Corruption still a major hurdle for Turkey

Corruption still a major hurdle for Turkey

Recent manifestations of entrenched corruption in Turkey threaten to unsettle investor confidence.

The outcome of the Turkish local elections on March 30 left many political observers somewhat uneasy about the prospects for democracy in the foreseeable future. The AKP, riddled by last summer’s massive protests and a corruption probe that would have left the ruling party of any Western democracy on the brink of extinction, won about 45 percent of the votes.

The AKP’s victory despite the corruption scandal diminishes investor confidence in Turkey’s rule of law, particularly when evidence of terrorism finance heightens the risks associated with conducting business there.

If media reports of corruption are not enough to induce anxiety among investors, the overlap of financial crime and terrorism finance in Turkey will force companies to do a double take. In 2012, the Financial Action Task Force (FATF), an international body responsible for combating terrorism finance, issued Turkey a blacklist warning.

The massive sanctions-circumnavigating “gas-for-gold” scheme between Turkey’s state-owned bank, Halkbank, and Tehran, remains an underemphasized component of the still unfolding corruption scandal. Not only was Halkbank (which continues to be viewed with suspicion) implicated in the scheme, but so too were members of Turkey’s political elite.

Worth noting is that Iran is not the only illicit party benefiting from Turkey’s unwillingness to comply with international rules combating terrorism finance.

Corruption a longstanding bane

Corruption has long been endemic in Turkey. How the electorate views corruption has changed. It was on the back of Republican People’s Party (CHP) corruption that the AK Parti (AK translates literally as “white” or “unblemished”) rose to power. CHP involvement and complacency towards corruption led to patronage politics that bankrupted the public budget.

According to Marko Klasnja and Joshua A. Tucker of New York University, corruption in “high-corruption” countries is only seen as a problem when the economy is also perceived to be bad. In contrast to the CHP’s tenure as ruling party, the Turkish economy is perceived as strong under the AKP.

An assessment by Adil Gur of A&G Research Inc. leading up to the recent local elections, then, is spot on: “If the economy is good, and if people are happy about it,” he notes, “then no tapes [spread in social media as proof of wrongdoings] or court cases will affect the vote.”

But perceptions of the Turkish economy might soon change. 2014 is proving difficult for the Turkish economy, and analysts predict Turkey’s bubble economy – heavily dependent on hot money and soaring debt – will burst when interest rates jump. Corruption will only exacerbate Turkey’s financial woes by increasing the cost of doing business.

The prevalence of terrorism finance deeply cuts into the potential growth opportunities investors seek. Due diligence suddenly becomes all the more necessary when investors fear the money they pour into construction projects in Istanbul may help finance illicit – even violent – acts.

Turkey’s spectacular growth is coming to an abrupt end. Barring a steady swing in the electorate’s ideological orientation, “business as usual” may diminish the investor confidence needed to keep the country’s economy afloat through trying times.

About Author

Eli Lovely

Eli is an analyst at Kroll Associates and has worked at the National Democratic Institute and the U.S. Department of State. He graduated Phi Beta Kappa from Wheaton College (MA) before earning his M.A. with distinction in Democracy and Governance Studies from Georgetown University. The views expressed on this site are Mr. Lovely’s and do not necessarily represent Kroll’s positions, strategies or opinions.