Turkey Graft Probe Ensnares Erdogan’s Cabinet, State Bank

Turkish Prime Minister Recep Tayyip Erdogan’s government was roiled by corruption allegations as police detained relatives of cabinet ministers, as well as the head of a state bank.

The sons of Economy Minister Zafer Caglayan and Interior Minister Muammer Guler were among dozens taken into custody yesterday during a probe of graft in government tenders, the state-run Anatolia news agency said. Hurriyet newspaper said at least 52 people were detained, including the son of a third minister. Suleyman Aslan, chief executive officer of Turkiye Halk Bankasi AS, was also detained, Anatolia said.

Stocks and bonds plunged on concern the arrests are part of an escalating power struggle between the government and followers of U.S.-based Islamist cleric Fethullah Gulen, who were seen as allies for much of Erdogan’s decade in office, sharing goals such as curbing the political influence of the secular army and easing laws restricting religious expression.

Signs of a rift have increased in recent months. In November, the government announced plans to close private exam prep schools, a source of money and influence for Gulen’s followers. Hakan Sukur, a former national soccer player, this week became the second lawmaker to resign from Erdogan’s Islamist-rooted party over the decision. Also in November, a local newspaper close to Gulen movement published what it said was a secret government plan to break the group’s influence.

‘Seismic Developments’

“The gloves will now be off in the battle between the Gulen movement and supporters of PM Erdogan,” Tim Ash, chief economist at Standard Bank Group Ltd. in London, said in an e-mailed note. The police raids will be viewed by many observers “as a warning to Erdogan from Gulen not to go for the presidency” in elections next year.

Halkbank’s shares plunged 12 percent, the most since 2007, and led the benchmark stock index to a 5.2 percent decline. Yields on benchmark two-year lira bonds jumped 18 basis points to 9.10 percent. The lira lost 0.5 percent to 2.0365 per dollar.

Erdogan said he “won’t bow to any threats” as his opponents “engage in ugly alliances” to destabilize the government. He declined to comment directly on the detentions, citing a continuing legal investigation.

‘Spilling Over’

Billionaire construction magnate Ali Agaoglu was among those arrested yesterday, Agaoglu Group Chief Executive Officer Hasan Rahvali said by phone. His net worth is $2 billion, according to data compiled by Bloomberg. Other businessmen and officials were also detained after a two-year probe into money-laundering, gold smuggling and bribery, Anatolia said.

Hostility between Erdogan and the Gulen movement “is spilling over to business and has the potential to further undermine the business climate in Turkey,” Wolfango Piccoli, an analyst with Teneo Intelligence in London, said in an e-mail. The dispute will probably escalate “given Turkey’s long electoral cycle,” with local polls in March to be followed by a presidential contest in August.

The Gulen movement, known as “Hizmet” or “Service” in Turkish, says it’s a network of devout Muslims who follow Gulen’s teachings and work to improve the community with no secret agenda. The group’s activities include a global network of schools.

Critics Jailed

Critics say it has systematically infiltrated the apparatus of the state in order to control it. At least two journalists and a former police chief who have written about the movement found themselves under arrest soon afterwards.

The Istanbul prosecutor’s office, which is in charge of the probe, said the operation was continuing. The crackdown may spread to other provinces and more arrests may follow, Haberturk newspaper said.

Halkbank handles payments for Turkey’s purchases of oil and gas from Iran. The gold-smuggling investigation may be linked to Turkish sales of the metal to Iran, which surged last year and then declined in 2013 after the U.S. tightened sanctions.

Another company caught up in the graft probe is state housing agency TOKI, which reports directly to Erdogan’s office. Its real-estate unit Emlak Konut Gayrimenkul Yatirim Ortakligi AS fell 12 percent, the most on record.

The arrests will renew concerns about “political risk in Turkey,” which had eased since a wave of anti-government protests in June, Julian Rimmer, a trader at F Global Trading UK Ltd., said by e-mail from London. “Regardless of the precise details, the net effect is extremely damaging to investors.”

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