Geopolitical developments can weigh on the foreign trade balance through energy prices and global supply chains. Against this backdrop, the US/Israel-Iran war, which broke out at the end of February 2026, was expected to weaken Türkiye’s foreign trade outlook. However, second-quarter data painted a different picture. Despite a marked increase in energy imports, exports remained strong and the foreign trade balance improved (Chart 1). What, then, were the underlying drivers of this improvement? This blog explores the answer to that question.
The war’s most immediate impact was seen in energy markets. Looking at second-quarter averages of energy prices in global markets, Brent oil prices increased by 55.2% year-on-year, while natural gas prices rose by 28.2%. In parallel, energy imports, adjusted for calendar effects, increased by 32.4% on an annual basis. In addition to the composition of energy imports, this increase also reflects existing supply agreements, the share of spot purchases, and lead times. Therefore, although the recent normalization in prices points to a moderation in the growth in energy imports, upside risks to energy imports have not entirely dissipated in the near term, as the effects of price developments materialize with a lag.
At first glance, this picture suggests that the increase in energy imports would also deteriorate the foreign trade balance. However, energy prices alone do not determine the external balance. To better assess the impact of rising energy prices on the external balance, it is useful to examine historical relationships. Although there is a strong correlation between energy prices and the net energy bill, the same correlation does not hold for the current account balance (Charts 2 and 3). This is mainly because the current account balance is shaped not only by the energy bill but also by a range of other factors, such as export performance, services revenues, and domestic demand. Indeed, while the surge in energy costs in 2022 during the Russia–Ukraine war exerted much greater pressure on the external balance than the historical correlation would have implied, the current episode has presented a different picture.
This divergence was primarily driven by exports. Despite the negative picture on the energy front, exports rose significantly, both year-on-year and quarter-on-quarter (Chart 4). Although exports to Middle Eastern countries declined sharply in March immediately after the outbreak of the war, they recovered in the second quarter (Chart 5). The realignment of global supply chains due to geopolitical developments played a role in the acceleration of exports during this period. The uncertainty over shipments from the Far East following the closure of the Strait of Hormuz, as well as longer delivery times, and rising freight and insurance costs were key factors in shifting demand toward Türkiye. Our interviews with firms indicate that increased demand during this period was driven primarily by Europe and motivated by precautionary buying, and that firms initially perceived this rise as temporary. Precautionary purchases and front-loaded demand supported exports in the chemical products and base metals sectors, while the supplier diversification trend boosted apparel and textile exports.
Another factor behind the strong performance of exports was the increasing contribution of the defense industry to exports. Recent capacity and technology investments in the defense industry have boosted the contribution of high-value-added production to exports. Over the past four years, the defense industry’s share in total exports has increased by approximately 2.3 points to 4%. Stronger demand for this sector amid current geopolitical developments has also made the impact of this structural transformation more visible.
The other pillar of the improvement in the foreign trade balance was the composition of imports. The rise in imports in the second quarter was entirely driven by energy imports, while imports excluding energy receded (Chart 6). An analysis by goods groups reveals that imports of intermediate goods excluding gold and energy remained unchanged, while imports of investment and consumption goods decreased (Chart 7). This picture is consistent with the ongoing weak course of domestic demand and favorable expectations for export orders in the second quarter.
In fact, the weak course of high-frequency data on domestic demand, such as credit card spending, is also confirmed by the slowdown in import demand for consumer goods (Chart 8). On the other hand, the Purchasing Managers’ Index (PMI) data also indicate that production declined in the second quarter, while expectations for export demand increased (Chart 9). Accordingly, the recent import demand for intermediate goods is attributable to a trend of a reorientation of external demand as well as price hikes driven by geopolitical developments.
In sum, the adverse impact of rising energy prices on the foreign trade balance in the second quarter was largely offset by the robust course of exports. Meanwhile, the ongoing weak outlook for domestic demand led by the tight monetary policy changed the composition of imports, which supported the improvement in the foreign trade balance. Taken together with the recent normalization in energy prices, these developments suggest that the upside risks posed by the war to the current account deficit have diminished compared with a few months earlier.