Turkish Elections and Why Erdogan Might Lose

Not many Western media outlets are covering the upcoming Turkish elections.

And since they might end up with a major upset, I thought I gave you a brief summary.

In a second post, I will outline the reasons why I think the opposition should hope for an Erdogan win.

Let's start with the elections.

Actually, there are two elections, the first one is to elect an executive president ostensibly styled after the American presidency as it exists in the mind of Donald J. Trump, al-Sisi be damned.

You know, someone who controls all three branches of government and, of course, the media.

Those elections are schedules for 24 June and if no candidate secures 50 percent of the votes a second round will take place on 7 July.

Concurrently, on June 24 legislative elections will be held to elect members of parliament (MPs) to a newly enlarged 600-member National Assembly.

The Players

There are six presidential candidates and two electoral alliances.

Tayyip Erdogan, the current president and the leader of the Justice and Development Party (AKP), is the most popular candidate by a country mile. Various polls place his first round electoral support somewhere between 42 and 54 percent.

So it is conceivable that he could get elected president in the first round. But most polls indicate that this is not very likely. After 15 years in power with his pugnacious ruling style and his polarizing rhetoric, there is a palpable Erdogan fatigue in the country, even among his supporters.

Muharrem Ince is the candidate put forward by the main opposition Republican People's Party (CHP). He is not the leader of CHP and he was designated as candidate when the party leader Kemal Kilicdaroglu's amazingly stupid plan of fielding the former president and AKP founder Abdullah Gul as the opposition candidate did not pan out.

Ince is more popular than the charismatically challenged Kilicdaroglu and he is proving himself a decent candidate.

Meral Aksener, the leader of newly formed Good Party (IP) is a curious candidate. She was one of the senior leaders of the proto-fascist National Action Party (MHP) and left MHP when the party leader, Devlet Bahceli, blocked her leadership bid. She formed the Good Party to go after MHP voters.

The dark side of her candidacy is the fact that, most of the extrajudicial killings that took place in southeast Turkey in the 1990s happened when she was the Minister of the Interior.

Selahattin Demirtas was the leader of the pro-Kurdish HDP until his recent incarceration. He was the man who engineered the stinging Erdogan setback in June 2015 elections by pushing his pro-Kurdish party over the 10 percent electoral threshold and reducing AKP's legislative presence.

Erdogan responded by bombing Kurdish cities in the southeast and by removing duly elected mayors of Kurdish-majority cities. Properly cowed, Kurdish voters flocked back to him six months later and he won a bigger majority. He then convinced Kilicdaroglu to agree to a constitutional amendment to lift the legislative immunity of MPs and once that was passed, Demirtas was promptly indicted and put in jail.

This could have been the last footnote for Demirtas had it not been for Erdogan's infamous Afrin invasion. As the June 2015 electoral defeat for Erdogan was largely the result of the Kobane debacle what put Demirtas back on top in Kurdish and Turkish politics was the misguided Afrin adventure. Pious Kurds decided to give him a second chance as did the Turkish progressives.

Two Electoral Alliances

For the presidential elections, Erdogan and MHP leader Bahceli formed the People's Alliance which fielded Erdogan as its sole candidate.

CHP, IP and the Islamist Felicity Party formed the Nation Alliance but they decided to fight the first round with their individual candidates. Whoever gets the second largest vote will face Erdogan with the support of the other parties.

Given CHP's electoral history and the recent emergence of IP, most analysts assume and most polls indicate that Ince will be the opposition candidate for the run off elections.

However, one polster (with a solid history for accuracy) recently suggested that Aksener had a comfortable lead over Ince and was likely to become the opposition candidate.

First round results

This is very interesting for a very good reason.

The Equations

According to the same polling company, if Aksener is the opposition candidate to face Erdogan, she gets 54 percent of the vote and becomes president.

Conversely, if Ince is the opposition candidate, he loses to Erdogan 57-43.

That's largely because Turkey's conservative center cannot bring itself to vote for a progressive candidate. In the eyes of this segment, Aksener being a staunch nationalist and a practising Muslim she is seen as a major departure from Erdogan himself.

This is substantiated by the fact that 80 percent of MHP voters and 15 to 20 percent of AKP voters are willing to support her against Erdogan. Whereas the support figures from MHP and AKP electorate for Ince go down to 20 and 7 percent respectively.

More interestingly, while some 35 percent of HDP voters are willing to vote for Ince in the second round, a staggering 65 percent declared that they would cast their ballots for Aksener. This, despite her past record about massacring Kurds.

It shows how pious and divided the Kurdish electorate is. Her Muslim identity is more important than her past as Turkish nationalist who waged a covert war against Kurdish separatists.

Nevertheless, Kurds are the kingmakers in these elections. HDP is expected to clear the 10 percent threshold for the legislative elections. If that happens, the AKP-MHP electoral alliance may no longer have the majority in Parliament.

Erdogan is so worried about that prospect that he got the Higher Electoral Board to relocate polling stations from pro-HDP villages to pro-AKP villages in southeastern Turkey.

I would not write Erdogan off as he is a wily politician with boundary issues: he will do anything and everything to stay in power.

In this instance, I think that would be the best option for the future of the country.

I will explain why in my next post.

The Looming Halkbank Fine

If you are like most people, the name of the state-owned Turkish bank will not mean anything to you. However, in a few days time, it might become the most important news item about Turkey's economic future and political stability.

I mentioned Halkbank, or Halk Bankasi AS (its full Turkish name) about two years ago as a major threat to Erdogan's political survival. It played a key role in the biggest sanctions-evasion scheme in recent memory.

