Recep Tayyip Erdogan had never even heard of a pastor from North Carolina called Andrew Brunson until last spring, according to one senior Turkish official. It was during a briefing ahead of a visit to the White House, the official claims, that the Turkish president first encountered the name of the evangelical preacher who has been trapped in the Turkish court system and whose fate has triggered a diplomatic meltdown, thrust Turkey into a currency crisis and sparked fears of global contagion.

“The idea that he is somehow responsible for every single case like this is ridiculous,” says the official.

The government insider uses this story to challenge the notion that Mr Erdogan — who has dominated Turkish politics for 16 years and in June took to the helm of a powerful new executive presidency — has power over every institution in the country.

Yet that is exactly the charge laid against him by his opponents. In fact, they argue, many of the root causes of the turmoil that has gripped the country can be traced back to the steady erosion of its institutions, disregard for the rule of law and the concentration of power in the hands of one man.

(FILES) In this file photo taken on July 11, 2018 (FILES) In this file photo taken on July 11, 2018 US President Donald Trump (L) talks to Turkeys President Recep Tayyip Erdogan (R) as they arrive for the NATO summit, at the NATO headquarters in Brussels. - The US warned Thursday it would levy more sanctions on the troubled Turkish economy if Ankara does not soon release a jailed American pastor described by President Donald Trump as a
President Erdogan (right) has responded to the events of recent weeks by accusing Donald Trump (left) of waging 'economic warfare' against an ally © AFP

“The pastor Brunson case is just one example of the dysfunctional nature of the Turkish judiciary,” says Faruk Logoglu, a former Turkish ambassador to Washington and a senior member of the main opposition party. Mr Brunson has been accused of espionage and abetting terrorists — charges he calls “slander”. “If there had been a speedy trial, a proper trial, maybe he would have been convicted — I don’t know. But the case would have been closed.”

Daron Acemoglu, an MIT economist and co-author of the book Why Nations Fail, argues that the origins of a currency crisis that has seen the lira plunge by a third against the dollar this year, also lie in the disembowelling and disempowerment of bodies such as the central bank. Mr Acemoglu says that they are vital to “create the right kind of economic dynamism and create the buffers for any kind of fluctuations”. He adds: “The buffers are not there in the Turkish case.”

In a symbol of the power-accumulation that has taken place, the official at the sharp end of the economic turmoil over the past ten days has been the man Mr Erdogan appointed last month to be treasury and finance minister — his 40-year-old son-in-law Berat Albayrak.

Right, Mehmet Simsek, whose presence in the government soothed international investors' nerves. Left Berat Albayrak, the president's son-in-law, whose appointed to head the finance ministry was heavily criticised. © FT montage; Bloomberg

The Turkish lira had been steadily declining this year even before the crisis that erupted when Donald Trump announced sanctions at the start of August on a fellow Nato member state in a bid to force the release of the jailed pastor. But the extreme swings since the row began — falling as much as 17 per cent in a single day last week — have wreaked havoc.

Warehouses filled up with stock as businesses struggled to set prices. Families cancelled holidays because they could no longer afford to buy euros. Even Turkey’s football clubs were affected, in an echo of the problems facing Turkish companies struggling with foreign currency debt. “The top players’ salaries cost €2m or €3m a year,” said a panicked executive at one of the country’s biggest teams. “All our revenues are in lira.”

For years Turkey was held up by some investors as a success story. Mr Erdogan, whose Justice and Development party (AKP) swept to power in 2002, sought to protect his party from secularists opposed to its Islamist roots by casting himself as a democrat and pro-business reformer who was open to the west.

Even AKP critics concede that, in the early years, the government allowed a flourishing debate on minorities and made overtures to the EU. It brought down inflation that was running at 45 per cent the year it took power and imposed fiscal discipline. Money flowed in. At its 2007 peak, foreign direct investment reached $22bn. The economy created jobs and brought new-found prosperity to millions, especially those from the country’s poorer or more marginalised segments.

Over time, however, Mr Erdogan has faced accusations of growing authoritarianism and intolerance towards those outside his core support base. Emboldened by successive election victories and shaken by attempts to topple him by the military and the courts, he moved to tighten his grip.

His solution to Turkey’s politicised institutions, critics say, was to fill them with his own people. Mr Erdogan himself admits that he empowered the Gulen movement, a secretive network of followers of a Turkish Muslim cleric, allowing the rapid promotion of its members in the police, the courts and the armed forces. They later fell out and the Gulen movement was blamed for the violent 2016 coup attempt, prompting a vast purge which has seen 130,000 sacked from state jobs.

Turkish President Recep Tayyip Erdogan delivers a speech during a Democracy and Martyrs' Rally in Istanbul, Sunday, Aug. 7, 2016. Turkey will continue fighting whatever powers seek to undermine the government, President Recep Tayyip Erdogan vowed Sunday as he addressed a massive flag-waving rally in Istanbul in the wake of the country’s abortive July 15 coup. (Kayhan Ozer/Presidential Press Service via AP)
President Erdogan's addresses a crowd after an abortive coup attempt in August 2016. The subsequent crackdown consolidated his power © AP

Over time, economic discipline also began to unravel. Mr Erdogan, who since 2007 has faced nine local, parliamentary or presidential elections and three referendums, ignored calls for new reforms and pushed instead for vote- winning growth. He achieved it — with the exception of 2008-09, gross domestic product growth has averaged 7 per cent.

