The Shadow of Sanctions in Istanbul's Housing Market

Istanbul residents are experiencing a cost of living crisis. Prices of food, clothing, and other essentials have spiked. Property prices have also surged and Istanbulites are spending a growing share of their income on housing. The high prices are primarily due to President Erdoğan’s heterodox belief that lowering interest rates can lower inflation, a so-called “low interest rate, low inflation theory.”

But many in Istanbul blame the higher prices on foreign property investors, who they believe are crowding out locals in the housing market. This resentment played an important role in the Turkish presidential election earlier this year. The leading opposition candidate, Kemal Kılıçdaroğlu, campaigned on banning the sale of homes to foreigners for at least five years. While the public anger is real, the actual impact of foreign investment on housing prices is not as concrete.

In recent years, the Turkish government has courted foreign investors, seeking an influx of foreign currency to replenish reserves dangerously depleted during the Turkish central bank’s defense of the lira. To help shore up its own economy, the government has enacted policies to make Türkiye a more attractive destination for foreign investment and residence. The outreach to foreign investors has been timely—Russian and Iranian investors have been eager to protect their assets from waves of Western sanctions.

Russian and Iranian investment in Türkiye rose markedly after the imposition of sanctions. When the US reimposed sanctions on Iran in 2018, the number of Iranians starting businesses in Türkiye jumped. Russian investment followed a similar pattern. When Russia annexed Crimea in 2014, the sanctions levied by the US and the EU coincided with a rise in the number of Russians registering Turkish companies. The largest spike—in the past two years—followed Russia’s invasion of Ukraine.

Property investments follow a straightforward pattern—when the US imposes sanctions, capital flees to Türkiye. In 2022, Russians purchased just under 15,000 Turkish residential properties, while Iranians purchased just over 9,000.

For Russians and Iranians, sanctions and growing fear of instability were push factors. Meanwhile, the Turkish government’s deliberate courting of the fleeing capital pulled investors to Istanbul, Antalya, and Ankara. The physical proximity of Türkiye to Russia and Iran make its cities attractive destinations. More importantly, the Turkish government is under no threat of being sanctioned and Turkish banks continue to be connected to SWIFT and other international banking systems.

While Russian and Iranian companies have established operations in Türkiye, the country is also a destination for individuals seeking to avoid economic isolation and instability in their home countries. Türkiye advertises citizenship to foreigners if they invest over four hundred thousand dollars in Turkish property. For wealthier Russians and Iranians, this offers a pathway to a new passport. The only condition for gaining Turkish citizenship is to maintain the requisite investment for at least three years and to confirm the investment with the land registry.

But acquiring Turkish citizenship does not appear to be the main goal of Russian and Iranian investors. The passport policy implemented five years ago has not led to a significant rise in foreign investors receiving Turkish citizenships. Of the tens of thousands that have bought Turkish property, less than five percent gained Turkish citizenship. While Iranians have made up a large percentage of those who receive investment-based passports, more Iranians bought property in August 2018 more than those who received a passport that year.

The fact that passports make such a small proportion of total foreign buyers—particularly those from sanctioned countries—raises additional questions. It is unclear whether those who have qualified for citizenship based on their investment of at least $400,000, fail to do so because of a lack of knowledge, indifference, or the bureaucratic slog. But clearly, Russian and Iranian buyers are more interested in acquiring an asset in a safe market than they are in becoming Turkish citizens.

Foreign purchases of residential properties have spiked in recent years, particularly in Istanbul, but also in other major cities of Türkiye, such as Antalya and Ankara. In Istanbul, Russians buyers have concentrated in Beylikdüzü, Kadıköy, Bağcılar, and Sarıyer districts. Iranians have focused on Esenyurt, Kağıthane, Sarıyer, Kartal, and Maltepe.

The market share of foreign buyers in Istanbul’s residential property market has nearly tripled in just five years, rising from 3.43 percent in 2017 to 9.61 percent in 2022. But these purchases remain a small share of Türkiye’s overall residential market. In October, purchases of Istanbul property accounted for less than 15 percent of all residential property sales in Türkiye, according to data from the Turkish Statistical Institute.

