A New Dawn: Turkey post July 2008

Now that the highly dramatic month of July has finally come to an end, the people of Istanbul can collectively turn a page and look to an immediate future, which appears considerably more certain, if not banal, in comparison to the recent past. The city's bourgeoisie will head to their summer houses in the greater Istanbul region, while the upper classes augment their social status and darker skin tones at exclusive seaside ghettos such as mythic Bodrum.


By mid-September, Istanbul and Turkish current affairs in general will most likely return to their more traditional frenetic cadence. The school year will have commenced, Istanbul traffic jams will be in full-force and the "deep state" Ergenekon trial will steadily gain momentum in the headlines. On the heels of the Turkish national team's truly remarkable and extremely lucky showing in the UEFA Euro 2008 tournament, one must also not forget the beginning of the new domestic football season; more Brazilians playing for Fenerbahce and greater promise for the eternal underdog and this observer's favorite team, Trabzonspor.

While all of the above is well-established on the country's active radar over the next three to four months, this observer is surprised by the relative lack of consideration being given to basic economic variables, which arguably hold the greatest potential to disrupt. It has been quite remarkable to observe how Turkish equities analysts, often quoted in the Western media, have been very quick point out that all of the political intrigue surrounding the country's economy has been "already priced into the market" with apparently great efficiency.

To their credit, the Istanbul Stock Exchange undertook an aggresive ascent during the hours leading up to the court's decision and barely flinched in reaction to the American Consulate shooting at the beginning of July and the more recent "double bombing" at the end of July. While both events were indeed tragic due to the loss of human life involved, both were also quite bewildering in terms of identifying a likely motivation or intended political message. Furthermore, the Turkish state's decisions to attribute the consulate bombing to "Al-Qaeda" and the Istanbul double bombing to the "PKK" were both predictable and unconvincing. The unfazed reactions of equities investors were a testament of the relative insignificance of both incidents.

The financial markets greeted the Turkish Constitutional Court's decision to not close the ruling AK Party with predictable enthusiasm. It was a highly pro-business decision, which this observer accurately predicted in April 2008. The recent sale of Akpet to Lukoil and the Istanbul Stock Exchange's rise from this year's doldrums, which have earned it the distinction of the world's worst performing emerging market exchange in 2008, will remain sparkling examples of Turkey's "new dawn" during the next few months. Nonetheless, certain extremely fundamental concerns, in addition to the slowing Eurozone economy, remain. They consequently demand adequate consideration in order to clearly assess the country's short and medium-term future.

The following are a series of economic issues, some new and others ongoing, that this observer has picked from the headlines over the past few weeks. It is highly likely that some combination of these issues will influence country's political and economic landscape through 2009.

Deutsche Bank AG, the world's biggest currency trader, raised its forecast for the lira against the dollar after Prime Minister Recep Tayyip Erdogan's Justice and Development Party escaped a constitutional ban. The currency will end the year at 1.20 per dollar, Arend Kapteyn, chief economist for Europe, Africa and the Middle East at Deutsche Bank in London, wrote in a report dated today. The bank's previous estimate was 1.41 per dollar.

Source: Bloomberg

Turkey's prime minister, defense minister and military commanders are meeting to appoint a new military chief of staff. The four-day gathering began Friday at the armed forces headquarters in Ankara...Gen. Ilker Basbug, the current commander of Turkey's army, is expected to succeed chief of staff Gen. Yasar Buyukanit, who retires this month.

Source: IHT

"Once the euphoria dies down, attention will again turn to run-of-the-mill issues, like global markets, oil prices, and the domestic macro situation," says economist Banu Tokali of Istanbul brokerage FinansInvest, citing "inflation and monetary policy, in particular, coupled with the still-gaping current account deficit."

Turkey's central bank raised rates a further 50 basis points in July, repeating identical hikes it made in May and June. The latest increase brings the overnight borrowing rate to 16.75%, with the lending rate unchanged at 20.25%. The bank has been cagey about projecting its future monetary course, given the uncertain outcome of the AKP case and the unknown duration of the recent drop in oil prices. But in its July inflation report, the bank hinted at a slowdown in rate hikes. The bank also revised upward its projected inflation rate for 2008, from 9.7% to 10.6%, and pegged next year's rate at 7.9%.

Source: Business Week

Turkey, which could find funding from global markets more easily in the past, had to increase its interest rates to cope with the squeeze. The credit crunch process in the global markets has created a dramatic change in the financing of Turkey's current account deficit.

In the first five months of the year, current account deficit rose 33.3% from $16.16bn to $21.54bn while the total of foreign direct investments and portfolio investments dipped 73.3% from $18.87bn to $5.0bn. Meanwhile, foreign borrowing of banks and companies surged 116.2% from $10.39bn to $22.46bn, an indication that there may be a problem in financing the current account deficit.

Normally, the distress in financing the current account deficit results in a narrowing of imports for investments and production. Therefore, while the current account deficit is moderated, the economy starts to shrink. When companies are unable to find resources from abroad, they are obliged to knock at the door of banks for loans. This increase in loan demand results in the further increase of loan interests.

Source: Referans

Turkey raised its natural gas prices by nearly 20% on Friday in line with a new cost-based pricing mechanism, state pipeline company Botas said, announcing a move likely to increase already high inflation.

The gas price rise was fixed at 16.88% for residential properties and 18.77% for industry, Botas said. The cost-based pricing mechanism, introduced by the High Planning Board from the start of July, applies to all state energy companies and is seen as an important step before further privatisations of power distribution and production facilities.

Before the new system was introduced, electricity prices for industry were raised by 22% effective from July. Electricity companies have not applied to set new power tariffs this month. Rises in energy prices generally have been a major component in Turkey's double-digit inflation. The central bank, which has raised interest rates this year and said it could tighten further, has repeatedly cited energy prices as an inflation risk.

Source: Reuters

Turkey Political Poll

A political poll commissioned by the Swiss bank Credit Suisse depicts a discernible level of fallout from the tumult, which has surrounded Turkey's governing AK Party. According to the poll conducted by A&G Research, support for the AKP has fallen to 39.7% from a mid-summer 2007 election result of 47%.

