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1 THE POLITICAL RISKS OF THE 2013 TURKISH PROTESTS Stelios Papadopoulos Bradburys Security and Political Risk Analyst 25th June 2013

2 THE POLITICAL RISKS OF THE 2013 TURKISH PROTESTS Stelios Papadopoulos - Bradburys Security and Political Risk Analyst 25th June 2013 KEY JUDGEMENTS Turkey is an emerging market with significant opportunities, however the risks of severe economic recession followed by a re-emergence of the protests that we have witnessed for three weeks are real and should be taken into account by both investors and travellers. Turkeys overall political risk profile is rated as low to medium owing to: Quelling of violent protests which took place from 1 st June until 17 th June A change of mentality among the populace characterized by lack of fear of the government coupled with strong expectations for democratic reforms. The very real prospect of an economic crisis which can lead to a re-emergence of social discontent. High political instability is expected in the short term when the Federal Reserve ends Quantitative easing-program whereby the bank purchases $85 billion worth of assets while supplying credit at extremely low interest rates. BACKGROUND The Turkish protests began on 28 th May 2013 after outrage over a police eviction of a sit in at Istanbul s Gezi park protesting the park s demolition before being followed by protests across Turkey. The protests can be explained by both political and economic reasons. Before I offer my main analysis at the second section of this report I will offer the following background in order to contextualize the protests. According to on the ground reports by the Guardian, Der Spiegel as well as the Turkish Sabah, protesters ranged from, Kemalists, Feminists, Unions, Kurds, members of the middle class, financiers and the youth. Given the policies of the last three years by the Erdogan government the diversity of the protesters comes as no surprise. Since 2010 the AKP has increased restrictions on freedom of speech and the press not only through oppressive means-such as the arrest and deportation 25 year

3 old journalist Jake Hess in August 2010 for writing about the plight of the Kurds-but also through links with Turkish media groups. The Islamic Authoritarianism of the AKP government has alienated the liberal middle class, the feminists and the Kemalists with education reform strengthening Islamic elements and courses in public primary and high schools, restrictions on alcohol sales and consumption coupled with an attempt at a ban on abortion in February 2013, as well as jail sentences for blasphemy. Financiers such as those of Koc holdings Turkey s biggest conglomerate along with Sabanci holdings with assets ranging from banking to automaking, have been in conflict with the Premier after a refusal by Koc in December 2011 to accept Erdogan s proposal for building a national automobile. The rejection of the proposal was expected given that Koc works primarily through joint ventures with international automakers such as Ford, Fiat, and Renault. Erdogan s decision in November 2012 to bolster presidential powers through legislation in November 2012 further alienated Koc holdings as well as Sabanci. It was an autocratic move but the problem for Turkey s biggest oligopolies was not morality but the fact that Erdogan s elite base is MUSIAD-a business association of small and medium sized Islamic businesses with interests which are naturally different from their own. However what fuels the unrest is not simply the authoritarianism of the government but also the economic conditions which have been underreported by most of Western media. Back in November 2012 Reuters reported on the alienation and disenfranchisement fuelled by the disparity in the slums of Istanbul and the poorest parts of the country. Inequality in Turkey is high with the richest 20% of the population accounting for half of national income. According to the OECD Turkey ranks third highest among 34 countries on a scale of income inequality and the situation is further exacerbated by limited rights for trade unions. This may come as a surprise to many after all the hype over the Turkish economic miracle but economic growth was fuelled by consumer debt and speculative capital flows. According to the Financial Times Turkey has a yawning current account deficit an indication that the country is heavily dependent on foreign capital flows. But it is not just the size of the deficit that is vexing it is also its nature. Only a fifth is covered by sticky foreign direct investment such as fixed industrial investments while the rest is comprised of portfolio flows such as investments in Turkish stocks and bonds. These flows are worth $44.4 billion covering 94% of the country s current account deficit (see appendix). It follows that an exit of such flows will seriously worsen Turkey s debt situation and will cause a serious recession in the country s economy. Due to the political and economic failings of the current government one may wonder how did Erdogan managed to win three elections in a row? The primary reason has to do with the fact that his government symbolized a break with the Kemalist ideology of former Turkish westernized secularist governments which alienated many people. The question now is what political risks does this social unrest pose for travellers and investors?

