Turkey: Clash of values; Political and cultural conflicts have raised concerns for the system that brought prosperity

January 13, 2014 6:58 pm

Turkey: Clash of values

By Daniel Dombey

Political and cultural conflicts have raised concerns for the system that brought prosperity

As a corruption probe swirled around his government and his family in December,Recep Tayyip Erdogan, Turkey’s prime minister, returned to the tactic he used against last year’s mass protests: he blamed his problems on a vast international plot.Addressing a rally in the western province of Manisa, Mr Erdogan said the investigation that has targeted four former ministers, prominent business figures and his own son was part of an orchestrated effort to weaken Turkey. Its seeds had been planted last June, when protesters gathered in Istanbul’s Gezi park to protest against his rule. “The disturbance over Gezi wasn’t enough” for the anti-Turkey forces, he said.

 

Such conspiracy theories about the probe do not travel well outside Turkey. Mr Erdogan’s battle with the legal authorities is widely seen as part of a long-brewing conflict with the movement of Fethullah Gulen, an Islamic preacher and one-time ally who has followers in Turkey’s police, prosecution service and judiciary.

Yet there are connections between the government’s response to the Gazi protests and the recent turmoil. They have exposed political rifts and stoked fears about the independence of Turkey’s institutions amid a fierce battle between the government and its perceived adversaries in political and business life.

Turkey has often been feted as an emerging market star. But today there are concerns that the improved economic governance that helped the country to prosper in recent years has decayed into a more personalised, less rule-bound system in which questions about corruption remain largely unanswered.

After Gezi, executives spoke of score-settling in which the government pursued companies it perceived to be hostile with supposedly autonomous regulators enlisted to its cause. Amid the corruption scandal, conditions have since worsened.

Last week one of Mr Erdogan’s advisers accused the Gulenist movement of mounting an anti-government “crusade”, while acknowledging “Gulen-connected companies” had played a big role in Turkey’s growth.

As Turkey tries to rein in its current account deficit and shift away from its heavy reliance on imports, its companies are working to build global businesses

Mr Erdogan himself suggested he would soon have words with “actors in the financial sector” over what he sees as a “judicial coup”. Turkish executives cite deepening concerns about the rule of law.

In response to what he depicts as prosecutors’ politically motivated claims of tender fixing, bribery and smuggling, Mr Erdogan has stalled the corruption probeby transferring hundreds of police officers. He wants new legislation to put judges and prosecutors under tight control. He argues that the government, unlike the judiciary, has been “authorised” by the nation.

It is a difficult environment for business. “The whole system now is one of fear,” said one executive.

Mr Erdogan’s government has long prided itself on being pro-business and has an enviable record of economic success, with growth averaging about 5 per cent a year since it took office in 2002 in the aftermath of a banking and financial crisis.

In those early years, particularly the run-up to the start of EU membership talks in 2005, the administration stuck to a programme of reform that has been praised as a source of Turkey’s subsequent success.

But there are concerns these gains are at risk. In his immediate reaction to the Gezi protests, Mr Erdogan struck a combative stance towards big business and finance – largely secular groups, many of whose employees participated in the demonstrations and which are sometimes viewed with suspicion by the prime minister’s pious conservative base.

In the first throes of the protests in June, the prime minister criticised what he calls the “interest rate lobby”: domestic and international financiers he accuses of trying to hold back Turkey’s growth. In the days that followed, he vowed to throttle speculators and suggested that Turks boycott private banks. He attacked Koc Holding, Turkey’s biggest company, for allowing protesters to shelter in its Divan hotel. “It is a crime to harbour criminals,” he declared.

Soon after his attack on speculators, Turkey’s capital markets board and its banking regulator announced wide-ranging investigations into brokerages and foreign exchange trading. The head of the capital markets board told the Financial Times that a principal cause of concern was that shares had fallen more after the protests than he considered warranted. The investigation continues.

Tax inspectors subsequently raided two of the principal subsidiaries of Koc Holding and in a break with normal practice were accompanied by police. The government also scrapped an outline €1.5bn agreement to purchase six warships from Koc’s shipyard, although officials say the reason was a complaint by a disappointed potential bidder.

Meanwhile, a state banking insurance fund replaced the editor of a newspaper it had seized in lieu of unpaid debts from a former ruling party MP. The country’s broadcasting watchdog fined television stations that screened extensive footage of the Gezi protests.

Such events led executives and diplomats to voice concern that the autonomous economic bodies that helped assure Turkish success over the past decade were being bent increasingly to the government’s will.

“We are a country in need of foreign direct investment,” said Ali Sabanci, chairman of Pegasus Airlines, Turkey’s upstart budget airline, after being asked last year about this sequence of events. “If local Turkish investors get uncomfortable because the agenda is this kind of topic, how can we ask the guy from Germany, Switzerland or England [to invest]? The one thing we cannot do is make foreigners think that democratically we are going backwards.”

A further concern is Mr Erdogan’s personalised rule and the country’s economic management. Although formally independent, the country’s central bank has been reluctant to increase interest rates in the wake of the prime minister’s attack on the “interest rate lobby”, even though the lira has hit a series of record lows against the dollar and the bank itself has relatively limited reserves.

“The competition board, the central bank, the banking regulator, they all need to remain above politics,” says Umit Boyner, former head of Tusiad, the business organisation uniting Turkey’s biggest companies. “This is a prerequisite for Turkey’s success.”

. . .

