Iran Conflict is the Greatest Test for Turkish economy

As the conflict in the Middle East escalates following the February 28, 2026, attacks, Prof. Dr. Selva Demiralp of Koç University has provided a comprehensive breakdown of the “transmission channels” through which the war is impacting the Turkish economy. Demiralp warns that while the total cost of the Iran conflict depends on the war’s duration, the structural damage is already visible across three primary fronts: energy shocks, global risk shifts, and massive capital outflows.

1. The Energy Shock: A Triple Threat to Stability

Demiralp highlights that because Turkey imports approximately 90% of its energy, the de facto closure of the Strait of Hormuz has triggered a direct macroeconomic crisis:

• Cari Açık (Current Account Deficit): Soaring oil and gas import bills are widening the trade gap.

• Inflation: Rising fuel and electricity costs are trickling down into every consumer good.

• Budget Deficit: To shield citizens from price spikes, the government has cut the ÖTV (Special Consumption Tax) at the pump, resulting in a significant loss of tax revenue.

“Energy-intensive inputs like fertilizer, petrochemicals, and aluminum are also surging, creating a secondary wave of costs for Turkish industry.” — Prof. Dr. Selva Demiralp

2. The “Hawkish” Fed and Global Liquidity Squeeze

The Iran Conflict isn’t just a regional issue; it has reignited global inflation fears. Demiralp explains that high energy prices are forcing the U.S. Federal Reserve (Fed) into a more “hawkish” stance.

• Delayed Rate Cuts: Expectations for global interest rate reductions have been shelved.

• Sermaye Çıkışı (Capital Flight): High U.S. yields and geopolitical uncertainty are drawing liquidity away from emerging markets such as Turkey.

3. Domestic Impact: Reserve Loss and Growth Slowdown

The most alarming figures in Demiralp’s analysis involve the rapid depletion of Turkey’s financial buffers since the Iran war began on February 28, 2026:

• Capital Outflow: An estimated $25-$30 billion has left Turkey in less than a month.

• Reserve Depletion: The Central Bank (TCMB) has reportedly spent approximately $25 billion in reserves to defend the Lira against this sudden capital flight.

• Security Risks: The entry of Iranian missiles into Turkish airspace and the general perception of regional instability are threatening tourism revenues and causing the cancellation of international business contracts.

The “Stagflation” Warning

Demiralp concludes that the combination of rising costs and tightening financial conditions is pushing Turkey toward stagflation, a period of high inflation coupled with stagnant or negative economic growth.

As credit channels contract and investments are postponed, the “bill” for the regional conflict is increasingly being footed by the Turkish consumer and the national treasury.