If there is indeed truth to the findings of this poll, their most significant message is not that the AKP is losing support among the Turkish public, but rather which political group is benefiting from this slide. Turkey's right-wing nationalist MHP has apparently improved its standing by three percentage points to 17.1%. Also of note, Turkey's mainstream secular party, the CHP, continues to lose ground.

As this Bosphorus Watch post from several months ago demonstrates, there is little surprise that Turkey is experiencing a shift toward the right and nationalism. In addition to the link between an economic downturn and nationalism, it is equally significant that the CHP has been unable fill the small void left by the AKP. The secularist party’s failure to generate traction among Turkish voters is most likely due to its particularly stale vision. There is little about the CHP that is fresh or that represents a radical departure other than its steady dose of reactionary squabbling with the AKP. In this respect, the sacking the CHP’s long-time leader, Deniz Baykal, would be a good first step toward creating momentum for the secularist cause.

Turkey In Between: Syria-Israel & Georgia-Russia

Adding to its much coveted resume as "Europe's bridge to the Middle East", Turkey has now been officially recognized as the facilitator of talks between Israel and Syria. Whether or not the Israeli media agrees with Prime Minister Ehud Olmert's motivations for publicizing the existence of talks, Turkey can at least shine in the warm spotlight of international recognition for a few weeks.

While most Turkish diplomatic activity in the Arab Middle East other than with Iraq follows a mechanical approach, Turkey's role as a mediator between Israel and Syria is uncharacteristically complex. There exists a very clear logic behind Turkey’s effort to mingle in the affairs of these two countries.

Compared to its relationship with neighbor Iran, Turkey's rapport with Syria is relatively underdeveloped. Perhaps the most significant reason for this is the incredible backwardness of Syria’s Baathist state-controlled economy, which is also responsible for the incredible backwardness of Syria’s regional foreign policy. Syria's problematic approach last affected Turkey in a dramatic way in 1998. Syria gave refuge to PKK leader Abdullah Ocalan, much to the disgrace of Turkish public opinion that had designated Ocalan as a terrorist. Syria would ultimately harbor the Kurdish leader in Damascus until the threat of a Turkish invasion successfully forced his eviction.

In comparison, Turkey’s rapport with Israel has proved quite dynamic. Successive Turkish governments and the Turkish military have pursued a symbiotic relationship with Israel despite the risk of alienating Turkey even further in the eyes of the Arab World. Both countries, similarly focused on linking themselves with the West, have cooperated through military exchanges and natural resource transfers. In addition, Turkey hopes to court the sympathy of the Israeli lobby in Washington as a means of counter-balancing the influence of the Armenian lobby on American foreign policy.

While no observer could claim that Turkey’s efforts will actually make a significant difference in solving the issues that separate Israel and Syria, Turkey’s actions will help it acquire some additional credibility with pundits who influence EU opinion. This alone could be reason for Turkey to exert its diplomatic energy.

The highly involved nature of Turkey’s interest in affairs south of its border stands in tremendous contrast with its attitudes concerning the tumultuous political situation to its north-east. Turkey has chosen a relatively silent course as Georgia struggles to deal with breakaway Abkhazia and omnipresent Russia.

(On Monday, the UN announced that a Russian jet did indeed shoot down a Georgian unmanned surveillance drone patrolling over Abkhazia.)

Other than its relations with Armenia, which are “very well” defined, Turkey's diplomatic intentions in the greater Caucasus region and Central Asia have been unclear ever since the failure of its Pan-Turkism initiative in the 1990s. While Turkish construction companies and textile producers have been keen to acquire contracts and conduct foreign direct investment projects, Turkey's main interest in the region has been its role as a conduit for Central Asian energy exports to Europe and beyond. Turkey's energy interests in Central Asia have understandably run counter to those of Russia, which are monopolistic by nature.

Turkey's concern for its trade relations with Russia must also not be overlooked. Roughly 70% of the country's natural gas supplies come from Russia, worth approximately $2bn. In addition, Turkish companies currently boast $4.5bn in foreign direct investments in Russia, while Russia companies have $3bn in Turkey. Therefore, the rather undefined character of Turkey's relations with the Caucasus and Central Asia is most likely due to its disinterest in provoking Russia's wrath.

In contrast, provoking Russia's wrath has been one of the main occupations of Georgia's second post-Soviet Union president, Mikhael Saakashvili. Saakashvili’s attempts to overhaul his country’s economy and mentality, often in brazen defiance of Russia, have won him a large following in the West. The US is widely believed to have provided the George Washington University Law School trained lawyer with the necessary moral support and financial backing to overcome considerable odds.

While Turkey has shown such great interest in helping Israel resolve its issues with Syria, it has comparatively neglected neighboring Georgia’s plight. Although comparing Georgia to Israel on a geopolitical scale is like weighing a bowling ball against a golf ball, it is nevertheless unfortunate that Turkey chooses not to more publicly support the Caucasus’ own geopolitical David against the Russian Goliath.

Turkey does in fact give military support to Georgia in the form of training and funding. While the monetary figure of this military support is dwarfed in comparison to that provided by the US, Turkey is probably Georgia’s second largest military donor state. The two countries have also successfully cooperated together on the Baku-Tbilisi-Ceyhan pipeline project – the cornerstone of Turkey’s design to become an energy transfer hub. A new train connection between Azerbaijan, Georgian and Russia will also encourage closer trade relations.

Saakashvili is reputedly trying to transform his country into a fully-functional democracy and regional economic force, both of which would be beneficial to Turkish interests. While Georgia is still far from realizing this dream, Saakashvili’s goals are noble and most likely much more of a near-term reality than expecting Baathist Syria to dramatically evolve.

If Turkey wishes to demonstrate its constructive potential to influence the affairs of the surrounding regions, it would be well-served by addressing an issue that is clearly within its means and in its natural sphere of influence. Sadly for Georgia, Ankara is either too scared to compromise economic relations with Russia or too consumed by the international notoriety it receives from pursuing “peace in the Middle East” as opposed to in the Caucasus.

