ECONOMIC LENS
Cost of proximity: Turkey’s economy in US-Israeli war on Iran
Why Ankara’s strategic flexibility is insurance, not income
By Golzar Aghaei
Economic policy specialist
Turkey’s position in the Iran-Israel/US war is that of a high-exposure non-belligerent. The conflict transmits through energy prices, trade routes, and regional instability into an economy already navigating a fragile disinflation program.
Macroeconomic frame
The IMF’s February 2026 Article IV consultation confirmed that Turkey’s disinflation program reduced inflation from 49.4 percent in September 2024 to 30.9 percent in December 2025, with growth forecast at 4.1 percent for 2025. However, the IMF warned that “external risks remain elevated due to persistent global trade uncertainty and regional conflicts,” and that an adverse shock such as an energy price increase could extend the period of still-high inflation. The IMF’s April 2026 World Economic Outlook revised Turkey’s 2026 growth down to 3.4 percent from 4.2 percent in January, citing weaker momentum and higher energy prices. The current account deficit is projected at 2.8% of GDP in 2026, narrowing to 2.5% in 2027, with inflation averaging 28.6% in 2026.
The World Bank’s April 2026 regional report lowered Turkey’s 2026 growth forecast to 2.8% from 3.7%, attributing the downgrade directly to energy and food price shocks linked to Middle East tensions. Input-cost inflation is eroding household purchasing power while high interest rates — the Central Bank held its policy rate at 37% in March 2026 — constrain domestic demand. Turkey’s energy import bill reached $62 billion in 2025, and every $1 increase in oil prices adds approximately $400 million to that burden. Net energy imports amounted to $47.2 billion in 2025, underscoring the structural vulnerability.
Defense exports, NATO alignment
The clearest external gains accrue to Turkey’s defense-industrial complex and its NATO client base. Defense and aerospace exports surged 47.1% year-on-year in the twelve months to May 2026, reaching $10.9 billion, up from $7.4 billion. NATO members accounted for $6.2 billion, or 57.3% of total sales. The sector’s export value per kilogram stood at $65.16 — nearly forty times Turkey’s overall average of $1.62 — underscoring its high-value-added character.
Security institutions, government
Domestically, the most plausible beneficiary is the security and defense establishment. Heightened external threat tends to reinforce the central role of security institutions in state management, expanding their budgetary claims and policy influence. The government may also gain politically if it can present itself as a stabilizing mediator — a role Ankara has actively pursued, conveying messages between Iran and the United States and participating in regional de-escalation formats.
However, this diplomatic capital is fragile and conditional. Turkey’s mediation is driven by strategic imperative: the assessment behind Ankara’s push for de-escalation identifies direct threats to financial stability, including the prospect of trade collapse with Iran—bilateral trade reached $5.68 billion in 2024 — and a refugee influx. Iran supplied approximately 7.7 billion cubic meters of gas to Turkey in 2025, about 13.2% of total gas imports, under a contract that expired in July 2026. Any disruption to these flows would overwhelm diplomatic or trade gains.
Sustained war:
Conditional strategic gains
If the war continues, Turkey’s potential gains remain indirect and conditional. The most significant is the acceleration of alternative trade corridors. Turkey is positioning itself as a relatively secure transit hub, turning connectivity into an instrument of strategic autonomy. Air connectivity reinforces this role: with northern routes over Russia restricted, Istanbul Airport has emerged as a key transit point linking Europe to Central and East Asia.
A second conditional gain is the deepening of defense partnerships with Persian Gulf states. As Persian Gulf countries seek to diversify security partnerships away from over-dependence on the United States, Turkey has secured defense contracts with Qatar, Kuwait, and Saudi Arabia, positioning itself as a reliable regional arms supplier.
Bottom line
The political economy of Turkey’s position in this war is one of asymmetric exposure. The beneficiaries are narrow and sectoral: defense exporters, security institutions, and a government that may gain short-term political capital from crisis management. The costs are broad and macroeconomic: higher energy import bills, elevated inflation, a wider current account deficit, and constrained fiscal space. Turkey’s strategic value as a NATO member with ties across competing blocs is real, but it is insurance, not income. The war exposes the structural vulnerabilities — energy dependence, import-reliant production, and unanchored inflation expectations — that make Turkey one of the most exposed emerging markets to this crisis. Turkey’s genuine gains lie in de-escalation, cheaper energy, and regional integration.
This paper is the third in a series on the political economy of the US-Israeli war against Iran. In the following issues, we will examine in detail the role of each beneficiary country. The next report will focus on the Persian Gulf countries and their sovereign wealth fund dynamics.