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Turkey’s Economic Enemies: Corrupt Politicians and the U.S. Fed

Turkey's economy was already in a shaky place, thanks to decisions by the U.S. Federal Reserve that could make it harder for Ankara to sell its goods and borrow cash overseas. A widening corruption scandal in Turkey could turn things from bad to worse. 

Twenty-four people, including relatives of officials and high-level executives have been arrested so far, in a corruption investigation that is creeping closer to Prime Minister Recep Tayyip Erdogan. As the political crisis has intensified this week, top officials have resigned, others have been dismissed and Erdogan has been called to resign. Protesters took to the streets Friday in Istanbul and were met with police tear gas, the Associated Press reported.

The growing unrest has already taken a toll on Turkey's currency, which hit a record low this week before rebounding somewhat on Friday. If the flight from the Turkish Lira is followed by long-term investors also deciding to leave the country, Turkey's economy could be hit hard.

"If the instability and this crisis continues, then I suspect there's also going to be pressure on the country's growth prospects as business people from Turkey or outside Turkey will become less willing to invest," said Kemal Kirisci, a senior fellow with the Brookings Institution. 

Kirisci said the investigation is recognition of what many people had suspected behind closed doors -- companies with close government ties were more likely to benefit from large development projects than companies without them. He said the extent of the damage to Turkey's economy will depend a lot on how deeply democratic institutions like the separation of powers and rule of law are damaged as the political scandal unfolds.

"No business in a capitalist environment is going to feel comfortable in a situation where the judiciary is compromised," Kirisci said.

The instability comes at a sensitive time for the Turkish economy, which analysts see as vulnerable to a recent decision by the U.S. Federal Reserve to pull back on its stimulus program. The Fed announced earlier this month that it would start scaling back its bond-buying program in January. In an effort to help the U.S. economy, the Fed had been buying bonds in order to hold down borrowing costs and encourage banks to lend and, in turn, businesses and individuals to spend. But now the Fed sees the U.S. economy as recovering, so it plans to reduce the number of bonds it buys every month.

The Fed's decision to buy fewer bonds, which will likely increase the value of the U.S. dollar, could hurt emerging market economies like Turkey. While the value of the U.S. dollar and interest rates have been low, investors sought bigger returns abroad.  The Fed's decision to "taper" its bond-buying program could lead to rising interest rates that could prompt investors to shift their money back to American investments. 

Tim Ash, chief economist at Standard Bank Group, said Turkey is particularly vulnerable to the Fed's tapering because of its reliance on borrowing money from abroad.

"This comes at a tricky time for the Turkish economy and markets," Ash said in an email. He said he doesn't see the political crisis resolving quickly, which could mean that investors will continue to want to sell Turkish Lira, further driving down the value of the currency.

While instability doesn't bode well for the short term, Turkish-American business consultant Elmira Bayrasli said long-term investors are less likely to be scared off.

"There's a political earthquake going on in Turkey, but at the same time it's a fairly stable country," Bayrasli said. She said the government is not likely to collapse and the crisis could even prove the strength of the government's institutions, if they can weather the political tumult.

Still, the ongoing investigation could keep new investors from jumping into the Turkish market in 2014. Bayrasli, who is writing a book on global entrepreneurship, said Turkish start-ups should be ready to answer some tough questions about the impact of the political crisis if they're seeking money abroad.

"I just don't think there's going to be a whole lot of new money going into Turkey," Bayrasli said. That could mean a tough year ahead for Turkish businesses.

OZAN KOSE/AFP/Getty Images

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Killing Mohammad Chatah

BEIRUT - The last time I met Mohammad Chatah, a former Lebanese minister opposed to President Bashar al-Assad's regime, he expressed a sense of relief that Lebanon had been spared the worst of the violence raging in Syria. Today, a few hundred yards from where we had that conversation, Chatah was killed when a car bomb blew apart his convoy, scattering twisted metal across the streets of downtown Beirut and leaving a plume of gray smoke over the city's skyline.