The erosion of institutions has been broader. Ankara has sought to roll back the power of the country’s court of accounts, prompting the European Commission to express “serious concerns as to the independence and effectiveness of [government spending] audit and control”.

A series of changes to Turkey’s public procurement law has exempted many high-profile projects. Despite the corruption scandal, parliament is considering a government proposal for further exemptions this month, along with measures making it more expensive to query tender results.

“The real concern in Turkey is that they are discovering the old politics of patronage that they put aside more than a decade ago,” says one senior Ankara-based international official. “These autonomous institutions were a key factor in people taking a different view on Turkey – you can say they are what it takes to become a high-income country.”

In quantifying the risks of undermining such entities’ independence, he cites the slide in foreign direct investment from a 2007 peak of $22bn to $11bn for the 12 months to September. The tumble has left Turkey reliant on short foreign funds to finance its economy – and a $60bn current account deficit – just as funds may be restricted by less accommodating US monetary policy.

Diplomats and executives privately say big potential direct investors have sat on their hands since the Gezi crackdown because of the uncertain political climate and the possible fallout for business.

. . .

Mehmet Simsek, Turkey’s finance minister, vigorously defends the country’s institutions, dismissing the idea that moves such as tax probes are politically driven. “Every year more than 50,000 audits take place,” he says. “I don’t sign a single one of them; the reports never come to me.”

Mr Simsek notes that even government purchases exempted from the public procurement law are subject to earlier rules. He argues that under current regulations the scope of the court of accounts’ powers is too wide. He maintains that in all countries, co-ordination between the central bank and government is essential.

But the anti-corruption probes have made the situation more turbulent. With their allegations of tender-fixing and bribe-taking, the investigations have thrown an unforgiving light on ties between the government and favoured businesses – particularly in the construction sector.

The probes are now in chaos. If police follow prosecutors’ directions they are liable to be swiftly removed by the government. In one instance this month, two police chiefs in Izmir were transferred on the day they carried out anti-corruption raids.

The economic consequences could be profound. Prominent businessmen involved in government-favoured plans to build a €36bn airport have had their assets frozen. They claim allegations against them are baseless. Mr Erdogan has suggested the probe targeted them because unnamed international forces could not abide Turkey having such a big new airport.

There is little neutral terrain for Turkish business in the fight. Even consumers’ choice of chocolate bars is sometimes determined by whether the manufacturer is seen as secularist or Islamic. Three big business groupings – Tusiad, Musiad and Tuskon – are seen as respectively closer to the old secular elite, Mr Erdogan’s AKP and Mr Gulen’s movement.

As a result, some businesses find it hard to take refuge from the convulsions rocking Turkish political life. Days after Mr Erdogan made his speech in Manisa, Koza Altin, a gold mining group close to the Gulen movement, said one of its principal mines had been shut down by the government, though it had provided all necessary documentation. (A court has since overridden the closure).

Both a government-friendly paper (owned by one of the construction groups targeted in the probe) and Gulenist affiliated media have since suggested that state institutions are pulling deposits out of a Gulenist-affiliated bank to weaken it.

Leading industrialists are now questioning whether in such circumstances a country once lauded as an emerging market darling can continue to grow and allow business to thrive.

“We are in a situation where we are questioning the basic institutions of the state . . . Markets can only feel secure when the rule of law is established,” says Muharrem Yilmaz, Tusiad’s president, in an interview with Milliyet, the Turkish newspaper.

Emphasising the importance of stability for a country so dependent on foreign funds, Mr Yilmaz adds: “Turkey is losing value.”

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Dynasties: Another class of business

Raised in Istanbul’s tough Kasimpasha neighbourhood, where he sold day-old pastries on the street, Recep Tayyip Erdogan comes from a very different tradition to Turkey’s traditional corporate chieftains.

While now in a battle with former Islamic allies, Mr Erdogan still portrays himself as the voice of the pious masses shunted aside when army-backed secularists reigned supreme.

“The old Turkey had an environment suitable for certain people’s benefits, but it . . . damaged our people,” said the prime minister this month. “The new Turkey is where the national will prevail and it has become a nightmare for those people who had benefits in the old Turkey.”

The epitome of the country’s old secular elite – known sometimes as “white Turks” – is the Koc family. Koc Holding, founded in 1926 by the late Vehbi Koc, prospered in the closed economy of the early Turkish republic, established just three years before.

Later generations of the family, which controls 68 per cent of the company’s shares, were born into billions. The company boasts that its revenues account for 9 per cent of Turkey’s GDP, it produces 10 per cent of exports and represents 16 per cent of the value of the Istanbul stock exchange.

It has joint ventures with Ford, Fiat and UniCredit; its white goods arm, known abroad as Beko, is the market leader in the UK; its varied operations include Turkey’s only oil refiner.

It has not always managed to stay away from politics. In 2001, Rahmi Koc, Vehbi’s son and the patriarch of the family, claimed without proof that Mr Erdogan had mysteriously accumulated $1bn. In 2008, he angered the prime minister by declaring he would not hire men with moustaches or beards, sometimes a sign of religious devotion. The company has resisted Mr Erdogan’s pleas to produce a Turkish brand car.

In September, Mr Erdogan suggested that “financial circles” backed the last coup in Turkey’s history, when an Islamist-led government collapsed in 1997 after military pressure. “I really wonder why they are not standing trial,” he said. A day later a lawyer filed a private suit against the coup’s alleged perpetrators, including Koc Holding. A decision has not yet been made on the complaint.