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With Gulf charm offensive, Turkey’s Erdogan sets up dealmaking deluge across defense, energy
Al-Monitor Pro members
Samuel Wendel
Senior Market Research Analyst, Al-Monitor
Aug. 18, 2023
A Turkish drone factory is coming to Saudi Arabia following a $3.1 billion deal with defense firm Baykar — one of many key deals that should soon take flight across numerous sectors as Turkey deepens cooperation with former Gulf rivals. The factory news arrived in early August, shortly after Turkish President Recep Tayyip Erdogan kicked off his third term by touring Gulf capitals, the latest salvo in his efforts to repair ties and attract foreign investment needed to revive Turkey’s moribund economy. So far, Gulf states appear open to Erdogan’s pitch and could compete to invest. That’s headlined by the UAE inking agreements worth $50 billion during Erdogan’s visit — double what Turkey had hoped for across the entire trip. Details on deals in the pipeline remain vague, but won’t be for long. Expect a dealmaking deluge across the defense, energy and other fronts in coming months, as Gulf wealth funds and players like Aramco and ADNOC target business with Turkey.
- Erdogan’s post-election Gulf tour marked a new stage of ongoing efforts to restore relations with Saudi Arabia and the UAE after a decade of frosty ties, while accelerating efforts to save Turkey’s battered economy, which went into free fall in recent years largely due to Erdogan’s policies.
- Turkey faces runaway inflation, a devalued lira, a gaping budget deficit and depleted foreign currency reserves. That crisis would be worse without Gulf support, which helped relieve economic pressure and gave Erdogan breathing room on the campaign trail. For instance, Saudi Arabia deposited $5 billion in Turkey’s central bank in March 2023, shortly after devastating earthquakes hit the country.
- Despite turmoil, Turkey’s overall market potential cannot be ignored by Gulf investors: the world’s 19th largest economy with a GDP of $906 billion in 2022, it features a population of about 85 million and significant industrial capacity — including industries on the rise like defense. The GCC and Turkey had also explored a free trade agreement in the past.
- Erdogan’s victory paved way for further normalization — underlined by the UAE deciding just days after the election to fully ratify an agreement with Turkey intended to increase bilateral trade to $40 billion by 2028.
- Erdogan has since kicked off new efforts to reassure investors and mend fences, including overhauling his economic team and reversing controversial financial policies that fueled Turkey's soaring inflation and currency collapse.
- Those moves are partially aimed at courting wary Western investors, but the central thrust of post-election efforts to revive the economy and lure foreign investment center on Saudi Arabia, Qatar and the UAE.
- The interest is mutual. In early June 2023, Saudi Aramco met with around 80 Turkish contractors to discuss $50 billion worth of potential projects planned in the kingdom through 2025, with refineries, pipelines and other infrastructure among focus areas, according to Bloomberg.
- Saudi Arabia was also the first stop on Erdogan’s Gulf tour in July. Before the trip, the Turkish government reportedly aimed to attract $25 billion in investments, including through privatizations and acquisitions.
- Turkey and Saudi Arabia signed several agreements during the visit, but the headliner was a $3.1 billion drone deal with Baykar. This is Turkey’s largest ever defense export contract and has since led to the agreement to localize manufacturing in the kingdom. Two more defense deals have also since emerged between Saudi company NCMS and Turkish defense electronics producer Aselsan and missile manufacturer Roketsan.
- The landmark drone deal could boost Turkish military exports to a record $7.5 billion in 2023, surpassing the initial $6 billion target. Saudi Arabia now joins the ranks of Gulf customers that own Baykars, including Kuwait, the UAE and Qatar.
- Turkey’s famously affordable drones remain its top military export, but its defense industry is currently developing a slew of advanced (and costlier) weaponry too. That includes its domestically produced 5th generation fighter jet, dubbed KAAN, which is set to start flights in December 2023.
- After Saudi Arabia, Erdogan visited Qatar. The visit lacked a landmark deal but did coincide with a pledge to jointly invest $60 million into a semiconductor production project in Turkey. Plus, in recent years Qatar provided billions in needed currency swaps to its long-time ally.
- The final stop was the UAE, which signed provisional agreements with Turkey worth around $50 billion. Those were in addition to the $40 billion trade deal. The new agreements covered defense, space, energy and natural resource projects and beyond.