4 BRADBURYS POLITICAL RISK RATING LOW - MEDIUM Before analyzing the potential political risks of the protests it is important to emphasize that any political instability in Turkey right now is due to the protests and not due to any loss of government control over the political system. Currently the AKP controls 60% of parliamentary MPs as well as the army and the police. The main opposition party the Republican people s party (CHP)-a social democratic Nationalist Kemalist party founded by Turkey s founding father Kemal Ataturk-has seen its popularity rise with the protests since according to a recent MetroPoll survey its share of the vote climbed from 15.3% in April to 22.7%. However the party is divided between a Nationalist Kemalist wing informally led by former CHP leader Deniz Baykal which is fiercely secularist and opposes attempts at what they see as the Islamization of Turkish society by Erdogan as well as concessions to the Kurdish minority. The second wing is more progressive aiming to reform the party so as to appeal to Erdogan s conservative Muslim base and it is led by current CHP leader Kemal Kilicdaroglu who is not a strong enough leader to unify his party. This fractured image of the opposition is very different from the AKP which is rather unified. There has been a different approach by President Abdullah Gul-cofounder of the AKP and long time ally of Erdogan-vis a vis the protests as evidenced by his more conciliatory remarks, but there is no sign that he has any intent of exploiting the protests to bolster his own popularity. If that were true he would not be calling for democratic maturity between authorities and protesters in June 12th commenting that the government could not tolerate more of the unrest that has disrupted daily life for two weeks. In addition Turks will most probably respond with a no to a planned referendum on constitutional amendments intending to bolster presidential powers. If Erdogan stepped down from the leadership of the party Gul would take over the party and the presidency with its increased powers. But a referendum right now does not seem very likely since one of the reasons that Turks are protesting is the government s authoritarianism. Hence the political regime seems stable internally which means that any political instability is strictly related to the protests. Political risks in the form of political violence have been high since the protests began but have fallen to low to medium because since June 17 th protests have overwhelmingly receded. Specifically when the protests began in Istanbul and spread to other cities like Ankara, Izmir, Adana, Eskisehir and Denizli, police have used tear gas and water cannons to disperse largely peaceful protests. According to the Turkish Medical Association over 11,000 people had been treated for tear gas exposure and nearly 800 for injuries caused by tear gas canisters. The police evacuated Gezi park on June 16th which has seen protests taking the form of standing man protests-inspired by choreographer Erdem Gunduz who was standing still in Istanbul s Taksim square-and so called people s assemblies similar to the Occupy wall street assemblies which began to emerge in different neighbourhoods across Istanbul. There are thirty five such assemblies right now in the city with at least one in Izmir (see Appendix). Protesters according to Eurasianet have set their eyes on the 2014 local elections. They have already formed a new platform called Gezi to the parliament an open platform where people can find representatives and vote and rank them. The highest ranking representative goes to parliament as

5 an MP. Their actions will also focus on information campaigns about what went on during the protests. The assemblies are not currently a source of instability for Erdogan since they are mostly talking clubs and this is because they lack a formal organization to coordinate their plans. But the fact that public discussions are being made is a potential source of instability. The source of the instability are the two radically different states experienced by the public. On the one hand there is freedom of assembly as shown by the assemblies, and on the other hand there is state authoritarianism. It is a problem of inconsistent or incongruent expectations within a society. It has been discussed by sociologists as source of social conflict and instability. If people are normalized within an authoritarian environment they become accustomed to it, but once given a taste of democracy and freedom they can see a radically better alternative and will forcefully react to any authoritarianism. An analogy that might help here is of a Phd student who has been socialized into accepting very high career and salary expectations. A problem of inconsistent or incongruent expectations arises when he suddenly realizes that economic necessity might force him to work as a cleaner. Hence my view is that protests will resurge in the short term. Secondly, it should also be noted that Turks are not afraid of the state anymore according to on the ground reports by experienced Turkish journalists, a fact which is not surprising given that individual protesters tend to feel safer and stronger when taking cover among large numbers of protestors. This is surely a sign of potential instability as protesters are empowered by the fact that the state is powerless in front of their large numbers. Political opposition then in the form of protests is imminent in the short term and a more organized form can emerge in the medium and long term under the condition that there is no extensive state crackdown which is probable given that Erdogan has a legitimacy problem. Any further state violence is against his own interest and he knows this otherwise he would not present himself as more conciliatory with promises that more beautiful days with more freedoms and less inequality are forthcoming. The question however that must be answered is what can trigger protests in the short term? It is the right question to ask because the fundamental causes of instability that have been described are not sufficient to actually trigger any political instability. Many things can trigger a protest but the only obvious catalyst at the moment is the following. As already mentioned Turkey has been heavily depended on short-term speculative flows for its economic expansion. According to Analysts at Standard Bank market reaction to the upheaval has been limited noting that state banks had stepped in to stabilize government bond yields. But these flows have been possible due to the Federal Reserve s quantitative easing program whereby the Fed purchases $85 billion worth of assets per month while supplying credit at zero interest rates. The cash has been invested by investors in government bonds as well as other assets in emerging markets such as Turkey, Brazil and Indonesia. There is uncertainty about when the Federal Reserve might taper QE but analysts agree that investors should be prepared for it. The end of QE will certainly bring about a recession in Turkey which will tarnish the government s image of managing an economic miracle. Erdogan will probably lose a large part of his popular base who will be the first to be hit by the credit squeeze tipping the

6 balance of power towards the protesters. 1 Naturally this is not certain because there is a strong cultural divide in Turkey between educated middle class secularists which are a large proportion of the protesters and Erdogan s base which is comprised of conservative Muslims from low income backgrounds. But the probability of an upheaval with more protesters leaving the ranks of the AKP is certainly probable with the tapering of QE. Overall then the risk rating can be classified as low to medium because there is political stability at the moment but can turn to instability due to the aforementioned reasons. CONCLUSION To recapitulate, when the protests began in the beginning of June they have been marked by violent protests with police brutality being the primary source of the violence. Since June 17 th protests have taken a passive form with standing man protests and assemblies and with the state not attempting to disrupt them in any way, since the AKP government understands that the political situation is sensitive with the government experiencing a legitimacy problem. However the country is polarized between Erdogan s conservative Muslim base who are usually from low income backgrounds and the educated secularist middle classes which make up a large proportion of the protestors. Yet as explained above an imminent recession in Turkey which is almost certain after the Federal Reserve brings QE to a halt, will most probably tip the balance of power in favour of the protesters given that the credit squeeze that will follow will be a rough hit for Erdogan s popular base. As a political and security risk analyst for Bradbury s I can say the following given the evidence: The political instability is absent at the moment but can be triggered by a recession coupled with the fact that the more fundamental causes are already present. 1 Erdogan s popular base is comprised of conservative Muslims from low income backgrounds.

7 APPENDIX Figure 1-Turkish net portfolio inflows Source: Reuters Figure 2-list of popular assemblies in Istanbul Source: Istanbul Metropolitan Municipality

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