With all the hubbub over Israeli Prime Minister Benjamin Netanyahu’s speech to a joint session of Congress on Tuesday, Turkish Prime Minister Ahmet Davutoglu’s visit to New York City this week was almost entirely overlooked in the United States. Turkey’s opposition press—or what is left of it—is pretty much convinced that Davutoglu is not visiting Washington because he is not welcome here. That seems unlikely. No matter the discord between Washington and Ankara over the fight against the Islamic State, how to deal with Egypt, the conflict between Israel and the Palestinians, and Turkey’s rollback of civil and political rights, the Turkish prime minister (regardless of who holds the position) is important enough to rate a meeting.
Then again, it is possible that senior American officials are too busy with ongoing Iran negotiations, the war against ISIS, and the crisis in Ukraine to spare the time for Turkey’s head of government. Everyone in Washington knows that President Recep Tayyip Erdogan wields all the power, making a meeting with Davutoglu more of a diplomatic obligation than an opportunity to get things done. Add to this the fact that Davutoglu is not well liked in Washington and the Turkish pundits just may be onto something. Davutoglu will be busy in New York, however, meeting with UN Secretary-General Ban Ki-Moon, attending a United Nations forum on gender equality, and speaking to corporate members of the Council on Foreign Relations. Importantly, Davutoglu also has Mehmet Simsek, the minister of finance, and Deputy Prime Minister Ali Babacan, who is responsible for the economy, in tow for meetings with international investors. According to Joe Parkinson and Emre Peker of the Wall Street Journal, the trio met with officials from Goldman Sachs and Citigroup to assure them that they need not worry about Turkey’s financial management.
Speaking of Citigroup, on Thursday, the firm announced it was exiting its 2007 investment in Akbank—one of the largest financial institutions in Turkey—and in the process taking an $800 million loss. Citi, which has operated in Turkey since 1975, will continue to operate Citibank AS that services corporate and commercial clients in the country. The sale of its stake in Akbank is, according to Citigroup CEO Michael Corbat, part of an overall strategy to focus on its “core business.” Fair enough, but the divestment also comes at a time when Standard & Poor’s issued a negative rating on Turkish banks. According to Today’s Zaman, S&P cited the “potential for political risks, or the perception of it, to directly or indirectly spillover into the financial system.” Here S&P was referring directly to the Savings Deposit Insurance Fund’s—Turkey’s equivalent of the Federal Deposit Insurance Company—seizure of a majority of Bank Asya’s preferred stock. Turkey’s bank regulators charge that Bank Asya’s operations made it difficult to conduct an audit of its operations.
A bank operating without full transparency? That does seem like a good reason to takeover a bank thereby protecting investors and depositors. Turkey’s Banking Regulation and Supervision Agency (BDDK) deserves credit for its vigilance. Yet what is the “political risk” that worries S&P so much that it has gone sour on Turkish banks, once an attractive investment? Well, it turns out that Bank Asya’s management and its major investors are close to the Gulen movement, which has been on the losing end of a struggle with President Erdogan and the Justice and Development Party (AKP) that broke into the open in December 2013. The Gulenists are believed to be behind leaks to the press that implicated senior members of the AKP as well as President Erdogan and his family in various corruption schemes. Erdogan subsequently vowed to make the Gulenists pay a price for these allegations, leading to the jailing of pro-Gulenist journalists, pressure on Gulenist business leaders, and purges of the bureaucracy. Clearly, S&P believes that the action against Bank Asya was politically motivated in order to further damage the Gulenists. This seems entirely plausible. In 2009, Erdogan and the AKP used the tax authority to hand the Dogan Media Group a $2 billion fine when its news outlets reported on potential corruption within an AKP-affiliated charity in Europe. More recently, Koc Holdings has faced what seem to be politically motivated lawsuits. (Full disclosure: Mustafa Koc, chairman of Koc Holdings, is on CFR’s Global Board of Advisors).
The government’s alleged effort to “bankrupt Bank Asya,” as some in the Turkish press have charged, is not the only political risk that is damaging the Turkish economy. Both Turkish and Western journalists have noted President Erdogan’s efforts over the past year or so to compromise the independence of Turkey’s Central Bank. Part of Erdogan’s success has been economic growth—or the perception of it—within Turkey’s middle class, which has felt richer during the AKP era. With the feeling of newfound wealth, middle class Turks have come to use (and abuse) credit for the first time in their lives. Low interest rates help to keep the economy growing, which makes Turks feel wealthier, resulting in more consumer spending and AKP electoral victories. Even as the lira depreciated and Economics 101 calls for a hike in the interest rate to avoid inflation and other deleterious effects of a falling currency, Erdogan has insisted on low interest rates. He had to accept a sharp increase in the interbank lending rate in January 2014. This helped avoid a currency crisis in Turkey and across emerging markets. Once the threat of that crisis passed in April 2014, however, Erdogan sought lower interests rates once again, cajoling the Central Bank to reverse course. Since last December the bank has cut interest rates twice, despite a currency in free fall, while Erdem Basci, the governor of the Central Bank, tries to beat back attacks on him and the bank from the AKP, which wants lower interest rates before the June 7 parliamentary elections. It seems that after all of Erdogan’s criticisms, he is in fact the “interest rate lobby.”
If Davutoglu’s meetings with bankers in New York do not go well, Turkey’s political leaders will have only themselves to blame, though they will likely still blame the aforementioned interest rate lobby or Zionists or Zionist bankers or international Zionist bankers in cahoots with “Pennsylvania”—a reference to Fetullah Gulen who lives there. As with everything else in Turkey these days, Ankara is willing to put the long-term health of the economy at risk so long as it serves the political interests of the AKP and President Erdogan.