The deal Turkey and the White House struck in the evening of October 17 over Ankara’s military intervention in northern Syria has not removed altogether the risk of sanctions that could possibly compromise the recovery of the Turkish economy and keep investors on the fence. 

“[Turkish president Recep] Erdogan still has a problem. US Senators have indicated that they are still planning to impose far-reaching sanctions on Turkey – an initiative over which [US president Donald] Trump has had little control,” Anthony Skinner, director for the Middle East and North Africa at political risk consultancy Verisk Maplecroft says. 

Turkey drew an international backlash by launching a military campaign in north-east Syria against Kurdish forces as soon as Mr Trump announced the withdrawal of US troops. EU countries and the US threatened sanctions against Ankara, and major foreign investors such as Volkswagen put Turkish investment plans on hold. 

A five-day ceasefire agreed by Mr Erdogan and US vice-president Mike Pence eased some of these tensions, although it may fall short of normalising US-Turkey relations. Although the White House has committed not to pursuing the sanctions against current and former high-profile officials of the Turkish elite announced on October 14 should the Pence-Erdogan agreement be respected, Congress has signalled that it remains keen to approve a comprehensive sanctions programme on Turkey. 

“While a 120-hour ceasefire is welcome, the other terms cave to the maximalist demands of Erdogan and would allow Turkey to ethnically cleanse a big swath of Kurdish areas and lead to a revival of Isis. Senator Lindsey Graham and I will continue to pursue our sanctions bill,” tweeted Democratic senator Chris van Hollen, who spearheaded the introduction of a bipartisan sanctions bill alongside Republican senator Graham, tweeted. 

The bill targets Turkey’s energy sector and military, and even proposes a ban on Turkish sovereign debt, which would inhibit the country’s ability to refinance about $180bn in short-term debt every year. 

“The bigger risk for the Turkish economy comes from even tougher sanctions imposed by the Senate. These could land the lira and the Turkish economy a devastating hit,” Mr Skinner says. “Most investors for now will take a wait-and-see attitude. The past few years have been something of a rollercoaster ride for investors in Turkey due to a series of crises in bilateral relations and an extended election cycle. Given the level of animosity that has accumulated against Erdogan in US Congress this crisis is more serious than previous ones.”

German car manufacturer Volkswagen postponed a widely expected decision on a $1.4bn investment in a new facility in Turkey. “We are monitoring the situation carefully and are worried about the current developments,” the company said in a statement on October 15. 

Volkswagen’s decision to pause rather than cancel altogether its investment project in the western Turkish city of Manisa highlights the dilemma investors are currently facing, given that Turkey’s investment case remains strong despite the geopolitical tensions. 

“It’s an interesting case. The company has been thinking long and hard about this investment. The business case is very compelling.  The political situation of the country has been difficult for a long time, and they took the decision anyways, but with the situation in Syria the communications around it was difficult, which is why they are postponing it, not ending it,” says Timothy Ash, senior emerging market strategist at BlueBay Asset Management.  

“There are compelling reasons to invest in Turkey. It’s a big market, good manufacturing base, great demographic, the automotive sector is very competitive at the current exchange rate. Big businesses invest in many difficult countries, they just need to understand where the country is going. [...] And regardless of what people think of Mr Erdogan, the administration is still pro-business and pro-FDI.” 

The sharp devaluation of the lira, which has fallen by 164% against the US dollar in the past five years, has boosted even further the country’s investment case for export-oriented manufacturers. Authorities at national investment promotion agency Invest in Turkey are now refining their message for investors to draw a line between geopolitical tensions and investment opportunities. 

“Turkey has become more pragmatic when it comes to differentiating between business and politics,” says Arda Ermut, president of Invest in Turkey. “Foreign investors take the longer perspective. Even though decisions sometimes may be postponed because of temporary problems, as well as the perception problems we are also dealing with, at the end investors are looking at the long-term.”

Turkey has been successful in attracting FDI and developing a manufacturing base around it under the leadership of Mr Erdogan. Yet investors’ resolve has been tested multiple times in recent years by political and security challenges. Should sanctions fully materialise, the country’s investment case will not be able to ignore politics any longer.