While foreign buyers are playing a bigger role in the Istanbul property market, there is no clear link between the rise in the proportion of foreign buyers and higher house prices. While yachts and luxury developments attest that there are rich Russians and Iranians in Istanbul, the volume of home purchases point towards a middle class involvement in the market. This could pit middle class Russian and Iranian buyers against members of the Turkish middle class, but foreigners and Turks have very different paths to purchasing homes in Istanbul.

The Turkish mortgage market is still developing and approval rates remain low. Buyers are expected to make a downpayment of nearly 80 percent, and the mortgage interest rate remains around 20 percent. Last year, only about half of all homes bought in Türkiye were purchased with a mortgage. Turkish lenders do not offer mortgages to foreigners, which means outside investors to make their property investments in cash.

Another difference is the commission that the brokerage receives for selling a given property. While the brokerage receives a commission from both foreign and domestic buyers, the currency of the commission depends on the buyer. Real estate brokers prefer to be paid their commission in stable euros or dollars, meaning that foreign buyers have a comparative advantage over Turkish buyers.

These advantages may explain why the rise in foreign property investment has not more clearly contributed to higher prices. Foreign buyers do not need to pay a premium on market prices in order to make property investments. By offering cash payments and attractive commissions, they may be able to secure a purchase agreement with a lower offer than a Turkish buyer would need to make. While sales to Russian and Iranian buyers have boomed in key neighbourhoods, there is no clear link between these purchases and price increases at the district level, according to data from Endeksa, a Turkish real estate analytics company.

Even if Russian and Iranian investment is not a major contributor to the cost of living crisis, it has cast a shadow on the housing market by shaping public perception. Young Turkish professionals who saved for years in the hopes of buying a home are now seeing their savings eaten away by inflation. Both for aspiring homeowners and renters, the doubling of housing costs has required cuts to other kinds of spending, adding to a perception of diminished standards of living. The response of the government has been to raise minimum wages and increase salaries for civil servants, but support for wages does not mitigate the underlying housing shortage. The Turkish government has also taken steps to lower housing demand, aiming these policies at poor refugees, mainly Syrians, by limiting their work visas and encouraging them to move onwards to Europe.

Most studies on sanctions impacts focus on the senders and the targets. The impacts of sanctions on political and economic circumstances in third countries are largely overlooked. In the case of Türkiye, capital flight from both wealthy and middle class Russians and Iranians has created new dynamics in the housing market. Understanding this capital flight is important for understanding the effectiveness of financial sanctions. Countries like Türkiye can modify their policies to accommodate this capital flight, potentially undermining the goals of those governments imposing sanctions. But these policies can have unintended consequences, like the shadow of sanctions cast on Istanbul’s housing market.

Photo: Canva 

The Middle East’s Next Conflicts Won’t Be Between Arab States and Iran

By Vali Nasr

For more than two decades, the United States has seen the politics of the Middle East as a tug of war between moderation and radicalism—Arabs against Iran. But for the four years of Donald Trump’s presidency, it was blind to different, more profound fissures growing among the region’s three non-Arab powers: Iran, Israel, and Turkey.

For the quarter century after the Suez crisis of 1956, Iran, Israel, and Turkey joined forces to strike a balance against the Arab world with U.S. help. But Arab states have been sliding deeper into paralysis and chaos since the U.S. invasion of Iraq in 2003, followed by the failed Arab Spring, leading to new fault lines. Indeed, the competition most likely to shape the Middle East is no longer between Arab states and Israel or Sunnis and Shiites—but among the three non-Arab rivals.

The emerging competitions for power and influence have become severe enough to disrupt the post-World War I order, when the Ottoman Empire was split into shards that European powers picked up as they sought to control the region. Although fractured and under Europe’s thumb, the Arab world was the political heart of the Middle East. European rule deepened cleavages of ethnicity and sects and shaped rivalries and battle lines that have survived to this day. The colonial experience also animated Arab nationalism, which swept across the region after World War II and placed the Arab world at the heart of U.S. strategy in the Middle East.

