Private equity, and the broader business community, has had plenty to put up with when it comes to external shocks recently. The pandemic might have seemed to be a one-of-a-kind disruptive episode but in its wake, we have seen a surge in inflation (sparking rapid interest rate increases), the Russian invasion of Ukraine and heightened tension between the United States and China, not least, but not exclusively, over the status of Taiwan. In that light, the message that we may well be on the edge of another international political melodrama might not be one that is welcomed. But there is the real risk of an outbreak of intense political instability and upheaval in the country of Turkey. If it happens, the uncertainty will have an impact on private equity irrespective of its investments (or not) there.

There will be elections held in Turkey on May 14th for the presidency and for the Grand National Assembly of Turkey, with the (strong) possibility of a second round of voting for President on May 28th if no candidate secures an outright majority the first time that votes are cast. These contests will determine whether Recep Tayyip Erdogan can maintain the dominance over his nation which he has maintained for the past two decades or be ousted from office. This is an event that has implications which extend far beyond Turkey’s own borders. For that reason, an article in the Washington Post in January was entitled (quite rightly): “The world’s most important election in 2023 will be in Turkey”.

Why Turkey matters

Turkey is a country of extraordinary strategic significance. It sits in close proximity to the Balkans in Europe, the caucuses on the European/Asian boundary and the Middle East, all areas of the world that have long been prone to chaos, crisis and conflict. It sits opposite Ukraine. It has control over the Dardanelles Strait and with this command of the Black Sea and access to the Mediterranean. It is also currently the involuntary host to six million refugees (more than any other territory on Earth) of which the better part of four million have fled from Syria and by either encouraging those people to move on into continental Europe or by pushing them back towards where they came from can have a hugely destabilising influence (a fact that President Erdogan has been happy to remind others of).

Turkey thus punches well above its weight. It has a population in excess of 85 million people. It was a founder member of both the OECD and the G20. It was an early member of the Council of Europe (in 1950) and NATO (1952). It is disproportionately vital to NATO today because of its location and it has flexed its muscles by holding up but then permitting its expansion to include Finland and is currently sitting on its hands until it has been satisfied that it is willing to see Sweden enter the alliance too. It has long had a very awkward relationship with what is today the European Union having become an Associate Member of the old EEC as early as 1963, formally applied to that body for full membership in 1987, entered the EU Customs Union on bespoke (but not especially generous) terms in 1995 and started accession talks for EU membership in 2005 (although they have made little progress of late).

Turkey, in short, can look in several different directions as it chooses. It can lean towards the US or be more accommodating towards Russia. It can see itself as more or less European. It can continue to be largely secular (as envisaged by Mustafa Kemal Ataturk, its modern founder) or move either in a modest or more radical manner towards Islamism. It can intervene (or not) in the Syrian Civil War or in the dispute between Azerbaijan and Armenia. All these options affect the international order.

The Erdogan era

Mr Erdogan has been a remarkably successful politician His AK Party (Justice and Development Party), and it is very much his party, came to power with a landslide election victory in 2002. He himself had been legally disbarred from being a parliamentary candidate by what would prove to be the outgoing administration, but that prohibition was swiftly reversed, he won a seat in a by-election in 2003 and became Prime Minister thereafter. He was seen as a dynamic figure, a reformer with an agenda of modernising the economy and national infrastructure. He was also, though, prepared to distance himself from Turkey’s ultra-secular constitutional and social norms with, for example, allies whose wives wore head scarfs and by taking a less permissive view of the easy availability of alcohol. His attempt to place a close supporter of an even firmer Islamic outlook as President caused unease not least because, at the time, the President was supposed to be an “above politics”, neutral figure.

The Erdogan agenda, therefore, defied straightforward categorisation. It was both left-wing and right-wing on economics and public spending initiatives. It was outward looking in the sense of his drive to make Turkey a mass market for tourism while inward looking in promoting its traditions. More than a decade before the term started to be used elsewhere (often in a disapproving tone) he was a populist. He was also popular, winning parliamentary elections in 2007 and again in 2011. He also steered through a referendum in 2007 allowing for the direct election of the post of President.

It appears that it was always his intention to occupy that position himself. In 2014 he stood for the presidency and triumphed on the first ballot with 51.8% of votes cast (less than many had expected). Whereas previous occupants of his new office had distanced themselves from day-to-day politics, it was obvious that Erdogan was still essentially in charge and pulling the strings of the Prime Minister.

