The Impact of Middle Eastern Balances on the Economy
Recent developments between Iran and Israel over the past week have also affected financial markets. Following these events, there has been a 7% increase in global oil prices, while gold and the US dollar have gained value, and fluctuations have occurred in stock and currency markets. Assoc. Prof. Dr. Asil Azimli, General Secretary of Cyprus International University (CIU) and faculty member of the Faculty of Economics and Administrative Sciences, evaluated the resulting economic turbulence in light of these recent developments.
Noting that the Middle East has always been a tense region in terms of geopolitical risks when considering its past and present, Azimli stated:
"Destabilization and potential disruptions in the oil supply chain will increase oil prices, which in turn raises company costs and ultimately leads to a downturn in financial markets."
He emphasized that:
"Since it is a region from which inputs used in energy are imported, geopolitical risks in the Middle East become a factor that affects the global economy."
Azimli also evaluated investor behavior and the structural responses that regional actors like Türkiye might face.
1. How do geopolitical changes in the Middle East frequently affect global markets? From an academic perspective, how would you interpret this region’s impact on economic systems?
Geopolitical tensions in the Middle East—whether through war or the threat of war—impact oil prices. Being a region rich in oil, such incidents lead to potential disruptions in the supply chain and inadequate supply. This raises oil prices and thus increases corporate energy costs, negatively affecting financial markets. Beyond financial markets, higher energy costs for energy-importing countries also lead to higher inflation and lower economic growth.
2. How is the concept of geopolitical risk defined in financial literature? Where do dynamic regions like the Middle East fit within this definition?
Geopolitical risk can be seen as instability arising from political, social, or military conflicts either between or within states. The Middle East, both historically and today, is a tense region in terms of geopolitical risk. This is due to ongoing political inconsistencies in the region. Where political inconsistency exists, geopolitical tension is inevitable. Uncertainty is also a key component. Factors such as Israel’s expansionist policies, religious and sectarian divisions in the region contribute to this. Because the region supplies essential inputs for energy, geopolitical risks in the Middle East become a global economic concern.
3. In light of shifting balances in the Middle East, what market movements should we expect?
Tensions in the Middle East can impact financial markets through various channels. First, disruptions in stability and the oil supply chain increase oil prices and corporate costs, leading to downturns in financial markets. This can be explained through several mechanisms. The first one of this is a decrease in cash flow expectations. This causes investors to price assets lower and/or demand a higher risk premium, putting pressure on current stock prices. Second one is that investors seeking safe havens move out of risky assets like equities and long-term corporate bonds, triggering market declines. The third one is increasing tensions and wars lead to political instability and a breakdown of investor confidence, pushing them to liquidate investments, further lowering markets.
4. Based on historical examples, how have regional instabilities in the Middle East affected investor confidence and foreign direct investment in the region?
Rising energy prices negatively affect financial market pricing due to increased company costs. Additionally, for energy-importing countries, this leads to extra costs and higher inflation, which also hinders economic growth. However, oil-exporting countries may benefit, as they can sell oil at higher prices, improving their economies and balance of payments. While importing countries face a growing trade deficit, exporting countries see a decrease. This also affects currency values: currencies of surplus countries tend to appreciate, while currencies of oil-importing nations tend to depreciate.
5. How will regional actors such as Cyprus and Türkiye be affected by these geopolitical developments? What structural reactions are observed in our financial markets?
As you know, there is no established financial market in Northern Cyprus. Therefore, this question can be evaluated in the context of the Turkish market and the Turkish lira. Türkiye is an energy-importing country and relies on external sources for energy production. Rising oil costs and potential supply chain disruptions—such as Iran potentially closing the Strait of Hormuz, which is a major oil transit route—would result in higher costs, rising inflation, a widening trade deficit, and a weaker Turkish lira. Additionally, investors moving away from risky assets might withdraw from Turkish companies, leading to lower market valuations.
6. How do investor behaviors change during periods of economic uncertainty? What strategies stand out for individual investors looking to manage such risks?
In uncertain periods like these, investors tend to exit risky assets and seek investments considered safe havens. Gold has long been viewed as a safe haven asset. For an asset to be classified as a safe haven, it must either maintain or increase its value during times when other assets are losing value. Recent studies show that shares in socially responsible companies, green bonds, and at times crypto currencies, may also serve as safe haven assets.
7. What would you recommend to young researchers or students working in this field regarding analyzing global developments?
This is not a question with a simple answer. There are numerous indexes and econometric models in the literature to measure, predict, and detect early signals of economic, political, and geopolitical risks. Today, with the help of artificial intelligence, indices created through textual analysis of news published in leading newspapers are considered quite effective in reflecting such risks.
8. What measures can be taken to better manage economic vulnerability?
Economic vulnerability can be measured by how sensitive a country’s economic and financial system is to external shocks. In today’s global economy and financial system, some risks are unavoidable. However, minimizing foreign dependency, maintaining low external debt, reducing reliance on foreign inputs in production, minimizing trade deficits, and ensuring sufficient central bank reserves are among the key factors that can help keep vulnerabilities at a minimum.