All of that is now changing. The Arab moment has passed. It is now the non-Arab powers that are ascendant, and it is the Arabs who are feeling threatened as Iran expands its reach into the region and the United States reduces its commitment. Last year, after Iran was identified as responsible for attacks on tankers and oil installations in Saudi Arabia and the United Arab Emirates, Abu Dhabi cited the Iranian threat as a reason to forge a historic peace deal with Israel.

But that peace deal is as much a bulwark against Turkey as it is against Iran. Rather than set the region on a new course toward peace, as the Trump administration claimed, the deal signals an intensification of rivalry among Arabs, Iranians, Israelis, and Turks that the previous administration failed to take into consideration. In fact, it could lead to larger and more dangerous regional arms races and wars that the United States neither wants nor can afford to get entangled in. So, it behooves U.S. foreign policy to try to contain rather than stoke this new regional power rivalry.

Iran’s pursuit of a nuclear capability and its use of clients and proxies to influence the Arab world and attack U.S. interests and Israel are now familiar. What is new is Turkey’s emergence as an unpredictable disrupter of stability across a much larger region. No longer envisioning a future in the West, Turkey is now more decidedly embracing its Islamic past, looking past lines and borders drawn a century ago. Its claim to the influence it had in the onetime domains of the Ottoman Empire can no longer be dismissed as rhetoric. Turkish ambition is now a force to be reckoned with.

For example, Turkey now occupies parts of Syria, has influence in Iraq, and is pushing back against Iran’s influence in both Damascus and Baghdad. Turkey has increased military operations against Kurds in Iraq and accused Iran of giving refuge to Turkey’s Kurdish nemesis, the Kurdistan Workers’ Party (PKK).

Turkey has inserted itself in Libya’s civil war and most recently intervened decisively in the dispute in the Caucasus between Armenia and Azerbaijan over Nagorno-Karabakh. Officials in Ankara are also eyeing expanded roles in the Horn of Africa, and in Lebanon, while Arab rulers worry about Turkish support for the Muslim Brotherhood and its claim to have a say in Arab politics.

Each of the three non-Arab states has justified such encroachments as necessary for security, but there are also economic motivations—for example, access to the Iraqi market for Iran or pole positions for Israel and Turkey in harnessing the rich gas fields in the Mediterranean seabed.

Predictably, Turkish expansionism runs up against Iranian regional interests in the Levant and the Caucasus in ways that evoke Turkey’s imperial past. Turkish President Recep Tayyip Erdogan’s recent recitation of a poem lamenting the division of historic Azerbaijan—the southern part of which now lies inside Iran—during a triumphant visit to Baku invited a sharp rebuke from Iran’s leaders. This was not an isolated misstep.

Erdogan has been for some time suggesting that Mustafa Kemal Ataturk was wrong to give up Ottoman Arab territories as far south as Mosul. In reviving Turkish interest in those territories, Erdogan is claiming greater patriotism than that of the founder of modern Turkey and making clear that he is breaking with the Kemalist legacy in asserting Turkish prerogatives in the Middle East.

In the Caucasus, as in Syria, Turkish and Iranian interests are interwoven with those of Russia. The Kremlin’s interest in the Middle East is expanding, not only in conflicts in Libya, Syria, and Nagorno-Karabakh but also on the diplomatic scene from OPEC to Afghanistan. Moscow maintains close ties with all of the region’s key actors, sometimes tilting in favor of one and then the other. It has used this balancing act to expand its advantage. What it wants from the Middle East remains unclear, but with U.S. attention on the wane, Moscow’s complex web of ties is poised to play an outsized role in shaping the region’s future.