The explosion today claimed the lives of at least six people and wounded more than 70 others. It follows a double suicide bomb attack targeting the Iranian embassy in Beirut, two car bombings in Beirut's Hezbollah-controlled southern suburbs, and worsening sectarian violence in the northern city of Tripoli and along the eastern border with Syria. The Syrian war, which has long destabilized Lebanon's peripheries, has come to the heart of the Lebanese capital.

Former Prime Minister Saad Hariri, to whom Chatah served as a senior advisor, implicitly blamed Hezbollah for the killing. Chatah's killers, he said, "are the ones who assassinated Rafiq Hariri; they are the ones who want to assassinate Lebanon."

The explosion that killed Chatah occurred only a short walk away from the 2005 blast that killed former Prime Minister Rafiq Hariri, his political ally. Next month, an international tribunal will begin a trial that has indicted top Hezbollah operatives of orchestrating the bombing that killed Hariri, along with 21 other people.

Some officials saw a connection between the assassination of Chatah -- who worked to establish the international tribunal and was the Hariri team's interlocutor with the United Nations -- and the looming trial.

"It is a message that their bombs are stronger and louder than justice," said Amal Mudallali, an advisor to Hariri who worked closely with Chatah. "They are saying they will continue killing with impunity...The world has tolerated them, and this was taken as a green light."

Chatah, who had previously served as Lebanon's ambassador to the United States, made no secret of his political views. He ran a blog and a Twitter feed that blasted both Hezbollah and the Assad regime. He criticized the Lebanese Shiite paramilitary group on Twitter an hour before his death, writing that it "is pressing hard to be granted similar powers in security & foreign policy matters that Syria exercised in Lebanon for 15 yrs."

He was even more hostile to the Assad regime, which he saw as a ruthless dictatorship that was being kept alive only by Iranian support in the face of a popular uprising. "The Assad regime is incapable of adapting to a powersharing arrangement," he wrote in his last blog post. "The regime is brittle and fragile as it is brutal and ruthless. It can break but cannot bend. Assad knows it and Iran knows it."

It was not, however, Chatah's anti-Assad and anti-Hezbollah views that set him apart from others in the Lebanese political sphere. As a Sunni politician and a Hariri ally, those were to be expected. Rather, what distinguished him was his keen sense of history, and a curiosity about where his community and the region were heading. He often sounded more like a professor than a politician: The last time we met, he wanted to speak not of the daily political feuds in Beirut, but the larger shifts in U.S. policy toward the Middle East and the asymmetrical strategies that allowed Iran to compete for influence with the world's greatest superpower.

Andrew Exum, a former special advisor for Middle East policy at the Defense Department who met with Chatah in the course of his work, described him as "the Westerner's ideal of a Lebanese politician - urbane, highly educated, [and] secular."

Exum described Chatah's attractiveness to a Western audience as potentially as much a liability as a benefit. With the U.S.-led war in Iraq, the Hariri assassination, and persistent sectarian violence in Lebanon, he feared, the Sunni community was becoming more attracted to fundamentalist clerics than moderate, secular politicians like Chatah. "I warned Chatah that Saad Hariri's continued absence from Lebanon [he left in 2011 and has not returned since] was only exacerbating the dangerous political trends," he said. "Lebanon's Sunnis were growing more radicalized, with dangerous consequences for everyone from the United States and Israel to the Hezbollah-supporting Shia community in Lebanon."

The fallout from Chatah's killing, however, could provoke an intensely local reaction. He hailed from Tripoli, and some shops there have already closed to mourn his death. The northern city was already on a knife's edge: A grenade attack hit an army convoy there last night, and Human Rights Watch has warned that the "government's security response has been weak" in the face of fighting between the Sunni and Alawite communities there. The city could see an upsurge of violence as factions seize on the popular anger from the blast to settle local scores.

There is also the bigger question of whether the Syrian war will drag Lebanon into full-blown civil conflict. Chatah had hoped that Lebanon just might muddle through -- that a regional accord and the state's institutions, as weak as they may be, could protect the country from chaos. Nobody can yet say whether those hopes are completely dashed, but the future looks grimmer than it did yesterday. 

Bilal Jawich/Anadolu Agency/Getty Images