Reflections from Istanbul
I spent the last few days in Istanbul and Ankara meeting with journalists, analysts, diplomats, business leaders, policy makers, friends and contacts.
Centre stage in discussions was obviously events around the arrest on allegations of corruption of Istanbul mayor, Ekrem Imamoglu, and the protests that sprung up in Istanbul and across Türkiye in response.
Türkiye is polarised at the best of times, but more so now, and I heard a range of views on the topic.
Imamoglu’s supporters argue that he is innocent and his arrest is an attack on democracy. They warn that Türkiye’s model of democracy is moving from a competitive autocracy, to a full blown autocracy.
Erdogan’s supporters, meanwhile, argue that the allegations of corruption are serious and that the judicial authorities are just carrying out their jobs. They also argue that the secularists have some idealised image of democracy in the years prior to Erdogan taking office - and forget that many of the same techniques were used against Islamists, and others in the past. Türkiye has a record of coups and even e-coups, which have had varied track records of success, and almost a winner takes all political culture. I heard complaints from Kurds as to where were the same mass protests following prior arrests of party leaders - Demirtas, et al.
A very common argument I heard across both camps, and indeed, neutrals, was that allegations of corruption were not that surprising. Indeed, corruption is prevalent across Turkish municipal government but if Imamoglu is being charged with corruption then others in pro-government circles should be similarly charged and there is not enough being done therein. The point was often made that this case is political as it has served to remove the perceived main challenger to Erdogan in future presidential elections. Many people told me that their democratic choices are being restricted and that this is not a democracy - something has been lost. They want a perspective to see political choice, where a party other than the AKP, or Erdogan can win. Or at least I heard that compliant often in my various interactions.
Don’t kill the messager, just reporting what people said to me.
An important point here to make though is that Türkiye still feels different to say the Arab Spring or Ukraine in 2004/05 or 2013/14 where there was a genuine feeling that the nation had overwhelmingly turned against the ruling party and leader. I still found plenty of people defending Erdogan, and a large section of the population (Kurds) are staying on the side-lines. The country is still polarised, is it 50-50, or 60-40, 45-55? I don’t know. But it is not 80% plus against Erdogan as seemed to be the case with Ukraine against Yanukovych in 2004/05 and again in 2013/14 - I was in Ukraine at both those times and that certainly felt to be the case.
And two weeks on though from Imamoglu’s arrest and Erdogan seems to have riden out one of the most serious challenges to his 23 years in office. Years back I joked that Erdogan was a politician with nine lives. Actually maybe it is now more like eighteen.
Demonstrations have receded.
The opposition I think have struggled to sustain momentum therein.
There has been talk of back room deals between the leadership of the CHP and the Erdogan administration. In particular, the suggestion that terror charges against Imamoglu and the CHP were not pursued - trustees not appointed to the CHP and Istanbul municipality - and this allowed the majority CHP in the Istanbul municipality assembly to select an acting replacement to Imamoglu as Mayor. The quid pro quo from the CHP leadership might have been to scale back demonstrations. Indeed, we have seen the CHP led opposition seem to move from pushing demonstrations to now boycotts of businesses seen as close to the Erdogan administration. However, the latter has drawn criticism for hurting domestic businesses and jobs (I heard that from pro-Imamoglu shop keepers), at a time when the economy is struggling against a backdrop of high inflation, weak growth and a difficult global economic backdrop seen now with the onset of Trump’s tariff wars. I doubt the boycotts will go far.
It feels as though the momentum has shifted away from the opposition back to the Erdogan administration. The opposition might be calling for early elections but it seems highly unlikely that Erdogan would sanction that before the outlook for the economy has improved, and unlikely then before 2027 or 2028. The hope for Erdogan is then that popular support/memory of Imamoglu will fade, with other issues coming to the fore which he can the run with/exploit to his political advantage.
If the move against Imamoglu was political, Erdogan timed/prepared his move well.