Turkey's Military and its Role in Politics

Bosphorus Watch favorite, Gareth Jenkins, has authored yet another intriguing piece about Turkish society. Jenkins' most recent essay concerns the professionalization of the Turkish military. Currently, only one in six members of Turkey's military is a professional soldier. While the military's total size is 600,000, the operational effectiveness of its conscripts has been repeatedly called into question especially during the recent operations in northern Iraq. In particular, Turkish conscripts have demonstrated a penchant for being abducted by the PKK, undoubtedly causing great embarrassment to the leaders of NATO's second-largest member force.

Starting in May 2008, the army will begin to phase out the use of non-professional soldiers for its six commando brigades, which comprise approximately 10,000 soldiers. By the end of 2009, the commandos will operate as an entirely professional fighting force. Although unlikely to be accomplished in the short-term, the commandos may only be the beginning of a military-wide effort to transform the Turkish military into an exclusively professional force.

(For further details, please refer to this article in Today's Zaman.)

The strength of Jenkins' piece is his in-depth exploration of the army's past and present relationship with Turkish society. His consideration of the military's role as an "educator" is particularly important:

It is unclear, however, what impact the increased professionalization of the Turkish military will have on its relationship with society as a whole. Many in the higher echelons of the TGS favor the complete professionalization of all of the country's armed services, although they acknowledge that cost considerations make such a change unlikely in the near future. But there is also a concern that the abolition of conscription would sever what they regard as a sacred bond between the Turkish nation and the profession of soldiering.

Turkish school textbooks still portray the military as something akin to the essence of the Turkish nation, although the intensity with which it is inculcated has declined in recent decades. Indeed, until the 1960s and 1970s, when more Turks began to have access to formal education, the country's military was itself frequently referred to as "a school." It was often during their military service that conscripts from poorer backgrounds first learned to read and write and become familiar with social niceties such as the use of a knife and fork. Even today, for the mass of the male Turkish population, military service remains a rite of passage into manhood. Although it is frequently overlaid with resentment at the often haughty manner in which they are treated by the members of the officer corps, many retain an emotional attachment to the institution, if not necessarily to all of its members, long after they have completed their military service. Particularly outside the Turkish elite, the inculcation of the identification between the military and the nation, together with the personal experience of military service, undoubtedly have an impact on public willingness to tolerate the Turkish military's occasional attempts to influence the political process; especially in times of perceived risk or crisis.

The identification between the military and the nation is, however, already being eroded by the spread of literacy and developments in communications, which have meant that Turks now have access to many more sources of information than the state-controlled educational system and what they are told by their commanding officers during their military service. Similarly, the gradual professionalization of the army, even if it is initially only in certain units, is likely to weaken the emotional bond formed by military service; raising the possibility that the requirements of improved military efficiency may come at the cost of a reduction in the TGS's ability to influence the political process in Turkey.

In relation to the lower and rural echelons of Turkish society referenced in Jenkins' article, the army arguably maintains a degree of influence greater than that exercised by the country's traditional primary and secondary school apparatus. In particular, it is relatively unknown to what level this demographic actually completes traditional education. Therefore, military service can be viewed as the last opportunity for the Turkish state to create an "emotional link" among the more disenfranchised, poor or rural members of Turkish society.

The poor or rural male demographic has proven quite significant to contemporary Turkish political proceedings; the number of AKP supporters who hail from this segment of society is substantial. As a result, the Turkish military's ability to apply an emotional stamp on the "hearts and minds" of these poor or rural young men would clearly have great appeal to those in Turkey who advocate a strict secular, Western line, such as country's generals. Professionalization of the military would not only involve a stiff financial cost, but it would also eliminate an important means of ideological influence.

There would also appear to be a second approach to analyzing the military's pursuit of an entirely professional force. With his comment that, "the identification between the military and the nation is, however, already being eroded by the spread of literacy and developments in communications", Jenkins makes the tacit suggestion that the Turkish military may be coming to grips with the fact that the secular state's ideological influence is waning. There is arguably no greater proof of this fact than in the repeated democratic election of the the AKP.

By foregoing the traditional opportunity to shape the hearts and minds of young conscripts, the military could instead concentrate its resources on creating a secular elite through the ranks of a professional army. It is widely known that those soldiers who are allowed to move up the ranks of the military are able to do so as a result of both professional and ideological merit. Those who profess beliefs other than the traditional Ataturk-inspired secular Western line encounter a professional dead-end. With a completely professional army, Turkey's generals could better guarantee that the desired ideology is maintained from the high command all the way down to the troops chasing the PKK on the ground.

While such improved ideological efficiency, paired with more reliable combat training, would ideally strengthen the Turkish military's operational capabilities, it would also reposition the military's role in society as Jenkins demonstrates.

Despite its much feted "e-coup" in the spring of 2007, the Turkish military's role in politics over the course of the AKP era has been steady, but remarkably restrained compared to past eras. It is conceivable that the generals have in fact bought into the need to practice good public relations vis-a-vis the EU, the Western media, and possibly even Turkey's regional peers.

Rather than diluting its resources in order to more widely interact with the masses, the professionalization of the Turkish military would be a philosophical shift towards the strengthening of elites. Although this might be a rather unfair comparison, a more PR-savvy Turkish military philosophy may hope to develop personalities from within it ranks, who ultimately play a role in Turkish politics similar to the one played by Dwight Eisenhower, Colin Powell and now John McCain in America.

May 1stanbul

The events of Turkey's 2008 edition of May Day passed in a predictable fashion. Roughly 500 protesters were reportedly arrested, Turkish police exploded tear gas bombs in front of hospital entrances, protesters were pulverized by water cannons and beaten by batons. As is typically the case during such crack downs, the actually number of people taken into custody undoubtedly exceeded official figures. May 1st is a time for security forces to take advantage of mayhem and "clean house" among unwanted members of society whether or not they are even participating in the day's events.




For this observer, and many seasoned expatriates living in Istanbul, there was little surprise concerning the level of flagrant brutality authorized by the Turkish government. One only has to look to the events that take place in the east of Turkey, in places such as Diyarbakır, to understand the potential of Turkish security tactics.