The sense that he was acting outside of established protocols was one of the factors which triggered an attempted military-led coup against him on July 15th, 2016, which ultimately failed ignominiously. After calling a state of emergency in the aftermath of that attempt to remove him, Mr Erdogan went for broke by putting a package of eighteen amendments to the constitution to a referendum. The centrepiece of these changes was that Turkey would cease to have a parliamentary system with the Prime Minister of the day dependent on the backing of a majority in the legislature and become a model where the President was both Head of State and the Head of Government with the right to appoint a Cabinet of his personal preference, irrespective of parliamentary numbers and sentiments.

The conduct of that referendum was incredibly controversial and approved on a 51.4%-48.6% split. A year later (and a year earlier than was required), the first presidential election for this new version of the portfolio was held with Erdogan prevailing in the opening round of the ballot with 52.6% of the vote. His AK Party emerged on top of the parliamentary election held at the same time (albeit with a coalition partner rather than on its own). The post of Prime Minister was abolished, and Mr Erdogan was installed as an Executive President with sweeping authority which he has exercised ever since. His hold over politics is enhanced by Turkey being a centralised state and not a federal structure.

The most important election in the world in 2023

The background to the 2023 elections

Although the track record of opinion polls in Turkey is far from stellar, these elections are obviously destined to be closely contested and there are many who think that the President is in deep trouble.

There are a number of reasons for this, but among the most substantial of these are:

• The Turkish economy is in a dire state. Inflation and unemployment are both high. The value of the national currency has been in free-fall. The autonomy of the central bank has been undermined and it is not considered to be capable of implementing remedial measures.
• The past five years have seen the Erdogan Government engage in increasingly authoritarian and socially conservative initiatives which have alienated much of the urban middle class.
• The earthquake that struck Turkey (and Syria) on February 6th this year had horrific results. It involved more than 50,000 fatalities with another 100,000 people seriously injured. About 14 million people (or 16% of the whole population) were affected involving 350,000 homes destroyed and 4 million other properties damaged. The overall cost will exceed $100 billion. The scale of the devastation has been widely blamed on the poor construction of buildings (in part due to corruption in the awarding of licences) and an inadequate rescue response.

The level of discontent is such that the President is now politically vulnerable as he has never been before. It has also meant, as will be outlined, that the opposition to him, which has been fragmented and frequently incoherent and inconsistent over the last twenty years, has shown more cohesion. All of which indicates that the presidency and a majority in Parliament are in play at the May elections.

The presidential and parliamentary contests

At the presidential level, four valid nominations have been submitted. The candidates are:

Mr Erdogan, at the behest of the People’s Alliance, a four-party group dominated by the AK Party.

Kemal Kilicdaroglu, a veteran figure for the Nation Alliance, a coalition of six separate parties.

Muharrem Ince of the Homeland Party, a comparatively small political force.

Sinan Ogan, the standard-bearer of the Ancestral Alliance, again very much a fringe institution.

The presence of the last two personalities may be enough to force the contest into a second round.

The parliamentary competition is distinctly complicated. The election is conducted under a form of party list proportional representation rather than electors choosing between individual contenders. There is a threshold of 7% of the national vote which has to be crossed for representation to occur. This is an incentive for sets of small parties to stand together on collective lists (Turkey has dozens of political parties, with new ones being established through schisms within older ones very regularly). This increases their chances of winning seats in Parliament but can imply that once the election has taken place, discipline within those parliamentary groupings is often very taxing to maintain. It also means that it is entirely possible, especially if the final vote tallies are tight, that the President may not have a sympathetic majority in Parliament (although under the new rules this matters less).

What might happen?

There are five credible scenarios as to where Turkey will stand once these elections are conducted.

1. President Erdogan could win again in a manner which is seen to be a legitimate victory.
2. The President could be declared the winner but in a fashion that is viewed as fraudulent.
3. The President could lose in the count but refuse to accept that defeat and try to avert it.
4. The opposition could win the presidential election but prove incapable of then governing.
5. The opposition could win the presidential election and have a smooth competent transition.

From the point of view of the United States and most of Europe the first and last of these options would have the most appeal (with the fifth one the private aspiration of many in Washington, D.C., Brussels and other leading EU capital cities and in Kyiv) because they would ensure a degree of stability at a time when Turkey is a particularly pivotal player in the Russia-Ukraine showdown.

Unfortunately, any of the second, third or fourth outcomes are more likely than the first or last. All three of them would be fraught with danger not only for Turkey itself but international relations. If the President were to be seen as having won a rigged election, then the opposition would probably boycott national political institutions and encourage the Army (the second largest in NATO) to stage a full-blooded coup (unlike the half-hearted effort in 2016) so that fresh elections could then follow.

If instead the defeated President were to “do a Trump” but actually manage to retain power and to stare down the military, then the US and Europe will find itself with a Turkey which had ceased to be a democracy in any meaningful sense (and which might move towards Moscow in search of an ally). If Mr Erdogan’s opponents win but then fall out with each other, Turkey would teeter on anarchy.

