Turkey: Erdogan's New Elite

October, 2010 (Bloomberg Markets) -- The prime minister has spurred record growth, tamed inflation and fueled the rise of a new clan of businessmen.

As Nahit Kiler shows off an apartment on the 40th floor of his 54-story Istanbul Sapphire, the selling points include a sweeping view of the hills, minarets and waterways of this ancient city and, if one looks down, offices belonging to some of his business rivals.

His Kiler Holding, which built this $250 million blue glass tower, the tallest in Europe outside of Moscow, was primarily a grocery operator as recently as a decade ago. Since Recep Tayyip Erdogan became Turkey’s prime minister in 2003, beginning a period in which gross domestic product per capita has climbed by 150 percent, the company has expanded into construction, energy and tourism and tripled its revenue. “Today we are among the biggest companies in the construction sector,” Kiler says.

Two nearby buildings owned by the billionaire Sabanci family, central to the country’s economy for three generations, are now dwarfed by Kiler’s sparkling apartment and shopping complex, Bloomberg Markets magazine reports in its October issue.

Kiler Holding is one of a crop of companies, thriving under Erdogan, that threaten to overshadow the business dynasties that have dominated Turkey for decades. “We’ve seen a lot of them being very successful, even in sectors where they weren’t involved at all,” says Wolfango Piccoli, an analyst who tracks Turkish politics at Eurasia Group in London.

This new business elite has roots in Anatolia, the eastern portion of Turkey that’s part of Asia rather than Europe, and conservative religious views shared with Erdogan and his Justice and Development Party, or the AK Party, Piccoli says.

Party Founder

Erdogan founded the AK Party after his tenure as mayor of Istanbul was cut short by his conviction in 1998 for violating a prohibition in Turkey’s constitution against government promotion of Islam. He spent four months in prison, and his previous political party was banned. Now the AK Party is dominant, as seen in the success of a referendum to change the Turkish constitution. Erdogan rallied support for the proposal, which voters approved on Sept. 12 with 58 percent in favor and 42 percent opposed.

It helps to be pious when doing business with Erdogan’s government, says Hakan Kalkan, who helps oversee $1 billion in investments at Autonomy Capital Research in London. “Let’s say you want some business from the government; you’re going to have to act a little more religious now,” he says.

The success of these enterprises has begun to create wealth approaching that of older business dynasties such as the Sabancis, who own banks, textile makers and the country’s biggest cement producers, or the Koc family, which owns the country’s largest automaker.

Building Wealth

Nahit Kiler is worth $500 million to $750 million, according to an October 2009 ranking by Istanbul-based newspaper Hurriyet. Ahmet Calik, head of a privately held group of construction, textile and telecommunications businesses, was reported to be worth $1 billion to $1.5 billion.

Erdogan and the AK Party have been very successful in liberalizing the economy and in shifting the center of power in the business community, Kalkan says. “The entrepreneurs who got these trends right, they increased their wealth,” he says. “The status quo guys who were looking for government help lost.”

Calik Holding AS, managed by Chief Executive Officer Berat Albayrak, Erdogan’s son-in-law, has built power plants in Turkmenistan, bought a bank and cell phone company in Albania and invested in an oil pipeline project backed by the Turkish government. The company had $1.7 billion in sales in 2008, more than double its 2003 revenue.

Aksa Enerji

A group run by Ali Metin Kazanci and his son, Cemil, has expanded by acquiring natural gas and electricity distributors from the government. Their Aksa Enerji Uretim AS subsidiary, which sold shares to the public in May, has built power plants, and the holding company has created a tourism unit.

Cemil’s brother Mehmet broke off from the family enterprise this year and, with a partner, formed MMEKA Makina Ithalat Pazarlama & Ticaret AS, which bid against Aksa in recent auctions of state-owned assets. In August, MMEKA won the right to operate the power grids in Istanbul and Izmir with a bid of $4.9 billion, a higher price than analysts had predicted.

Mehmet Kazanci praised Erdogan at a press conference after the bidding. “The environment of stability and trust that has been formed in the country more than doubled the price,” he said.

Eightfold Share Gain

Mining group Koza Anadolu Metal Madencilik Isletmeleri AS has doubled sales in the past four years. Its shares are up more than eightfold since they began trading in February 2003. The company sold shares in its gold mining unit, Koza Altin Isletmeleri AS, in February in an offering that raised $443 million.

Some of Turkey’s old-guard business groups have also done well under Erdogan. Revenue at the Sabanci family’s Haci Omer Sabanci Holding AS rose 86 percent in four years to $12.6 billion in 2009. Koc Holding AS’s revenue doubled from 2004 to 2006, though it dropped 25 percent after that to $26.3 billion last year.

Aydin Dogan, a 74-year-old billionaire whose media company controls half the country’s newspaper market, including Hurriyet, has had the sharpest conflicts with the Erdogan government. He failed in 2006 to get a government permit for construction of an oil refinery in Ceyhan. Calik Holding got permission instead.

Dogan

By 2008, Dogan’s disputes with the government escalated into a public fight over coverage by his papers of a German court case alleging corruption at a Turkish charity. Dogan is now battling a claim by the finance ministry that his companies owe 5.7 billion lira ($3.8 billion) in back taxes.

Shares of Dogan Sirketler Grubu Holding AS are down more than 10 percent in the past 12 months, even as the Turkish stock market has rallied. The Istanbul Stock Exchange 100 index rose 2.7 percent yesterday to a record, helped by the referendum results.