Unlike the east of Turkey, it was quite remarkable how well the events in Istanbul were caught on camera. As an American who vividly remembers the uproar that surrounded the Rodney King affair, it was unfathomable how oblivious the Turkish security forces acted despite being under a lens for much of the day.

Equally shocking was the indifferent line that seemed to be chosen by mainstream Western media outlets. Despite the fact that Prime Minister Erdoğan provided a choice sound bite during the lead-up to May 1st - "It will be mayhem when the feet start to manage the head" - May 1st was not as widely analyzed as one would have hoped. This decision is particularly puzzling given the fact that Turkey is one of the few Muslim countries with a significant middle-class and is such a popular topic in the Western media in general.

Moreover, Turkey's May 1st demonstrations provide a rare view of less mainstream or "silenced" elements of Turkish politics. While the Turkish labor unions ultimately canceled their march on Taksim square, the day was a nationally-televised showcase for a much wider range of political distention than normally receives coverage in Turkey.

The May 1st footage also encouraged this observer to put Turkey in the context of the greater region. The events of May 1st proved that Turkey is not an exception among American neo-conservative backed governments, which are tacitly encouraged to repress political opposition. While Azerbaijan continues on its draconian path and therefore does not merit discussion, Georgia and to a lesser extent Armenia have quite recently witnessed government coordinated acts of repression. Georgian President Mikheil "Misha" Saakashvili, barely received a slap on the wrist in the West for his repression of opposition elements prior to making the decision to hold early presidential elections. Such is Misha's reward for representing the region's only stalwart against Russian imperialism.



Georgia and even Armenia are a "Wild West" in comparison to Turkey - Turkey is a much more affluent, stable and strategically important country compared to its neighbors in the Caucasus. While it therefore feels somewhat odd to compare Turkish politics and discord to that in Armenia or Georgia, the country's ceremonial May 1st repression ritual reminds one of just how easily Turkey's affairs can devolve if the circumstances are right. Despite its much greater levels of economic and democratic development, the events of May 1st remind one of the degree to which Turkey continues to be influenced by the insecurities of its corporatist core.

Turkey's FDI Drops Dramatically

Turkey's foreign direct investment (FDI) figure for the first two months of 2008 has experienced a very significant drop.

Turkey received $1.5bn in foreign investment during January and February 2008 - an 80.4% decrease from the FDI levels achieved during the first two months of 2007.

FDI levels fell 37% from January to February. This trend will most likely continue as investors continue to fret over new details involving the tense political situation that currently defines the country.

Source: Click Here

Considering the Likely Fate of the AKP

The drama surrounding the potential closure of the ruling AKP party acquired a significant nuance with the decision of Standard & Poor's to cut Turkey's credit rating to three increments below investment grade (BB-) last week. The credit agency attributed its sudden decision to "the increasingly challenging political and global environment that Turkey faces in the near term". Moody's, on the contrary, has decided to keep its rating unchanged, choosing to focus on more fiscal factors for its credit appraisal.

While S&P's credit rating cut was probably a bit rash, its verdict on the Turkish economy was nevertheless inevitable at some point in 2008. After multiple years of robust growth, it has become increasingly clear over the last nine months that the country's economic pendulum has begun to swing away from good fortune. Only the very brave, or ignorant, have argued that the Turkish economy could easily navigate the brewing global downturn. In this regard, S&P's announcement can be taken as the symbolic beginning of a new era of Turkish political-economic history; the good times will no longer roll like they once did.

The current economic situation is not particularly dreary for most segments of the Turkish population other than inflationary pressures on food prices. However, as growth projections are revised due to the impending slowdown in foreign direct investment (FDI), the economy will increasingly experience more unpleasant realities. The mechanics of this impending economic malfunction are largely related to the Turkish economy's need to attract FDI in order to stave off the symptoms of its looming account deficit. In addition to the usual threat posed by cheap imports from China, one of the main causes of Turkey's robust account deficit has been the AKP's legacy of generous public spending. It should also be noted that this spending has made a significant contribution to the party's popularity in certain parts of the country.

Economic issues are perhaps of highest importance to Turkish voters and may have in fact been responsible for the AKP's resounding victory in the July 2007 referendum. It is therefore the opinion of this observer that any attempt to predict how the AKP will weather the current legal storm must be considered in the context of economic factors.

If Turkey's constitutional court decides to advocate the closure of the AKP on grounds of anti-secular activities, members of every single part of the Turkish political and religious spectrum will face a great economic punishment. The reasons for such a forecast are in fact quite simple.

1.) Any legitimate sympathy Turkey in fact has in the EU political universe vis a vis its EU candidacy will vanish over night. Without even the lingering possibility of EU membership, Turkey will become a much less attractive place to a certain breed of foreign investor. Whether Turkey truly needs the EU from an economic standpoint is separate question. What is certain is that "perceptions" of Turkey among investors will be damaged if the EU has reason to distance itself.

2.) While the AKP has probably been partly responsible for the considerable amount of Arab investment from Gulf sources that has poured into Turkey over the course of its political tenure, its actual skill for "economic management" can be isolated to a single issue: stability. As an emerging market prone to natural disasters, military coups, terrorism activity, and domestic turmoil of many kinds, the AKP has been very adept at keeping a lid on Turkey's eternally boiling pot. By Turkish standards, the political scene has progressed quite smoothly over the past couple of years and this has emboldened investors to make greater financial commitments.

3.) Closure of the AKP would require new elections and the creation of a new government. Assuming economic conditions slide as a result of the political turmoil and the EU chooses to take a step back from Turkey, it is quite likely that the Turkish public would turn inward. An introverted Turkish public might very likely gravitate towards the right-wing nationalist arms of one Devlet Bahçeli, the head of the MHP or Nationalist Movement Party. Having won 14.3% of the electorate in the July 2007 vote, MHP might prove to be the biggest beneficiary of a court ruling against the AKP. The social turmoil that this gravitation to the right would entail could become extremely unpleasant and would further stall the country's economic progress.

