Shadow Governance has released a report today entitled ‘All the ‘Cumhurbaşkanı Men’ – Political Exposure in Turkey’. The report identifies key commercial enterprises that have proven their loyalty to President Erdoğan by responding to his directives, in exchange for preferential access to state resources. As Erdoğan continues to accumulate powers in Turkey, essentially personalising the Turkish state, he is also – inadvertently – creating a patron-client system that will inevitably introduce new obstacles and integrity concerns for foreign investors.

The current political environment in Turkey has had a direct impact on the composition of the country’s economic elite. President Recep Tayyip Erdoğan and his AKP party have successfully navigated a road that has led to the de-facto personalisation of power, embodied in Erdoğan. This has, in turn, eroded political checks and balances, and is undermining accountability and transparency in both economic and political decision-making.

Whilst accumulating greater powers, Erdoğan has gradually surrounded himself with a group of loyal businessman. In exchange for their unbridled support – political and financial – they are granted preferential access to state resources. This has come in the form of lucrative government tenders, or in the form of certain protections from state institutions. In essence, Erdoğan’s emerging Turkey is beginning to take on characteristics of a typical patron-client state.

This development has resulted in growing political exposure when doing business in Turkey, or internationally with Turkish partners.

Although domestic interests remain the main source of income of the President’s men, they are also benefiting from growth in foreign markets; or, at least in countries that have been earmarked as foreign policy priorities for Ankara.  

Companies that have proven their loyalty to Erdoğan have benefited from the AKP’s policy of opening up towards its immediate neighbours, especially in relation to the Middle East. Notably, Turkish interests in the Middle East increased from U.S. $9 billion in 2012, to $64 billion by the end of 2016 (Al-Monitor, 13.12.2016). However, the performance of these companies in these new markets will depend on the status of the relationship between Erdoğan and other national leaders.

An Emerging Patron-Client State
Most of the businessmen that are part of Erdoğan inner-circle are the same as those investigated and detained during Turkeys now infamous 2013 corruption scandal. This scandal, which was epitomised by the release of a series of taped telephone conversations between the nation’s key political power players, uncovered the informal tools used by Erdoğan and the AKP to secure the loyalty of private sector actors – viewed as an important financial source for the party and personal interests.

The reaction of the government (i.e. Erdoğan and the AKP) to this scandal was to employ an aggressive wave of discourse against former political ally, the Gülen Movement (GM). This discourse legitimised purges within state institutions, and gave reason for reforming state structures – and gained even greater legitimacy after the failed coup attempt in 2016. Playing up potential conspiracies against the government, Erdoğan further justified his accumulation of power; as he set himself up as the only capable leader of saving Turkey.

Erdoğan’s position in Turkey was further entrenched in April 2017 after a referendum was called and a series of constitutional amendments passed that legitimised his position. Of equal importance, these amendments reinforced Erdoğan’s ability to manipulate state institutions, informally utilising them to further secure his influence and the interests of those who had proven their loyalty to him. Thus, the President’s higher degree of influence over the national budget, and his capacity to appoint 69% of the members of the High Board of Judges and Public Prosecutors (HSYK - Hakimler ve Savcılar Yüksek Kurulu) - the body that elects and admits new judges and prosecutors into the profession – are power tools that will increasingly be employed in the emerging patron-client state.  

These mechanisms of informal influence will merely be added to the ones previously used to distribute state resources, or to bestow other types of preferential treatment, to loyal businessmen. Other state institutions utilised informally to exert influence include the Housing Development Administration of Turkey (TOKİ – Toplu Konut İdaresi Başkanlığı), the Public Procurement Law, and the use of the Saving Deposit Insurance Fund (TMSF).

There is no doubt that the domestic and international interests of Erdoğan-linked businessmen are completely dependent on the political fate of the President.

Although the status quo remains relatively safe at home, this hypothesis can be illustrated through the fate of Turkish investments in Egypt. While Erdoğan enjoyed good political relations with Cairo under the Mohammed Morsi government, his loyal businessmen benefited from Egyptian government contracts. Once Abdel Fattah el-Sisi seized power and toppled the Morsi government, Turkish business interests seen to be allied to Erdoğan were frozen; resulting in an estimated loss of U.S. $5 billion (Hürriyet Daily News, 15.03.2017).

Identifying Cumhurbaşkanı’s Men
For the most part, the commercial elite currently linked to Erdoğan and the AKP held limited commercial influence before the AKP came to power. With the rise of Erdoğan, these businessmen have exponentially increased their trade volume and business interests – either through preferential access to state contracts/tenders, or by benefitting from AKP / Erdoğan patronage and protection from the country’s regulatory and law enforcement authorities.

Over this period, many key Erdoğan private sector allies have acquired – often through opaque and questionable transactions - the assets of Erdoğan’s political competitors, who often happen to be commercial competitors for them. In some key cases, these acquisitions have significantly increased the holdings of key pro- Erdoğan conglomerates.

One key group of commercial elite tied to Erdoğan are involved in a joint venture to develop Istanbul Grand Airport. This particular group of companies – detailed in our Report that will be released at the end of the week on Erdoğan’s circle of commercial elite - won the tender to construct and operate the Third Airport over a 25-year period, with a bid of U.S. $22.4 billion (FT, 15.11.2015).

Interestingly, all of the holdings in the joint venture were previously involved in various transactions with the government. But the most significant was their involvement in the creation of the so-called “pool media”. Five holdings took part in the acquisition of the Turkuvaz Media Group, allegedly created under the pressure then Prime Minister Erdoğan. It is widely believed that this consortium purchased Turkuvaz so that it could be used as a vehicle for Erdoğan and the AKP; in exchange for which the consortium members would benefit from preferential access to state tenders and concessions.

Conclusions
While Erdoğan has accumulated his political powers, he has simultaneously been securing a power base consisting of loyal members of the political and commercial elite. In many cases, it appears as though Erdoğan has secured loyalty for access to state resources; however, even here there are allegations of kick-backs either to the party or to particular persons.

Although the financial benefits being awarded to this group of preferred businessmen have been notable, their political exposure and expectations are not insignificant. It is these ties that threaten the future of their holdings, both at home and abroad.

At home, this group is feeling secure in the patron-client relationship being established. Not only are financial benefits being bestowed, but these businessmen are also benefiting from the protection of state institutions that are increasingly accountable – often informally – to Erdoğan. Abroad, the sustainability of their assets is tied to Erdoğan’s foreign policy and his ability to maintain positive political ties. As the case of Egypt has revealed, piggybacking on Erdoğan’s foreign ventures to win short-term commercial gains may in fact result in more significant longer term losses.

The future of all the ‘Cumhurbaşkanı’s Men’ is clearly tied to the fate of Erdoğan. As such, any change in Turkish domestic politics or foreign relations will place their assets in jeopardy. This makes dealing with ‘Cumhurbaşkanı’s Men’ a potentially risky venture; one that requires careful navigation to fully understand political exposure, and associated short and long term operational risks.