But over the past decade, much of the growth has been powered by cash that flooded the markets after the global financial crisis. Instead of funding investments in productive, high-tech sectors that could boost Turkey’s exports, the money was funnelled mainly into construction and consumption. When Mr Erdogan took power there were 53 shopping malls in Turkey, according to Turkey’s Council of Shopping Centres. Today that figure is 403.

One result has been an increase in inflation. Another has been a surge in imports, causing a larger trade deficit that needs to be financed with inflows of foreign money. With foreign direct investment down sharply in recent years, most of that funding comes from “hot money” flows that can change direction sharply at a moment’s notice.

ISTANBUL, TURKEY - AUGUST 15: People shop at the Zorlu luxury shopping mall on August 15, 2018 in Istanbul, Turkey. The Turkish Lira recovered to trade at 6.1 USD despite President Erdogan announcing Turkey will boycott U.S. electronic goods, including Apple products, and raised tariffs on imported products from the United States including luxury goods, passenger cars, tobacco and spirits. The Trump administration has demanded that American pastor Andrew Brunson be released immediately and hinted at further economic measures against Turkey if he is kept under house arrest. (Photo by Chris McGrath/Getty Images)
The Zorlu luxury mall in Istanbul. The number of malls in Turkey has vastly increased as President Erdogan delivered economic growth © Getty

These factors have made Turkey one of the economies considered most vulnerable to rising rates as the US Federal Reserve and other central banks unwind a decade of monetary stimulus.

For much of the past decade, the presence of people like Mehmet Simsek, a former Merrill Lynch banker who held the finance brief from 2009 until this summer, helped to soothe investor concerns. Party insiders, however, claim that Mr Erdogan has grown more domineering and more paranoid over the years and increasingly surrounded himself with loyalists and family members. Last month, after winning five more years in office, Mr Simsek left the government and Mr Erdogan put his son-in-law in charge of the economy.

Then came a huge shock to the system with the announcement of US sanctions on Turkey as long-simmering tensions between the two countries came to a head. As Mr Trump and Mr Erdogan locked horns, Turkish assets suffered a heavy sell-off. Although it has recovered some ground from its lowest point, the lira is down 38 per cent against the dollar since the start of the year.

Investors clamoured for a drastic interest rate rise to stem the crisis. But Mr Erdogan publicly restated his infamous opposition to high rates, deriding them as a “tool of exploitation”.

Analysts believe Mr Erdogan’s influence has grown as his powers have increased. In May, he sparked a smaller currency crisis by telling London financiers that he would take greater control of monetary policy after impending elections. His victory in the June poll triggered the transition to a new executive presidential system that gives him the power to directly appoint the governor of the central bank.

Dani Rodrik, a Turkish economist at Harvard, says that the problem is not authoritarianism per se, given that some authoritarian countries have well-run economies. The issue is, he says, “the subjugation of every aspect of governance to the political aggrandisement of one man, come what may”.

Ozgur Yasar Guyuldar, head of emerging markets sales at Austria’s Raiffeisen Centrobank, draws a comparison with Russia, where President Vladimir Putin has “kept his full faith” in the central bank governor and allowed her to take steps against inflation. The beleaguered rouble has performed better than the Turkish lira since March 2014, despite the imposition of US sanctions from that date. Mr Guyuldar says that Turkey should learn from Russia’s experience.


Others question whether Turkey has the expertise to handle the crisis. They say that the steady politicisation of institutions, which accelerated after the coup attempt, has damaged its ability to respond to the unexpected.

Wolfango Piccoli, co-president of the consultancy Teneo, believes institutional competence has declined. “In an environment where you need a credible, multiyear plan [to tackle the crisis], there is a question mark as to whether or not Turkey has the right people in office to draw up this plan,” he says.

The government bridles at criticism of the purges. Ruling party officials say they have confronted a series of extraordinary threats. Foreign minister Mevlut Cavusoglu said last month that Europeans still did “not fully understand” the trauma that Turkey went through during the coup attempt.

Some highly talented bureaucrats do remain, say those who deal regularly with ministries and agencies. This week, the banking regulator sought a creative alternative to an interest rate rise by curbing short selling — a measure that helped the lira to rise for three days. But investors say that such measures are only a sticking plaster. On Friday, the currency came under fresh pressure amid mounting concerns of more US sanctions.

Mr Erdogan has responded to the events of recent weeks by accusing Mr Trump of waging “economic warfare” against an ally, a charge that fits neatly into his long-held narrative that western powers are trying to destroy the country. One of the ironies of the US president’s aggressive actions, argues Mr Acemoglu, is that the Turkish president now has a scapegoat for a crisis that some economists see as largely self-inflicted. “It is playing into his rhetoric,” he says.

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