It is unlikely that the AKP will face closure or that any of these doomsday scenarios will see the light of day. Turkey can nonetheless grasp this moment in its political history as an opportunity to evolve its democratic institution to its next possible level of development.

It may indeed be true that the AKP is at fault for transgressions against secularism. However, Turkish proponents of secularism and other supposed "pro-Western" elements of society would be remiss for decisively terminating the life of a democratically elected political party. While Turkey is a democracy in practice, it remains reluctant to emotionally embrace the kind of pluralism that characterizes the world's strongest democracies. Very few people in Turkey seem to sufficiently trust their government in order to hold the expectation that government will protect the rights of individuals on any end of the political spectrum. It is for this reason that most secular Turks consider it unthinkable for the AKP to protect the rights of women who chose not to wear the headscarf. Conversely, religiously-observant Turks continue to fight for equality in Turkish society, as evidenced by the removal of the law against women wearing head scarves on the grounds of Turkish universities. It is quite unclear whether this particular reality concerning head scarves in universities will endure beyond the era of the AKP.

If the country's constitutional court were to decide to reprimand as opposed to ban the AKP, democracy in Turkey will have taken a giant step forward. By allowing the AKP to persist, albeit under certain constrictions that force it to better "respect" the secularist framework of society, Turkish politics would have gained an important new dynamic. Such a decision would help establish an environment in which the country's emerging religiously-minded values can coexist with its traditionally secular mores and legal framework. In the long term, this is something for which both the EU and foreign investors would enthusiastically cheer.

Armenia's Presidential Election and its Ramifications for Relations with Turkey

Armenia's presidential election has finally passed after simmering for much of the month of March. For a synopsis of the events before and after the election, please refer to this article in the Diplomatic Courier, or read the following open to an article from the February 21st Economist.

ELECTIONS in former Soviet republics rarely yield surprises. The incumbent wins; the opposition cries foul; it takes to the streets. The presidential vote in Armenia on February 19th ran true to form. Serzh Sarkisian, the prime minister, won 53% of the vote, enough to avert a runoff with his main rival, Levon Ter-Petrossian, with 21%. Mr Ter-Petrossian, a former president, said Mr Sarkisian had stolen the vote even before ballots were counted. Independent observers talked of ballot stuffing and intimidation.

It will probably be some time before elections in the Caucasus shed their flair for the dramatic. Even neighboring Turkey, a "pillar of political stability" for over half a decade, is giving the region a run for its money. The possibility of dismantling a ruling party due to alleged anti-secular transgressions would make any intrigue from the Caucasus look like a cheap B-movie.

Whether fraudulent elections or economic concerns, Armenian political debate rarely ventures far from a number of issues related to the country's intimidating western neighbor. Optimists could argue that the newest selection of political personalities in Armenia may indeed prove to be the necessary ingredients for improving relations between Armenia and Turkey. Other than the long-standing quarrel surrounding the Armenian Genocide, one of the most important issues defining poor relations between the two countries is the contemporary dispute concerning Nagorno-Karabakh.

The current conflict that defines this small region dangling between Armenia and Azerbaijan has its origins in the early days of the Soviet Union, and includes an intriguing historical connection to Turkey. Before the Bolsheviks swept through the Caucasus in the early 1920s, the Nagorno-Karabakh region had been traditionally inhabited by both ethnic Armenian and Azerbaijani peoples. It had therefore been a point of contention during the short life-span of the newly minted states of Armenia and Azerbaijan. With the arrival of the communist era in the Caucasus, this conflict would be subsumed under the greater strategic affairs of the Soviet Union.

In 1923 Stalin, who was the Soviet commissar of nationalities at the time, decided to cede Nagorno-Karabakh to Azerbaijan as an "autonomous oblast". According to a biography of Georgia's most famous son by Robert Service, Stalin made this decision in order to curry favor with Ataturk's Turkish Republic, which apparently maintained a keen interest in "Turkic affairs" even at that early time.

Following the collapse of the Soviet Union, Nagorno-Karabakh experienced a string of bloody conflicts between Azerbaijani and Aremenian military and paramilitary forces. While Armenia received the bulk of its military support from Russia, the comparatively ill-equipped Azerbaijani forces are believed to have been supported by non-Azerbaijani Muslim mercenaries. With Armenia emerging as the nominal victor of the conflict, Turkey has chosen to isolate Armenia politically and economically, possibly with the ulterior motive of deflecting attention away from the Armenian Genocide or inflicting punishment as a result of public-relations discomfort it has caused the Turkish state.

While the fall of the Soviet Union involved a very unpleasant reality check for all those involved in the communist market experiment, the last decade has seen many of these countries make economic progress quite often due to their energy reserves. Over 15 years after the fall of the Soviet Union, the circumstance of the Armenian economy remain dire when compared to any of its neighbors. The financial and travel blockade imposed by Turkey and Azerbaijan is largely responsible for its lack of economic progress. Like the economies of its neighbors, the Armenian market and political landscape is riddled with corruption. When considering the question of Armenian-Turkish relations in the near future, it appears that this issue of corruption, particularly as it relates Nagorno-Karabakh, is of great relevance.

The following Voice of America (VOA) article demonstrates the degree to which politicians hailing from Nagorno-Karabakh maintain a stranglehold on the Armenian political process.

Here is a selection of the article's most poignant ideas:

Aram Abramian, editor in chief of the Yerevan-based daily newspaper "Aravot" and who has roots in Nagorno-Karabakh, says Kocharian and Sarkisian brought in associates from the territory who took over state posts and dominated the business elite.

"There are 20, 30 families -- oligarchs -- people who, thanks to the opportunities that are provided to them by the authorities, became rich, and have wide possibilities of avoiding taxes and custom fees," Abramian says, adding that well-connected moguls were able to gain "monopolies" over fuel, sugar, and other commodities.

Among those identified by analysts as part of the Karabakh clan are Kocharian's son, Sedrak, who reportedly controls mobile-phone imports; Barsegh Beglarian, who dominates the gas-station market; Mika Bagdasarov, who controls oil imports and heads the national airline; and Karen Karapetian, head of the Armrusgazard gas company, a joint venture with Russia's Gazprom.