This is what makes these elections so seminal and is why Turkey is the ticking time-bomb that it is.

How an election might be rigged

Arguably, it already has been by the simple existence of Mr Erdogan as a valid candidate. According to the Turkish Constitution (Article 101), no person can serve as President for more than two terms. In that case, the current President is ineligible having been in office from 2014-2018 and 2018-2023. Mr Erdogan asserts that because the nature of the presidency changed after the 2017 referendum, it became de facto a new political institution, so his term in the old-style presidency should not count.

The arbitrator on such questions is the Supreme Electoral Council. It is far from an independent body. Among its more notorious decisions was its decree on the day of the 2017 constitutional referendum itself that ballot papers which did not bear the official stamp upon them (previously deemed improper) should be counted unless evidence could be provided that they were dubious. This might be considered in some quarters to be an open invitation for ballot rigging particularly as many election officials were very closely linked to the President and his party. Although it would be hard in Turkey to manipulate the vote on a massive scale, in a close contest mischief might win it.

How the president might lose but see to continue

The margin of an opposition triumph may be of a scale that is not possible to avoid by fraud. This would not mean that the President would automatically accept defeat and hand over his office. He has a number of assets if he decided to dig in his heels. He could petition the Supreme Electoral Council to annul the election and run it again at a later date citing technicalities (this was done in 2019 when an opponent of the President became Mayor of Istanbul, but the second election led to the same outcome). The President has the backing of much of the national bureaucracy (which has been heavily stacked with AK Party adherents). He might presume the loyalty of the Police (whose numbers have been built up in recent years to make it a rival force to the Army). He certainly has plenty of friends inside the judiciary. State television is largely his own and numerous opposition-aligned newspapers are no longer in business. The means for staging what would be a coup d’etat of his own are certainly there. What is less clear is how the nearly 900,000 strong Armed Forces, which have historically seen themselves as the guardian of the Turkish Constitution, would react to it. In the most extreme circumstances, the chances of something akin to civil war cannot be discounted.

Why the opposition might win but fall apart thereafter

The opposition does not agree on much other than wanting to see the back of the present President. Their presidential nominee – Mr Kilicdaroglu, is a mild-mannered 74-year-old intellectual and a long-serving head of the CHP (the Republican People’s Party) known as “Turkey’s Gandhi” because of his temperament and physical resemblance to him – was chosen over two more dynamic but divisive alternatives. His ability to impose himself over a kaleidoscope coalition is likely to be rather limited.
The main policy which the “Table of Six” entities within the Nation Alliance agree upon is reversing the 2017 referendum and subsequent constitution, reinstating a parliamentary form of government. This is easier said than done. It takes two-thirds of the Grand National Assembly to approve changes to the constitution (400 out of 600 legislators) or three-fifths to send proposed amendments for a national referendum (360 out of 600). It is conceivable that the opposition will not have the votes.

Beyond that question, consensus swiftly disappears. The largest party of the six, the CHP, is a social democratic party of the centre-left on economic and social matters. Others are more akin to free market liberals or conventional conservatives. Most of the Table of Six are staunchly secular but SAADET (otherwise known as the Felicity Party) are Islamist in inclination. The majority of the opposition want to move Turkey’s foreign policy in a European and internationalist direction but both IYI (or The Good Party) along with SAADET is notably more nationalist in orientation. There are divergent opinions in their approach towards the Kurds (the main Kurdish political party, the HPD, is tacitly endorsing the Nation Alliance but is not an official component of it), different views about how to handle the refugee situation and a range of instincts when it comes to the Syrian civil war and the extent to which Turkey should be aligned with Europe and the US in assisting Ukraine.

Put another way, there is the real prospect that Turkey will find itself with a President who does not believe in a presidential system but cannot rid himself of it and who cannot shape either a strategy for the economy, a resettlement scheme for the survivors of the earthquake or a new foreign policy without rampant disagreement breaking out in his own ranks. Parliament may also be unleadable.

Conclusion – All eyes on Ankara

A further bout of international turmoil may not be welcome but let it not be said that if it comes it will be without warning. Turkey is an immensely important country simply by its geography. If it is to turn in on itself or become incapable of making political choices, that would be really significant. A menu which involves dictatorship, military intervention or democratic mayhem is hardly appetising. It would be an undesirable situation at any time but the presence of Russian troops inside Ukraine makes the notion of Turkey in turmoil even more traumatic. It will not take markets long to notice. Yet again, private equity and the global corporate fraternity had better start to reach for a seatbelt.