Turmoil in Turkey

Following a corruption scandal that saw a spate of high-profile arrests and sent investors heading for the exit, Turkey’s market went into a tailspin. Cris Sholto Heaton reports.

Was 2013 a good year for Turkey?

Not if you were an investor. Turkish stocks fell more than 28% in US dollar terms during the year, making Turkey the world’s worst-performing major market. Much of the damage happened in the last month after a major corruption scandal that saw police detain a number of high-profile figures on allegations of bribery for real-estate projects.

Those involved include a construction tycoon, the sons of three cabinet ministers and the head of a state-run bank; the latter was allegedly found with $4.5m in cash stashed in shoe boxes in his home.

The arrests – and the government’s reaction to them – raised fears of political risks ahead of elections in 2014, hence the decision by many investors to head for the exit.

How did the government respond?

Firmly, but not necessarily as outsiders would like. Prime Minister Recep Tayyip Erdogan  fired or reshuffled dozens of senior police officers and prosecutors who played key roles in the arrests. He also blocked a second round of investigations that would have probed alleged corruption on several major infrastructure projects promoted by him.

This not-entirely-democratic response was justified on the grounds that the police investigation was in reality a foreign-backed plot to topple his government.

Who are the alleged plotters?

Erdogan is pointing the finger at Fethullah Gülen, an influential Muslim cleric who lives in self-imposed exile in the US, accusing him of conspiring with Israel to undermine him. For more than a decade Erdogan and Gülen cooperated in building mass support for Erdogan’s Justice and Development Party (AKP).

This allowed Erdogan to win three successive elections since coming to power in 2002 and – perhaps more notably – largely erode the power of the Turkish army, who used to intervene in politics whenever they disapproved of the direction that elected governments were taking.

However, relations between Erdogan and Gülen have become strained and Erdogan has recently moved against his former ally, announcing plans to close almost 4,000 Gülenist-backed private schools and dismissing some Gülenist officials.

Why did they fall out?

Foreign-policy disagreements apparently play a part: Erdogan wants Turkey to exert more influence in the Middle East, while Gülen and his supporters oppose this. They object to the deterioration in relations between Turkey and Israel in recent years and also to Erdogan’s decision to arm rebels in Syria.

Gülen has also expressed concern about Erdogan’s increasing authoritarianism at home, notably the crackdown in June on protests over plans to build a shopping mall in one of Istanbul’s few urban parks.

But it’s not clear whether the split really reflects profound disagreement on policies, or just concern among Gülenists that Erdogan has become too powerful.

Are the allegations true?

It’s impossible to be sure. Real estate is always rife with opportunities for corruption in emerging markets. Some of the details that have appeared in the press – such as transcripts of telephone calls between those under investigation – seem to imply shady goings-on.

However, while accusations of a plot might sound paranoid, the Gülenist movement is influential in the judiciary and the police; indeed, the prime minister has depended on the support of this faction to curb opposition in the army and civil society, jailing several hundred military officers, academics, journalists and politicians on questionable charges, such as plotting coups.

It’s plausible that the same apparatus is now turning on Erdogan in response to his anti-Gülenist measures. But it’s clear that there is a worsening power struggle at the heart of the Turkish state.

Who will come out on top?

On the face of it, Erdogan is the favourite. Polls suggest that the AKP continues to have strong approval ratings: Erdogan’s core electorate of conservative voters is generally assumed to care little about corruption at the top as long as the economy continues growing. But the Gülenists are far more influential and organised than Erdogan’s existing political opponents.

The prime minister is also starting to make fresh enemies within his party after forcing the three ministers whose sons were implicated in the corruption investigation to resign. This is likely to be the toughest challenge he has faced – at least since the early days of his struggles with the military.

If Erdogan prevails, he’s likely to be virtually untouchable, especially if he wins the presidential election later this year. If he’s forced to compromise with Gülen, he could be on the way out sooner than expected.

What happens next?

It’s almost inconceivable that Erdogan will resign or be deposed by his own party soon, so the first test will be local elections at the end of March. These will show whether his image has been significantly tarnished by the scandal.

Later this year, direct presidential elections will be held for the first time. Erdogan, who has already said that he would not serve as prime minister again, is likely to run for president and attempt to transform this largely ceremonial post into the country’s real seat of power. However, an upset in the March elections could undermine this plan.

Instead, current president Abdullah Gül – an ally of Erdogan, but a more conciliatory figure – would be likely to hold onto the job or to become prime minister himself, attempting to mend relations with the Gülenists and repair wider damage to the AKP’s image.