If the ideas advanced by the VOA article are indeed true, it is hard not to be pessimistic about the future of Nagorno-Karabakh issue and, as an extension, the future of Armenian-Turkish relations. The conflict in Nagorno-Karabakh legitimates the political class currently running Armenia. In particular, it distracts the electorate away from the single biggest issue affecting their lives on a daily basis - a sickly economy. As the VOA article suggests, what motivation does Armenia's ruling Nagorno-Karabakh cabal have to resolve the conflict and further improve relations with Turkey in order to resuscitate the economy? A more free-market economic system, involving trade and investment with Turkey, would only undermine their current political and economic existence as it would empower potential opponents.

Turkey, for its part, should also be expected to engage the Nagorno-Karabakh with a more constructive attitude. This is especially the case in light of its role as the region's most important power broker after Russia and its aspirations to join the European Union as a valuable diplomatic partner. Prior to its construction, Turkey offered to route the Baku-Tbilisi-Ceyhan pipeline through Armenia, allowing its neighbor to collect the lucrative transit fees, in exchange for recognition of Nagorno-Karabakh as a part of Azerbaijan.

Such a swap would have merely fattened the wallets of the corrupt. More importantly, it would have done little to address the underlying issues stoking the Nagorno-Karabakh conflict - disputes between two distinct ethno-religious groups wanting to living on the same plot of land. While a more constructive approach must be demonstrated on Turkey's part, such an expectation may prove foolish. The rising levels of ethno-nationalistic sentiment that could very well mark the post-AKP era of Turkish politics render the possibility of reconciliation with Armenia increasingly unlikely.

Regardless of Turkey's role, there is a much greater motivation for Armenia to resolve Nagorno-Karabakh compared to Turkey considering Armenia's desperate need to reintegrate itself into the regional economy of Eurasia. Armenia cannot afford to be locked in its current economic ice age and slip further behind its neighbors in terms of economic development. Unfortunately, there does not appear to be a clear sign of when the country's democratic process will be capable of overcoming Armenia's suffocating political-economic corruption.

Further Reading: "Made in Turkey" - but for how long?

The following article from the Economist is as a very useful extension of this website's discussion of the Turkish economy's future. In particular, the article makes a number of revealing observations concerning foreign direct investment not necessarily creating as many jobs as one might expect, as well as outlining weaknesses in the country's widely championed manufacturing sector related to its emphasis on assembling components made in other countries and its labor costs.

Snowsuits and Headscarves

A free, throw-away commuter newspaper made its debut in Istanbul during the past week and its timing could not have been more auspicious. As far as this observer is aware, the paper's debut has coincided with an event that has not occurred since the Czarist Russian offensive through the Caucasus during WWI - the last time Turkish soldiers were thrown into a mountainous winter campaign beyond the borders of Anatolia. Turkish military sceptics, including this observer, were generally surprised to learn that the military had chosen to undertake a winter operation in light of the added level of difficulty. The Turkish media has accordingly taken great pains to capture the exploits of the military's adventure into snowy northern Iraq. Photos of Turkish soldiers wearing white snowsuits have been the highlight of the media's coverage partly to emphasize the operation's degree of daring and surprise, but also due to the simple fact that the Turkish military has not allowed sufficient media access for the creation of alternative images.

The winter surprise attack on PKK positions in the Qandil Mountains region in northern Iraq has thus far yielded two main story lines in the international media and in the Turkish media to a lesser extent. First, there appears to be a general level confusion concerning what the Turkish military has actually accomplished. While body counts of dead "terrorists" as well as Turkish "martyrs" are provided in order to give the public a sense of progress, there does not exist a single source beyond the Turkish military's website or a press conference with General Büyükanıt to corroborate or qualify such statistics. (What delicious irony that the Turkish military, the country's staunchest defender of secularism, has appropriated an Islamic term to describe its combat dead.)

In addition, there appears to be a second point of confusion surrounding the question of why the Turkish military has maintained such a media freeze over the operation. This is particularly bewildering in light of the military’s comments that the operation has specific objectives, which are supposed to be limited in duration. It is unclear what the military has to gain from this approach.

It is still quite likely that the Turkish military will reveal the scope of military achievements for its latest operation once Turkish forces begin to conduct their pullout. The military seems to have so far maintained the view that it is turning the winter elements to its advantage with the added help of the element of surprise. The snow will hamper the Turkish forces, but it will also impede PKK fighters from fleeing the scene of attack. However, this observer also wonders whether PKK forces have truly decided to sit around the camp fire holed up in the snowy Qandil mountains for an entire winter season, as opposed to settling at lower and warmer elevations for the winter while waiting for the Turkish military to venture out in the spring. Whatever is the case, the Turkish military will undoubtedly label its operation a success whenever the time comes to make such announcements.

Another point worthy of consideration is to question whether Turkey’s winter offensive was truly intended to have decisive military implications. Rather, it seems quite possible that it was conceived for sheer political convenience. This view comes to mind when one considers the dominant fashion statements plastered across the entire spectrum of the Turkish media over the last eight days - either soldiers in white snowsuits or female university students wearing headscarves.

Combat operations against the PKK have always functioned as a unifying mechanism in Turkish society. This is no more apparent than when viewing the constant footage on all national news broadcasts that depicts the official funeral ceremonies or the grieving families of the Turkish combat dead. Faced with the incredible degree of polarization that has resulted from their successful initiative to legalize headscarves for women attending Turkish universities, it seems logical for Erdoğan and Gül to have encouraged the military to trudge around in the snow for a few weeks. A winter operation would distract the public away from its social crisis since it would remind them that there exist more critical and immediate threats to the livelihoods of the Turkish people compared to the headscarf. Judging by the fact that combat operations have been constantly featured as the lead story on the evening news during the past week, their tactic seems to have worked.

Further Reading: "Minority Rules"

Meline Toumani's New York Times Sunday Magazine article, "Minority Rules", is simply phenomenal. Her account of the contemporary situation of Kurds in Turkey, which is based on an interview with Diyarbakır's former mayor, weaves together all of the most necessary threads to describe the current state of affairs.

