Erdoğan gift to sanctions-busting banker reflects Turkey’s economic malaise

Mehmet Hakan Atilla, jailed in the United States for breaking sanctions on Iran, made his first major public appearance as the head of the Istanbul Stock Exchange this week.

The former deputy CEO of Turkey’s state-run Halkbank gor a hero's welcome on his return from the United States in late July after spending more than a year in a Pennsylvania jail. Much to the Turkish government’s anger, Atilla was convicted on Jan. 3 last year of helping to funnel billions of dollars through the U.S. financial system in order to bypass sanctions on Iran.

Atilla, now sporting a greying beard, appeared before Turkish television cameras on Wednesday at the Bonds, Loans and Sukuk Turkey Conference in Istanbul to announce a series of measures designed to strengthen Turkey’s capital markets. They included new foreign exchange contracts in the derivatives market and a new mechanism for interest rate swaps to help banks manage their finances.

Atilla’s conviction, approved by a Manhattan jury in a headline-grabbing trial, relied on evidence collated by New York prosecutors, the FBI and the testimony of Turkish-Iranian businessman Reza Zarrab, who turned state’s witness to claim that Atilla, with the approval of senior Turkish officials and ministers, helped him falsify gold and food trades to funnel cash to the Islamic Republic in return for embargoed oil. Zafer Cağlayan, economy minister at the time, was allegedly gifted luxury watches by Zarrab as a reward for his cooperation.  

President Recep Tayyip Erdoğan sought to quash the case by lobbying the Trump administration on numerous occasions. When the attempts failed, Erdoğan labelled the case a plot by Turkey’s enemies to undermine his government.

Atilla’s appointment as CEO of the Istanbul Stock Exchange appears to be a gift from Erdoğan for his loyalty during the U.S. legal proceedings. It was announced by Erdoğan’s son-in-law, Treasury and Finance Minister Berat Albayrak, last month.

But the decision has negative repercussions for Turkey’s economy. It has already prompted the European Bank for Reconstruction and Development (EBRD) to announce that it is looking for buyers for its 10-percent stake in the stock exchange. The EBRD is one of the biggest single investors in Turkey and has encouraged foreign banks to join it in placing capital in the country.

Image is critical when it comes to selling an economy to investors and Atilla’s hiring comes at a time when Turkey badly needs foreign cash. Once boosted by inflows of hot money and cheap credit, the economy has taken a severe knock after a currency crisis erupted in August last year.

Hakan Atilla
Treasury and Finance Minister Berat Albayrak welcomes Atilla upon his return to Turkey

Under Erdoğan, Turkey was once held up by foreign investors as a shining example of economic transformation among emerging markets. But they are now leaving the country in droves as Erdoğan’s increasingly authoritarian government reverses democratic reforms, jails its political opponents and robs the central bank and other economic institutions of their operational independence.

Since July, Turkey’s central bank has been led by another former Halkbank official, Murat Uysal, who led the bank’s investment arm. Uysal has slashed interest rates to try to help Erdoğan and Albayrak achieve their ambitious goals for economic growth. Uysal also introduced unconventional measures rewarding banks that lend more to the economy and penalising those who do not.

Turkey’s October military incursion into Syria has further unnerved investors. The invasion briefly sparked U.S. economic sanctions and sparked widespread condemnation from leading politicians in Europe, Turkey’s biggest investor and trading partner. It prompted German carmaker Volkswagen to suspend a plan to build a $1.1-billion factory in Turkey.

In the currency markets, many U.S. and European financial institutions have given up trading in the lira saying they cannot predict its price. The central bank and state-run banks are seeking to bolster its value through opaque cross-currency swaps, they say.

In another danger sign for investors, Turkey’s government is reportedly considering introducing legislation punishing economists, journalists and analysts who predict doom and gloom for the nation’s economy with fines or jail time. Prison sentences of up to 24 months are under consideration, a leading columnist reported last week.

Given Turkey’s strengthening system of one-man rule, investors would not normally bat an eyelid had Erdoğan appointed a favoured official of a state-run institution to head the stock exchange. But the hiring of Atilla, a convicted criminal incarcerated for breaking U.S. sanctions on Iran, is terrible PR for Turkey.

The system of trading in Turkey’s biggest companies – the stock exchange has a market capitalisation of more than $160 billion - is now overseen by a persona non-grata. It does not matter whether the charges against him were real or, as Erdoğan claims, pure fabrication.

The decision to hire Atilla appears at best highly ill advised. At worst, it is perhaps a reflection of Erdoğan’s disdain for the U.S.-led global financial system and the institutions that support it.

Turkey is currently spending hundreds of millions of dollars to turn Istanbul into a regional financial hub to rival Dubai. With Atilla at the helm of its chief institution, good luck with that.