Israel, too, has expanded its footprint in the Arab world. In 2019, Trump recognized Israel’s half-century-old claim to the Golan Heights, which it seized from Syria in 1967, and now Israeli leaders are planning out loud to expand their borders by formally annexing parts of the West Bank. But the Abraham Accords suggest that the Arabs are looking past all of that to shore up their own position. They want to compensate for America’s dwindling interest in the Middle East with an alliance with Israel against Iran and Turkey. They see in Israel a crutch to keep them in the great game for regional influence.

The tensions between Iran and Israel have escalated markedly in recent years as Iran has reached farther into the Arab world. The two are now engaged in a war of attrition, in Syria and in cyberspace. Israel has also targeted Iran’s nuclear and missile programs directly and has been blamed most recently for the assassination of Iran’s top nuclear scientist.

But the scramble for the Middle East is not just about Iran. Turkey’s relations with Israel, Saudi Arabia, the UAE, and Egypt have been deteriorating for a decade. Just as Iran supports Hamas against Israel, Turkey has followed suit but has also angered Arab rulers by supporting the Muslim Brotherhood. Turkey’s current regional posture—extending into Iraq, Lebanon, Syria, and the Horn of Africa while staunchly defending Qatar and the Tripoli government in Libya’s civil war—is in direct conflict with policies pursued by Saudi Arabia, the UAE, and Egypt.

This all suggests that the driving force in the Middle East is no longer ideology or religion but old-fashioned realpolitik. If Israel boosts the Saudi-Emirati position, those who feel threatened by it, like Qatar or Oman, can be expected to rely on Iran and Turkey for protection. But if the Israeli-Arab alignment will give Iran and Turkey reason to make common cause, Turkey’s aggressive posture in the Caucasus and Iraq could become a worry for Iran. Turkey’s military support for Azerbaijan now aligns with Israel’s support for Baku, and Iran, Saudi Arabia, and the UAE have found themselves in agreement worrying about the implications of Turkey’s successful maneuver in that conflict.

As these overlapping rivalries crisscross the region, competitions are likely to become more unpredictable, as will the pattern of tactical alliances. In turn, that might invite meddling by Russia, which has already proved adept at exploiting the region’s fissures to its advantage. China, too, may follow suit; its talk of strategic partnership with Iran and nuclear deal with Saudi Arabia may well be just the opening act. The United States thinks of China in terms of the Pacific, but the Middle East abuts China’s western frontier, and it is through that gateway that Beijing’s will pursue its vision for a Eurasian zone of influence.

The Biden administration could play a key role in reducing tensions by encouraging regional dialogue and—when possible—use its influence to end conflicts and repair relations. In response to change in Washington, feuding adversaries are signaling a truce, and that provides the new administration with an opportunity.

Although relations with Turkey have frayed, it remains a NATO ally. Washington should focus on improving ties between not just Israel and Turkey but also among Turkey and Saudi Arabia and UAE—and that means pushing Riyadh and Abu Dhabi to truly mend ties with Qatar. The Gulf rivals have declared a truce, but fundamental issues that divided them persist, and unless those are fully resolved, their differences could cause another breach.

Iran is a harder problem. U.S. officials will have to first contend with the future of the nuclear deal, but sooner rather than later Tehran and Washington will have to talk about Iran’s expansionist push in the broader region and its ballistic missiles. Washington should encourage its Arab allies, too, to embrace this approach and also engage Iran. Ultimately reining in Iran’s proxies and limiting its missiles can be achieved through regional arms control and building a regional security architecture. The United States should facilitate and support that process, but regional actors have to embrace it.

The Middle East is at the edge of a precipice, and whether the future is peaceful hinges on what course the United States follows. If the Biden administration wants to avoid endless U.S. engagements in the Middle East, it must counterintuitively invest more time and diplomatic resources in the region now. If Washington wants to do less in the Middle East in the future, it has to first do more to achieve a modicum of stability. It has to start by taking a broader view of regional dynamics and making the lessening of new regional power rivalries its priority.

Vali Nasr is the Majid Khadduri professor of Middle East studies and international affairs at Johns Hopkins University’s School of Advanced International Studies. He served in the U.S. State Department from 2009 to 2011.

Photo: IRNA