Michael Collins

The Republic of Turkey is consumed by intense conflict, conspiracy charges, and underlying financial problems that simply won't go away. A perfect storm is brewing in Turkey. (Image-summer protests, Turkey)

Prime Minister Recep Tayyip Erdogan's government and supporters are charged with a secret gold-for-oil deal with Iran. The deal, in violation of trade sanctions against Iran, enriched the PM's ministers and other key supporters involved (including the PM's son), according to prosecutors. The deal also involved misreporting billions of dollars in trade, which, in turn, resulted in Turkey overstating national income and understating its current account deficit.

A more ominous charge focuses on Erdogan's open support of a wealthy Saudi known for funding al Qaeda and the PM's alleged support of Al Qaeda fighters engaged against the Syrian government. Just today, we saw this headline: Turkish governor blocks police search on Syria-bound truck reportedly carrying weapons . Erdogan is a strong supporter of the Syrian rebels, assumed recipients of the weapons.

The crisis started on December 17, 2013 when dozens of Erdogan's close associates were arrested for corruption. The arrests included the CEO of Turkey's state bank caught with million in euros stuffed in shoeboxes. Charges and arrests continued. Prosecutors and police who handled the case were fired at the behest of the Prime Minister. The Turkish supreme court ruled that the government couldn't interfere with police investigations through firings and intimidation. Undeterred, Erdogan fired more prosecutors claiming the charges were an attack on the Turkish state. To top it all off, authorities banned reporters from police stations and pressured the media to stop focusing on the scandals.

Warring Factions

The two warring political factions are within the ruling AKP, which claims to be a moderate, pro business Islamist part. Prime Minister Erdogan's faction is pitted against its former long-term ally, Fethullah Gulen and his Hizmet movement.

Erdogan's rule since 2003 has been marked by an emphasis on economic growth and constitutional reform. Over the past two years, Erdogan has adopted a dictatorial style that involved policies reflecting Islamist principles.

The PM's opponent is Fethullah Gulen who fled Turkey in 1999. He has lived in rural Pennsylvania ever since. Gulen presides over a worldwide network of schools and multimillion-dollar business. His movement claims to promote progress and interfaith understanding. Like Erdogan, Gulen is an advocate of "free market" economic policies. Gulen's initial entry to the United States and his ability to remain a resident has been supported by major figures in the U.S. intelligence community.

Others

The Turkish military has staged a number of coups over the past 50 years. As this crisis emerged, the military announced it did not want to be "involved in political debates." However, just days later, the imprisoned generals from the Ergenekon trials spoke out. They demanded a new hearing, proclaiming their innocence. On January 2, Hurriyet Daily News ran this story, Turkish military asks prosecutors to investigate ‘plot’ claims. According to the story, the convicted generals filed a criminal complaint supposedly against Fethullah Gulen for conspiring to convict them in the Ergenekon trials.

The People's Republican Party (CHP), the Nationalist Party, and other political parties are critical of Erdogan, seemingly intimidated by his charges that they are pawns of the "international conspiracy" Erdogan references so often.

Then, of course, there are the people of Turkey, largest and arguably, the most important faction in this struggle. The people of Turkey have enjoyed a strong economy and low unemployment for through the world recession. The scandals have the potential to seriously impact the Turkish economy, at the expense of the majority of Turks. Their labor formed the basis for economic growth but lacks a voice in determining the outcome of the current crisis.

Risks

Turkey is the southern flank of NATO and a frontline state in the West's regime change effort in Syria. Until 2011, Turkey and Syria had enjoyed a rapidly improving relationship. Then, everything changed. Erdogan faction of the AKP joined the demands of then Secretary of State Hillary Clinton to oust Syria's elected president, Bashar al-Assad. Saudi Arabia provided financial support for rebels and Turkey allowed Istanbul to be used to transship Saudi purchased weapons to Syrian rebels.

Turkey is supposed to be a pillar of the West, stable and reliable. With the burgeoning chaos in government and no-win conflict among warring factions internally, the Obama administration and NATO powers will be tempted to meddle to control the outcome. We all know how well that works out.

The risks to Erdogan are substantial and can impact the entire nation.

The two biggest concerns are Erdogan's ongoing support for Syrian rebels, particularly the Islamist jihadists sponsored by Saudi Arabia, the Islamic Front. Critics of the PM are raising his open association with Yasin al-Qadi, an alleged funding source for Al Qaeda and a designated international terrorist by the U.S. government. Erdogan was dismissive of any problems when confronted on the association saying that al-Qadi was "a charitable person who loves Turkey." He may have more explaining to do if investigations continue.

Reporting on evidence from prosecutors and first hand witnesses, Michael Rubin found:

"According to Turkish interlocutors, there are consistent irregularities in 28 government tenders totaling in the tens of billions of dollars, in which kickbacks and other payments were made, a portion of which Turkish investigators believe ended up with al-Qadi’s funds and charities. These funds and charities were then used to support al-Qaeda affiliates and other radical Islamist groups operating in Syria like the Nusra Front." Dec. 27

Will the bubble burst?

"Irregularities" in government tenders are part of a much larger financial crisis brought on by Erdogan's policies. As noted in a an article earlier this week:

"While the focus to date has been on charges of personal enrichment by Erdogan’s ministers and associates, the real problem for the current government is financial fraud in reporting its current account deficit and national income. These figures are the basis for access to international financing. Intentional, inaccurate reporting constitutes fraud that understates the risk to lenders and provides a more favorable interest rate for the borrower than is warranted." Michael Collins, Dec 29

Mustafa Sonmez detailed the problems in Hurriyet Daily News, an important analysis overshadowed by the more spectacular charges of late. Turkey's secret gold-for-oil deal with Iran distorted financial reporting figure. Debt was understated and income overstated as a result. Turkey's economic success is based on foreign investments. When foreign investors look at the political instability combined with the financial reporting problems, they will vote with their feet. A survey of Middle East fund managers found that none planned to raise investments in Turkey in 2014 and 13% planned to reduce their investments.

The charges of rampant corruption, international conspiracies, and support for terrorists are important. Jobs are more important to the ultimate jury passing a verdict on Erdogan's future, the Turkish people.

Turkey's Deputy Prime Minister addressed foreign investor loss of confidence in the Turkish economy today (Jan 3). He said, " … there might be a rise in Turkey’s political risk premium but when we look into their results, I want to underline that the picture is not as distressing as it seems.”

He can underline as much as he'd like but that won't change the facts that led foreign investors to tell Reuters that they were planning to stand pat on new cash for Turkish investments in 2014. That's not good news for a growth economy based on foreign investment. As the scandals spread and repression increases, what happens if there's a flight of foreign investment and the economic bubble bursts?

The crisis in confidence based on rational analysis will be Erdogan's ultimate undoing. If he goes before it reaches fruition, it will become the problem of his successor.

And who suffers? The people.

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