First, a resurrection of the Kurdish peace process, and supported remarkably now by Erdogan’s nationalist MHP ally, Devlet Bahceli, and the MHP, seems to have held back Kurds from widely supporting the CHP led demonstrations over the arrest of Imamoglu. Kurdish groups seem not to have wanted to rock the boat with that process, and Kurdish discipline has been strong - in generally holding back from demonstrating in support of Imamoglu. For some this might be surprising given that the Kurdish HDP appeared to give tacit support to the CHP and Imamoglu in last year’s local elections. Kurds though appear disappointed with what they have achieved from their alliance with Imamoglu and the CHP, and are now waiting/expecting concessions from the Erdogan administration assuming a formal call by Ocalan for the PKK to lay down its arms, and assuming PKK fighters respond to the call.
Second, Western governments have been muted in their response to the arrest of Imamoglu.
On the one part it is a bit hard for them to criticise when the allegations relate to corruption. In other EU accession states like Ukraine, and in the Western Balkans the EU has been calling for greater effort in the war in graft. The Erdogan administration will argue it is just responding to that call, and ask the EU to judge the evidence against Imamoglu.
I also heard comment from the Erdogan side to look at recent political actions in the EU, against Georgescu in Romania and most recently Le Pen in France - how are they different from the move against Imamoglu? Le Pen looks to have broken the law in France, but was her barring from running in the next presidential election also political?
More importantly though, Europe is in a weak position to criticise Erdogan given that it is facing an existential threat now from Russia, and is desperately in need of Turkish military and military industrial support to counter that threat. Türkiye has also shown a willingness to participate in the much talked about “Reassurance Force” that the U.K. and France are trying to lead to secure any ceasefire in Ukraine. Türkiye has the largest army in European NATO and could field tens of thousands of troops in Ukraine, if agreement is reached with Europe.
Cynics might say that Europe often lectures Türkiye, and globally, on its values of human rights, democracy, rule of law et al, but if it allows Ukraine to be defeated there will be no values to protect. Russia will roll out very different values across Europe. It looks like now a hard choice for Europe between interests and values - and Erdogan realised here that at this point in time European interests demand that Europe stays quiet over domestic political trends in Türkiye.
Similarly, Erdogan realised that the new Trump presidency was not particularly focused on values (see Gaza) but more on interests, specifically therein a desire to sell military and aerospace equipment to Türkiye, plus Trump’s interest also to pull US troops out of Syria. Türkiye can cover US interests in Syria, particularly by keeping a rein on IS, et al. Türkiye is also useful herein in the context of US, and Israeli, plans to max out pressure on Iran. Is the US thinking here of using Turkish military bases and/or airbases for future military action against Iran but also to enforce tighter U.S. sanctions on Iran?
Türkiye and Israel are currently at loggerheads in Syria, and the U.S. is mindful not to further strain this relationship - it is currently using its diplomatic leverage over Türkiye, and Israel, to try and bring the two together. So Trump shows no interest in rocking the boat now over Turkish domestic political developments.
Both the Trump and Erdogan teams still appear optimistic around the relationship - an Erdogan - Trump call last month, before the arrest of Imamoglu, is reported to have gone well, as did a visit last week to D.C. by Turkish FM, Fidan. The Erdogan administration are still optimistic about a White House visit for Erdogan. And notably in the latest round Trump tariffs, Türkiye managed to escape at the lowest level of universal tariff, must 10%.
Bottom line, Erdogan seems to have leverage over Trump, which has kept Trump quiet over the Imamoglu affair.
Third, the Simsek team have done a remarkable job in stabilising the economy over the past 18 months or so, after the 2023 elections. CBRT FX reserves accumulated by over $100 billion to recover to highs of close to $175bn. Markets were clearly shocked upon the announcement of the arrest of Imamoglu. Foreigners, who had rebuilt significant portfolio investments back in Turkey, headed for the exits in the first few days after the arrest of Imamoglu - uncertain I think what the implications of the arrest would be (Simsek dismissal, & orthodox policy reversal?). The lira was hit hard, falling 14% in the first few hours after the arrest, to a new record low of weaker than 42 to the dollar. However, the CBRT responded robustly, using FX reserves to facilitate a smooth exit of foreign portfolio money, then hiking the upper band of the interest rate corridor, the lending rate, and tightening lira liquidity. This worked to stabilise the lira and halt foreign outflows. Importantly there was not much evidence of dollarisation from locals. Evidently herein the reforms institgated by Simsek and the CBRT over the past 18 months have done much to re-establish confidence by the markets, and local Turks in particular. The high carry for the lira kept locals invested. In recent days we have seen FX reserves rebuild.
