In the Shadow of War: Can Turkey’s Reserve Strategy Withstand the Shock?
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By Economist and columnist Mr Onur Canakci, Yenicag Gazette
As tensions in the Middle East intensify, the world isn’t just bracing for a military conflict—it’s already entering an economic battlefield. Israel’s airstrikes on Iran have reignited fears of a broader regional war, and the first shockwaves hit global markets swiftly: oil surged by 9% to $75 per barrel, gold soared to new highs, stock markets slumped, and crypto assets tumbled.
For a country like Turkey—with high energy dependency, fragile foreign policy footing, and limited foreign reserves—this could be the very “worst-case scenario” policymakers hoped wouldn’t come.
March 19 Rate Hike: Confidence or Complacency?
On March 19, 2024, the Turkish Central Bank raised interest rates to 50%, which briefly restored investor confidence. But the stability came at a cost: to defend the lira and attract capital inflows, the government resorted to heavy FX interventions. Official data shows nearly $30 billion in net reserves were drained following the rate hike.
These interventions were justified under the mantra: “The worst is behind us.” Yet today’s geopolitical volatility raises a sobering question—was that optimism dangerously premature?
Oil Dependency: A Structural Achilles’ Heel
Turkey imports around 90% of its energy, making it acutely sensitive to oil price spikes. A 10% rise in Brent crude, like the one we just witnessed, directly threatens Turkey’s trade balance and current account deficit.
We saw this during the Russia–Ukraine war, when oil prices exceeded $100/barrel and added $40 billion annually to Turkey’s energy bill. A similar surge now could again weaken the lira, stoke inflation, and undermine Central Bank credibility.
Were the Reserves Burned Prematurely?
Was the $30 billion in reserves truly spent to fight the “worst day,” or have those days just begun? As Iran–Israel tensions rise, FX outflows are likely to accelerate, and investors may lose confidence in Turkey’s ability to defend its currency.
Finance Minister Mehmet Şimşek’s assurance that “the worst is over” now rings hollow. In fact, it may reflect a critical misreading of the geopolitical risk environment and violate the principles of prudent fiscal policy.
Market Fragility: Risk Perceptions and Investor Sentiment
Net reserves (excluding swaps) have once again turned negative, while gross reserves are barely enough to cover short-term debt and essential imports. In an energy shock or capital flight scenario, Turkey’s ability to intervene will be deeply constrained.
As gold and oil rise and risk premiums climb, capital will inevitably flee toward safe havens. For Turkey, a country that relies heavily on external financing, this could be a perilous turn.
Tactical Moves, Strategic Weakness
The government’s reserve strategy has so far amounted to short-term fire-fighting. Currency stability was purchased at the expense of structural reforms, while vulnerabilities in Turkey’s external accounts were ignored.
Building FX buffers through swaps, short-term external debt, and volatile portfolio inflows cannot replace genuine reserve accumulation—especially when the regional backdrop is increasingly unpredictable.
The Key Question
If the Iran-Israel conflict escalates, Turkey will face higher energy costs, rising FX demand, and potential capital outflows. When that moment arrives, the “worst is behind us” narrative may no longer convince markets—or citizens.
So the critical question becomes: Was March 19 the true test of resilience, or the beginning of a much bigger storm we are ill-equipped to weather?
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