Click here, or

nytimes.com/2008/02/17/magazine/17turkey-t.html?ref=magazine

Toward the conclusion of her article, Toumani admits to her Armenian heritage. Sadly, this will most likely result in her article being discredited and ridiculed by many circles in Turkey. Even more criticism will be aimed at her choice to feature Diyarbakır's mayor, whom Ankara sacked after Toumani first conducted her interview.

Head Scarves and Socio-Economic Mobility in Turkey

Few individuals in Turkey or beyond lack an opinion about the AKP's proposal to give young women attending university the legal right to wear head scarves in university facilities. The mere political progress made by this reform convinces many of the country's secular citizens that their country is five years away from resembling Iran - a type of doomsday "back to the future" scenario considering the last great Islamic revolution was in 1979. Western voices, which laud the democratic or Western aspects of these impending reforms, are chastised by the secular elites for not understanding the critical threat of "politicizing" religion in such an important public sphere of Turkey's legally secular society. These elites furthermore derive a feeling of abandonment and perhaps betrayal from the West’s tendency to cite Turkey as an example of the potential for democracy to cohabit with Islam.

In addition to the rhetoric of politicians, Turkey’s secular community has made most of the headlines with flag-waving political demonstrations. There nevertheless exists a less publicly assertive portion of Turkish society, which is a less-widely reported, but is nonetheless growing in importance for the Turkish social landscape. This segment is composed of individuals who are less concerned with issues such as secularism or political symbolism. They desire equal opportunities for religiously observant woman, who want to remain faithful to the commandments of their religion while in the act of receiving a Western-style education in Turkey's universities.

Arguments concerning the validity of religious symbols have enveloped the domestic and international discussion of head scarf reform in Turkey, obscuring other extremely important and equally symbolic aspects of the political initiative. Not simply an issue of religious political symbolism clashing with the original secular values of the Turkish Republic, the crisis over the head scarf is perhaps more importantly symbolic of frictions related to the socio-economic evolution that defines modern Turkey.

As is the case in many fledgling nations, accumulating wealth, increasing one's standing in society or simply creating a sense of security have all been a function of a citizen's proximity to the state. For the first five or six decades of the Turkish Republic's economic history, the state was almost the exclusive orchestrator of economic development in Turkey. Foreign investment was non-existent, entering the economy only by way of various aid packages from the United States and other allies in the West.

The development of many of the substantial conglomerates, which currently rule Turkey's modern economy, accordingly followed this rule of proximity to the state. Vehbi Koç, the founder of Koç Holding, was a mere grocery owner in Ankara during the 1920s. Tapped by Atatürk to become one of Turkey's early captains of industry, his descendants now control an empire of 98 companies that ranks 358th in the Fortune Global 500 of 2006. While the Koç story is extraordinary, it is nonetheless indicative of an economy strongly influenced by the state. Successful participants in Turkey's private sector, in addition to generations of Turkey's armed forces and other state organizations, traditionally acquired great wealth or more moderate financial security due to their affiliation with the Turkish state. Such affiliation naturally included their adoption of state-sponsored social mores - unabashed secularism chief among them.

Free market reforms during the 1980s, which were implemented under the leadership of then Prime Minister Turgut Özal, would prove to have a dramatic, and perhaps unintended, influence on the socio-economic dynamics of Turkey. Privatization of state assets allowed the Turkish economy to develop in new ways and slowly increase its interaction with global markets. This in turn paved the way for a customs union with the European Union in the mid-1990s, greater foreign investment, and ultimately the economic conditions in which a non-state affiliated lower-middle and middle classes could emerge.

This phenomenon was marked by free market economic growth that was not restricted to the traditional Turkish industrial centers such as Istanbul, Bursa or Ankara. During the 1990s and most prominently since 2001, unprecedented levels of prosperity, which were still extremely low by European standards, were also felt in traditionally underdeveloped places like Gaziantep, Kayseri and Konya. Business Week-type clichés such as "Anatolian Tiger" were accordingly coined to describe a phenomenon that would not have been possible two decades earlier. Turkey's president and AKP leader, Abdullah Gül, started his political career in Kayseri. Much of the AKP's current domestic political punch is thanks to the influence of wealthy businessmen from Kayseri and other regions in Anatolia that had been neglected by economic development prior to the free market reforms.

From the perspective of social values, these traditionally poor areas of Anatolia had understandably not bought into the mores of Ataturk's republic quite as enthusiastically as the more economically developed centers. Moreover, the social values and political concerns that had always held sway in these areas did not necessarily evolve due to the greater levels of economic development. Rather, they gained a more prominent political voice since they no longer represented a strictly poor cross-section of society as had traditionally been the case. With the gradual economic development of a non-state affiliated middle class in interior Anatolia starting in the 1990s, values common to interior Anatolia would come to develop a stronger political voice at the national level.

The development of the poorer regions in Anatolia has been a priority of the Turkish Republic since Atatürk's time. While it is true that the state did invest in these regions, it was ultimately capitalist free market actors that would appear to have generated the greatest momentum for socio-economic mobility. While Atatürk no doubt hoped that such an "Anatolian Tiger" renaissance would some day occur in Anatolia, it is doubtful that he would have appreciated the interior Anatolian social values that it has assisted in bringing into the national political arena.

It is ultimately within this framework that one can further consider the great paranoia of the secular Turkish elites concerning the current head scarf crisis. In particular, the emergence of the head scarf issue serves as a reminder to Turkey's secular elites that conservative social-values no longer exclusively belong to the domain of the poor in interior Anatolia. Rather, these values are espoused by Turks, who are steadily growing into sizable middle classes, and who consequently have a much greater will and ability to realize their social interests through politics. While still solid, the secularist economic power base established by Atatürk maintains a weakening grip on the direction of the country.

