Massive Investor Risk in Turkey as Erdogan Takes on Koc

Turkish Prime Minister Recep Erdogan has decided to take on the biggest family in the country in the form of Koc Holding. The markets don't like it all, and the price of this political battle will be a major shock to investor confidence at a time when Turkey is about to realize its ambitions of becoming a major energy hub.  

Koc Holding has a long political history of butting heads with the AKP and the Islamists in general.

The head of the Koc family, Mustafa Koc, has been critical of Erdogan in the media and during the Gezi Park protests this summer, the Koc family allowed protesters to seek shelter in one of its hotels in Istanbul. Erdogan is using this to make a case that Koc Holding has anti-government intentions. Erdogan's response to this was to order a tax police raid on Koc's refinery subsidiary, Tupras, and to cancel a €1.1 billion tender for Koc to build a warship, as well as threats to cancel another $5.7 billion Koc tender for the building of roads and bridges.  

Two weeks ago, legal action was launched against the company, alleging that it orchestrated the February 1997 military coup. Erdogan is also including the media group that published Koc's comments, owned by the Dogan Group, in the criminal charges.

At the same time, Koc Holding has been trying to get into the LNG segment, but Erdogan is holding it back. Koc's Aygaz-the largest LPG distributor in Turkey-was one of the 13 companies that applied to the EMRA in August 2012 for import licenses. It was not among those who were granted a license. Aygaz deals in LNG sales (imports and wholesale) and transmissions, and has been eyeing the liberalization of the market with great interest, but politics is hindering these efforts.  

But this is not about Gezi Park alone. There is a history here. Back in 1997-under the previous Islamist government--one of our sources was in the offices of the head of MUSIAD (Independent Industrialists' and Businessmen's Association) when Rahmi Koc (Mustafa Koc's father), called and threatened to destroy MUSIAD's members if they continued to take the state contracts that had traditionally gone to Koc.

Erdogan's panic right now is focused on the fact that at one time during the era of military tutelage, Koc had more than 100 retired high-ranking members of the military on their various company boards. The specter of the military, however much it may have been weakened in recent years, remains an area of paranoia for Erdogan, and this is the brunt of the issue with Koc and the reason for the drive to destroy it no matter the price. Gezi Park has simply revived the potential of this threat.

Sources close to Erdogan's circle describe the prime minister as increasingly irrational and mentally unstable, saying his closest associates are reluctant to approach him with anything at this time due to his explosive nature. Much of this irrationality is due to Erdogan's underlying suspicion that the Koc family is threatening his survival, and this suspicion is turning into paranoia.  

We believe that Erdogan could, theoretically, destroy Koc Holding, but this would come at a very high price for both Erdogan and the AKP, and we do not believe that he will have full AKP support in doing so.

Koc Holding owns the country's only refinery, along with JVs with Ford and Fiat and a number of other manufacturing powerhouses. Erdogan is attacking a family that provides 9% of the country's GDP, 10% of its exports and 9% of its tax revenues. And, significantly, Koc Holding also includes the country's biggest lender--Turkiye Garanti Bankasi AS (GARAN) - which is also a specific target of the attack.

The first price to pay will be in the form of a loss of investor confidence. Foreign money has been slowly leaving Turkey, and any prosecution of Koc and Dogan (who have a significant amount of shares on the Istanbul Stock Exchange owned by foreigners) would be the trigger for a sudden outflow. Foreign investors are already wondering whether to jump ship.  

What's the bottom line?

Even through the three months of intensifying mass protests this summer, we would have said Turkey's economy is still sound-and energy investments are still highly favorable for foreigners. But Erdogan has quickly begun to unravel in the Gezi and post-Gezi Park protest environment. He is showing signs of paranoia and instability that are extremely troubling at best. His attack on Koc Holding is a direct symptom of this paranoia, and that he is willing to risk not only the AKP's standing but the entire economy is irrationality at its strongest.

Koc Holding will not take this sitting down, as judged by the fearless interviews Mustafa Koc continues to give in response to Erdogan's attacks.

"There are a number of assumptions about a big conspiracy against Turkey and that we were a part of it. But it is important for us to say at every opportunity, how crucial inner peace and economic and social stability are, and to ensure the future prosperity of the country and therefore the world of business. For this reason alone we must oppose the idea, we would ally with groups that act against the stability of Turkey, " Koc said recently.

In Turkey, to make energy investments work, you have to be aligned with a key power broker-and these are now becoming extremely polarized. If you want a deal through, you have to make sure the dynasty you're attached to is on Erdogan's side-and even then there are no assurances because even the members of Erdogan's closest circle are scared to approach him with anything new at this time. If you want anything to move forward in Turkey, the message is that you had better find yourself an AKP-supporting partner and stay away from the secularists-like Koc Holding-even though they control a major part of the economy.