Erdogan has pushed to make Islam more prominent since the AK Party swept to power by winning a majority of the seats in Turkey’s parliament in a 2002 vote and ending more than a decade of coalition governments. The prime minister has said Turks should drink fruit juice instead of alcohol and has proposed prison terms for adultery.

He has tried -- and so far failed -- to lift a ban on women wearing Islamic-style headscarves in universities. This prohibition is loaded with history and symbolism, having first been instituted by Mustafa Kemal Ataturk, the champion of secular values who founded the Turkish Republic in 1923. Ataturk challenged the elite of his day with political and social changes that transformed the remnants of the Ottoman Empire into the modern state of Turkey.

Referendum Success

The success of the constitutional referendum undermines the power of the generals and judges who have opposed Erdogan. The vote is a prelude to a complete overhaul of Turkey’s constitution, written under military rule in 1982, Erdogan said after the referendum.

Eurasia Group’s Piccoli says the vote signals that Erdogan has a good chance of winning a third term in general elections that must be held by July.

The business allies of Erdogan play a role in his push to make Turkish society more religious. Workplaces run by Kiler, Calik and Kazanci allow Muslim dress. Some companies give money to schools, hospitals and other charities in keeping with the Islamic principle of zakat.

Headscarves

At older companies in Turkey, including those run by the Sabanci and Koc families, the wearing of headscarves has long been discouraged and business functions may include alcohol.

Kiler, who got his start in business working alongside his brothers at the family’s grocery in Istanbul in the 1980s, says Erdogan has created an environment that fosters the growth of his company. His brother Vahit Kiler is now an AK Party member of parliament representing their hometown of Bitlis in eastern Anatolia.

Erdogan, 56, has plenty to brag about in the Turkish economy. “A Turkey that in 2002 was the 26th-largest economy in the world is now the 17th,” he said in a speech in Ankara on June 29. “Turkey is being talked about as an example for the world. We’re being watched with envy.”

Under the AK Party, the government has tamed the inflation that plagued the country for decades. Since early 2004, consumer price increases have been no more than 13 percent. That’s a victory in Turkey, where the inflation rate touched 73 percent as recently as February 2002 and was even higher, on average, throughout the 1990s.

Strong Growth

While gross domestic product shrank in the first three quarters of 2009 because of the global financial crunch, Turkey has recovered strongly. In the first quarter of 2010, the economy grew at an 11.7 percent annual pace, though the International Monetary Fund predicts that growth will slow later this year.

The average annual pace of growth in Turkey from 2004 to 2008 was 6.1 percent, more than triple the rate in the previous five years. Turkey’s exports were $102 billion last year, up from $36 billion in 2002, even as the economies of Turkey’s trading partners contracted.

The moves Kiler Holding has made into construction and energy make sense because of Erdogan’s economic successes, Kiler says. “We have started these investments with confidence in the government’s decisions,” he says. “A single-party government without opposition speeds things up.”

Calik Holding

Erdogan’s critics in the opposition Republican People’s Party, or the CHP, say some companies have benefited from something more than good stewardship of the economy. Calik Holding is the subject of their most-strenuous complaints.

Ahmet Calik stood beside the prime minister at the wedding in 2004 of Erdogan’s daughter Esra to Albayrak, the son of a columnist for Yeni Safak, a newspaper that supports the AK Party. When Albayrak was in New York working on his business degree at Pace University, he had already begun working for Calik. By 2007, at age 30, Albayrak was CEO of the holding company.

In 2007, Calik Holding beat out Luxembourg-based RTL Group SA in the bidding for Turkey’s second-biggest media company, Merkez Yayin, owner of the Sabah newspaper and ATV television news channel. To help the company fund the $1.25 billion deal, two government-controlled banks came in with $375 million each in loans.

Censure Attempt

The CHP, then led by Deniz Baykal, asked the parliament to lift Erdogan’s immunity so he could stand trial over the Calik transaction. Baykal said the deal was part of a scheme by Erdogan to expand his influence over media outlets.

The prime minister denied the allegations, and his party defeated a censure motion brought by opposition lawmakers by a vote of 318 to 134. The AK Party controls 336 of the 550 seats in the parliament. Ahmet Calik didn’t respond to requests for comment.

“There’s never been as much corruption and cronyism in Turkey as during the time of this government,” says Kemal Kilicdaroglu, the current leader of the CHP. The sale of Sabah and ATV to Calik and the bank loans show that Erdogan will cross the line in his effort to control the media, the business world, charities and unions in Turkey, Kilicdaroglu says.

“The fact that Tayyip Erdogan’s close relatives are working with Calik does not mean they are being favored,” says Murat Mercan, an AK Party member of parliament who is part of Erdogan’s inner circle. “These people have excellent educations, good skills,” says Mercan, who is head of the parliament’s foreign relations committee.

Reading It Right

The acquisition of Sabah and ATV has so far been a drain on Calik Holding’s finances, according to Fitch Ratings, which as of August had the company’s debt at B-, six steps below investment grade.

Rizanur Meral, who runs Tuskon, one of the Islamic business groups that works with the government promoting Turkish industry, says complaints about favoritism are misplaced. Newly successful Turkish companies, including members of Tuskon, have been farsighted and smart. “They are reading the world of politics and economics much better than anyone else,” he says.

For foreign investors, who may have worked with Turkey’s older business dynasties in the past, Meral has a message: “There is a new generation. The way of doing business in Turkey has changed. We suggest they look for new partners in Turkey.”

Benjamin Harvey is a Bloomberg News reporter in Ankara at bharvey11@bloomberg.net; Mark Bentley is in Istanbul at mbentley3@bloomberg.net

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