Further Reading: Headscarves, generals, and Turkish democracy

The following article is an exhausting, yet extremely comprehensive, sketch of the most important issues in contemporary Turkish society. The author, Niels Kadritze, is the editor of the German edition of Le Monde Diplomatique. While Mr. Kadritze's essay is somewhat lacking in terms of the organization of ideas, the quality and range of his observations are absolutely first rate.

www.eurozine.com/articles/2008-02-01-kadritzke-en.html

Turkey's Next Economic Horizon: reviewing financial indicators

At the beginning of this past week, the world was gripped by the imminent possibility of global financial Armageddon. While the global markets have encountered and overcome small patches of turmoil over the last eight months, only this most recent turn of events has caused the Turkish media, government and upper-classes to immerse themselves in an open round of soul searching. What was once a whisper or secondary thought is gradually becoming the palpable hum of financial anxiety - a reality with which Turkey is extremely familiar.

Over the past few years, Turkey has emerged as one of the global stars of foreign direct investment (FDI). The Turkish lira has reached unprecedented levels of strength, allowing Turks to better cope with rising energy prices, experience unprecedented buying power in the form of cheap goods from China and for wealthier Turks, it has given them more confidence to purchase foreign delicacies such as sunglasses from Gucci. Whether one is a bus driver in Malatya or a bank employee in Izmir, Atatürk's famous saying Ne Mutlu Türküm Diyene (How happy is he who says "I am a Turk") has acquired a new meaning for today's Turkish consumer.

Turkey's AKP-led government continues to maintain a very confident demeanor. The World Bank released a very favorable review of Turkey's GDP prospects in 2008 and investors still show interest despite the looming global financial turmoil. While this observer does not mean to suggest that Turkey's economy will abruptly dive into utter chaos as a result of a global economic downturn, it is important to remember that multiple years of robust growth have produced a lot of fat, which a downturn will ruthlessly trim away. It is only after this inefficient excess has been exposed and removed, that one can truly evaluate the AKP-administered economic renaissance in Turkey.

The following are a number of noteworthy Turkish financial statistics and remarks for consideration. Many of the initial comments were taken from this TDN article.

Year-to-date current account deficit: Rises by 11.6% to $32.758bn in November 2007. The figures for the January-October period were adjusted from $29.06bn to $29.48bn.

12-month trailing current account deficit: Rises to $35.74bn in November from $35.16bn in October 2007 according to Türkiye Ekonomi Bankası (TEB).

Sertan Kargın, chief economist at TEB, said, “We are not concerned about the current account deficit thanks to robust Foreign Direct Investment (FDI) stock, record high foreign exchange reserves, and solid non-debt creating capital inflows.”

TEB key factors driving the current account deficit: “The widening trade gap was mainly due to higher import substitution in intermediate goods, the overvaluation of the Turkish lira, record high oil and commodity prices, private sector capital investments, and the spillover impact of fiscal loosening on domestic demand.”

Global slowdown according to Kargin of TEB: Global growth conditions are the key risk for Turkey’s current account outlook, according to Kargın. "In our view, a consumption-led global slowdown is creating a risk on the current account balance as Turkey’s foreign demand sensitive export industries account for 60% of total exports," Kargın said. "Furthermore, exports are highly sensitive to foreign demand rather than the exchange rate."

FDI in 2006: Almost $20bn in FDI in 2006.

Projected FDI for 2008:
Kargın of TEB: “In 2008, we expect Turkey to raise an additional $20bn to $25bn through FDI, and $4bn to $5bn via global investors’ equity and Turkish lira debt instrument purchases.”

Özgür Altuğ, chief economist, Raymond James, Istanbul: Turkey will probably get $23bn of FDI in 2008. That will finance less than half of a current account gap that’s likely to swell to more than $50bn.

Government Assets and FDI: The recipient of almost two-thirds of foreign investment will likely be the sale of government assets, such as banks, power generation and distribution companies according to Altuğ.

It has also been reported in recent months that the government is trying to accelerate the pace of privatizations.

Sovereign Wealth Funds and FDI: "In the wake of these developments, Economy Minister Mehmet Şimşek traveled to Dubai yesterday to encourage the Saudi Arabia Public Investment Fund and other sovereign wealth funds to increase their investments in Turkey." (For more, please click here.)

"Government officials had previously said Turkey could attract around $10bn in investment from the Gulf countries, excluding the new Saudi Arabia Public Investment Fund, to the real estate, tourism and financial sectors as well as to privatizations." (For more, please click here.)

TUSIAD Remarks: According to the chairwoman of Turkish Industrialists and Businessmen's Association (TUSIAD), Arzuhan Dogan Yalcindag:

“Our growth has slowed down to a large extent and inflation has a relatively upward trend,” she said during an address to a TUSIAD general assembly meeting in Istanbul. “The unemployment rate has begun to increase with high current deficit figures and damaged financial discipline. And unfortunately that is how we are bracing for the upcoming global wave.”

“The world is closing in to a global crisis and 2008 will be a difficult year for Turkey. We need to concentrate all of our energy to economy.” (For more, please click here)

Perhaps the most remarkable issue to emerge from this small assembly of viewpoints is the degree of urgency and weight shouldered by FDI regarding the stability of Turkey's economy in 2008. Turkey needs FDI in order to address its great imbalances in trade. The fact that a government official is openly lobbying for a greater share of the petrodollar FDI pie is rather telling. It also confirms the degree to which the AKP's economic success has been linked to their close ties with the more religiously conservative, petroleum-rich countries. (For further analysis of this political development, please click here.)

Another point worth considering is the two-thirds figure for the amount of total FDI directed towards the sale of state-assets. It is probably quite normal for an emerging market economy like Turkey to attract the majority of FDI in this matter. However, at some point the number of state companies available for auction will dwindle. Ideally, the newly-privatized and traditionally private firms will generate enough new growth to create the market enthusiasm necessary to attract sufficient levels of FDI. However, the transition for state-asset oriented FDI to ultimately represent the minority of overall FDI in Turkey, instead of the majority, could prove quite difficult in the near term. This will be especially true if the global economy stumbles in the next couple of years and investors decide to retreat to economies with less risk. No wonder Turkey is so keen to attract a portion of the more than $1trn on the table for Saudi Arabia's new sovereign wealth fund.