporarily consolidate power, the long-term costs to investor confidence, FDI, and market stability are substantial. For now, tactical plays—such as shorting the TRY or favoring state-backed firms—may offer asymmetrical returns. However, investors should remain vigilant: a prolonged deterioration in rule of law could transform Turkey into a market to avoid entirely.

In the words of CHP leader Ozgur Ozel, “The victors have always been those who resist.” For investors, resisting overexposure to Turkey's political volatility may be the wisest resistance of all.