The announcement of the arrest of Imamoglu shocked the system but it survived, and arguably the mere fact it’s survived without systemic crisis has provided further assurance in the stability of the system. Arguably also the positions of the reform team - Simsek, Karahan, et al - has been strengthened as Erdogan now needs the team more than ever to help stabilise the economy (fight inflation) and fend off against potential future political instability.
I have heard hopes from the opposition that the market will ultimately be the last check and balance on Erdogan. That seems unlikely in reality while there are still buffers - including a weight still of FX reserves (>$150bn, or one year’s gross external financing), a relatively modest current account deficit (1-2% of GDP, likely now helped by lower oil prices as Trump tariffs triggers a global recession), solid public finances (public debt to GDP less than 30%), sound banks and confidence in the banking system, and a high carry on lira assets acting as a counterbalance against increased dollarisation. But also trust in Simsek and team, and their ability to do whatever it takes to stabilise markets - including rate hikes - which should keep locals invested in lira assets. As long as Simsek stays I think the market should provide an anchor against political instability.
Longer term heightened political instability, and concerns around the rule of law, will weigh on long term economic development - it will slow foreign direct investment, and rating upgrades. But if the carry is high enough, portfolio investment will return.
The question is perhaps will foreign investors return, given fears of a move to a more restrictive political environment? The answer surely lies therein in the experience in Russia, Saudi Arabia and the Gulf states. In Russia, for example, many investors were long (and ultimately wrong) Russian assets in the run up to the full scale Russian invasion of Ukraine in 2021 to early 2022. This is despite the fact that President Putin has removed all domestic political opposion, with suspicions that he was behind the deaths of Boris Nemtsov and Alexey Navalny. In Saudi Arabia obviously the Khashoggi incident provides similar evidence that markets rarely penalise more restrictive political settings. As long as trading is legal, and Western sanctions are not imposed on Türkiye, and economic policy is orthodox then international investors will continue to view Türkiye from a risk/reward perspective, and put money to work where it is in their interests and P&L.
As noted, longer term, higher rates in defence of the lira and in response to heightened political risks will weigh on ratings, FDI, and growth. But actually though, and as Minister Simsek told foreign investors last week, this could ultimately prove disinflationary and help the fight against inflation. And what we learned I think from last year’s local elections in Türkiye, the population are being heavily impacted by inflation and it is a number one issue in elections. If through all this Simsek, the CBRT and team can beat inflation, this could still bring Erdogan salvation at the next elections.
Never write Erdogan off is a watch phrase I have learned over the last twenty odd years covering Türkiye. You would think that his move against Imamoglu would ultimately cost him dearly at the next election - some commentators now suggesting that the opposition will rally behind any candidate presented against Erdogan in the next election (assuming early elections or constitutional reform to allow Erdogan to run again). Possibly, but maybe not, as time can still present Erdogan with opportunities. And Erdogan is a skilled operator at outplaying his domestic political rivals. He also plays hugely difficult regional geopolitics to his advantage, time and time again. Erdogan is assuming that voters will quickly forget about events around Imamoglu. And he will assume that if he can deliver a Kurdish peace deal, a recovery in the economy with lower inflation, and pull some rabbit out of the hat of regional geopolitics, that there is still a path to electoral victory for him. On the issue of regional geopolitics, Türkiye could still benefit from huge contracts to re-arm Europe and Ukraine, and financing as a reward for helping peace a ceasefire in Ukraine, to stabilise Syria, and to ensure positive outcomes with regards to Iran. Erdogan will look to play all these scenarios to Türkiye’s advantage and to his own political salvation. The opposition would respond that events over the past few weeks make political change a case of not if, just when. Time will tell.