- Specifics on deals remain scant, but the package was framed as diversifying the comprehensive economic partnership agreement between the two countries, set to enter into effect in September. The agreements also included Abu Dhabi wealth fund ADQ potentially financing up to $8.5 billion of Turkey’s earthquake relief bonds.
- Notably, one MoU was a strategic cooperation agreement between Turkish Petroleum Corporation (TPAO) and Abu Dhabi’s state oil giant ADNOC, which is now expanding its footprint after taking a stake in an Azerbaijan gas field in August, its first major international purchase of upstream hydrocarbon assets, reports Bloomberg.
- This comes as Erdogan’s government has ambitious plans to make Turkey a geostrategically-positioned energy powerhouse and reduce its reliance on imports. Key to those goals are its gas discoveries in the Black Sea.
- In April 2023, the first phase of TPAO’s ultra-deepwater Sakarya Field began producing gas, giving Turkey badly needed options to increase energy independence. The national oil company operates the field with 100% equity. In December 2022, Turkey also upped estimates of its Black Sea natural gas reserves by nearly a third, putting total deposits at 710 billion cubic meters.
- Also noteworthy: during his tour Erdogan gifted Gulf counterparts with electric cars made by Turkish manufacturer Togg, which rolled out its first vehicles last year and is now eying exports.
- So far, Erdogan’s economic reset is producing results, with Turkey enjoying inflows: overseas investors bought $179 million in local equities during the last week of July, the eighth straight week of inflows. Turkey’s new finance minister has touted “a surge” in investor interest in Turkish assets, with increasing equity and debt deals alongside FDI inflows from GCC countries.
- Although Turkey has started attracting Gulf investments, more is needed and there are signs that Western players are again showing interest. In late July, Istanbul-based Ronesans Enerji inked a partnership with France’s TotalEnergies to expand renewable power generation capacity in Turkey.
- In late July, Turkey’s new economic team held their first international investors meeting with 50 foreign companies. That included separate meetings with JP Morgan and Franklin Templeton.
- Still, the economic picture remains challenging. Turkey's central bank recently revised its year-end annual inflation projection to 58%, up from 22.3% previously. However, Turkey also logged a $674 million current account surplus in June, its first in nearly two years.
Scenario 1: Turkey pushes for a multilateral agreement with the GCC
After successfully deepening ties with Saudi Arabia and the UAE, Turkey works to revive momentum for a free trade deal with the GCC to cement Ankara’s long-term economic integration with the bloc.
Yet, it doesn’t appear those negotiations have regained steam so far. Such a deal would also face hurdles, not least of which is rising interregional competition between the UAE and Saudi Arabia.
Scenario 2: The UAE invests in Turkish upstream
As part of ADNOC’s international expansion, the Abu Dhabi oil company partners with TPAO to further develop the Sakarya field, unlocking a new gas province and helping fast-track Turkey’s energy hub ambitions.
That said, collaboration may instead focus more on Turkey’s green energy transition. The ultra-deepwater Sakarya field also comes with technical challenges and requires costly ongoing exploration activity to reach full potential, while geopolitical factors also loom.
Erdogan’s regional charm offensive is paying off, for now, with Turkey’s FDI from the Gulf set to surge while Western investors proceed cautiously. Attention now centers on the UAE as it deploys funds around upcoming business forums. For instance, COP28 will likely produce UAE investments into Turkish renewable energy projects, while an EV deal with Togg could also materialize. Meanwhile, Saudi Arabia is poised to significantly expand trade activity and recruit Turkish companies to underpin Riyadh’s sprawling economic diversification plans. Turkey will also continue pushing regional defense deals, as it needs customers (and Gulf investment) for its advanced weapons programs. That should generate more co-production agreements, which could see Saudi Arabia boost its own weapons exports. Ultimately, some deals will favor Gulf investors and won’t promote sustainable economic growth in Turkey, but Ankara can also leverage Emirati-Saudi competition to its own benefit even if revived ties fail to transcend the transactional and produce lasting strategic relationships.
Samuel Wendel is a senior market research analyst with Al-Monitor covering economic, tech and business trends across the Middle East. He has previously served as a journalist with Forbes Middle East and Wamda, where he reported on key industry developments spanning a range of sectors in the region.
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