Reza Zarrab, a dual Iranian-Turkish citizen helped Iran sell its oil and gas and buy goods by creating an alternative to the SWIFT network through Halk Bankasi.

It was a complicated setup.

Tehran then decided to use a bypass system based on Turkey’s Halkbank. SWIFT was sidelined first by setting up front companies in China. Money was sent to the Chinese bank accounts of these companies from Iran as if they were reimbursements for exports. That money was instantly transferred to front or real companies in Turkey, also as export reimbursements. Gold bought with that money was moved to Iran via Dubai.

According to the Foundation for Defense of Democracies (FDD), this "massive "gas-for-gold" sanctions-busting scheme yielded neighboring Iran some $13 billion in Turkish gold between 2012 and 2013."

In fact, this was just the tip of the iceberg as the FDD estimates that the actual sums were much higher.

The more we investigated, the more we realized that Zarrab’s schemes, which could have helped Iran pocket more than $100 billion, rank among the largest sanctions evasion episode in modern history.

Since the sanctions were designed to hamper Iran's nuclear program, you can imagine where at least some of that money went.

Zarrab took his family to Disneyland in March 2016 and was promptly arrested by the American authorities and indicted by Preet Bharara, the then US Attorney for the Southern District of New York.

After a long trial with many ups and downs, former Halkbank deputy general manager Hakan Atilla was found guilty on 3 January 2018 (along with two Turkish ministers who were charged in absentia) and he is awaiting sentencing. While the prosecution is asking 20 years, the judge postponed sentencing twice so far. It has just been reported that the sentence will be announced on Wednesday 16 May.

What is more interesting for our purposes is the fine that the Treasury Department's Office of Foreign Assets Control (OFAC) is likely to impose to Halkbank and perhaps six other Turkish banks.

Turkish analysts and markets initially appeared optimistic about the size of the fine. But people who are familiar with the BNP Paribas (BNP) believe that Turkey is in for a big surprise.

In a decision made in May 2015, a U.S. court imposed a penalty of $8.9 billion against BNP, including $8.8 billion that it said was equal to the amount of transactions identified as criminal. The agreement with BNP was conditional on it accepting full responsibility for the crime and convincing U.S. authorities that it would set mechanisms in place to ensure full compliance with the sanctions regime in the future.

Remember that the amount BNP was accused of laundering was $10.3 billion.

The fact remains that Halkbank has laundered at least four (4) times more money than BNPP. In addition, a former top level U.S. Treasury official testified at Mr. Atilla’s trial that U.S. officials had warned Mr. Atilla and other Halkbank executives not to violate U.S. sanctions on a few occasions. Moreover, Halkbank has had the benefit of BNPP’s example as a test case for what happens when banks violate sanctions regimes. As a result, any fine imposed upon Halkbank will likely exceed that of BNPP’s and any settlement will likely contain stricter and more rigid measures.

I got curious and called a friend of mine who is in senior management at BNP and put the question to him. He said that the BNP analysts believe that the fine will be between $30 billion and $100 billion.

I asked if their people could be mistaken as these are huge sums and they would certainly bring Turkey to its knees. His response was that, is OFAC followed the same guidelines, there is no way they can impose a fine less than $30 billion.

He also added that they might postpone the decision until after the upcoming Turkish elections on 24 June. He was implying that the results might determine the size of the fine.

What should be worrisome for Turkish companies is the fact that such fines are always accompanied with an admission of wrongdoing and we know that Turkey's bombastic president will never agree to issuing such statement.

And without one, Washington could designate Halkbank on OFAC's sanction list.

This designation would effectively cut off the bank’s access to the U.S. market. Since Halkbank is the largest listed bank in Turkey, such a designation could have serious repercussions not just for the bank, but for Turkey at large.

That would remove Halkbank's ability to do business in dollars. And that is a kiss of death for any bank.

Moreover, if the fine was very high and targeted the other six banks named, the economic repercussions would be very serious.

The evaporation of credit would bring household consumption and fixed capital formation growth downward significantly, subsequently bringing headline GDP growth down by about 1 percentage point compared with current projections. Depreciation of the lira would be more prolonged, the stabilization of which would deplete foreign currency reserves to dangerously low levels. The sharp weakening of the lira and concurrent drop in reserves would severely undermine the country's ability to meet external debt obligations. Net portfolio capital flows could be outward for several months, raising the likelihood of a current-account crisis. With markets unstable, inflation would spike.

Originally, the OFAC decision was scheduled for 17 May (I can't find the link but I know I read it somewhere). If my friend at BNP is correct, we will see it postponed until after 24 June.

But if it is announced before the elections and it is substantial then we can assume that Turkey is no longer useful for the longer term American regional plans.

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UPDATE

The sentence came in as reported and it is just two years and eight months. Judge Berman was lenient:

Prosecutors had asked for at least 15 years in prison for Mr Atilla, 47, citing the seriousness of the crimes and the need to deter similar offences. 

But US District Judge Richard Berman said that the Halkbank executive appeared to have been “following orders” from the bank’s chief executive, Suleyman Aslan, who is one of several suspects wanted in the US in connection with the case, along with Zafer Caglayan, a former minister of the economy. 

“Mr Atilla was something of a cog in the wheel and, I would add, at times a reluctant one at that,” he said, arguing that he deserved a “lenient” sentence because of his minor role and otherwise “exemplary” life. 

But analysts believe that (a) the fine will come after the elections on June 24 and (b) it will be large enough to cause major disruption.

We'll see in due course.