This Is A Very Old Turkish Film With Perhaps A Different Ending

The Turkish people should be familiar with the currency crisis now rocking their country. It is not as if they haven’t seen this film before – lots of times. During the un-lamented 1990s the country was plagued with serial economically illiterate and incompetent governments while inflation soared and the currency melted like ice cream in July. After each bout of near-100% inflation whatever government was in charge – and there were many -- would sheepishly head for the IMF to arrange a bail-out. After pledging absolute obedience to the IMF rules the government would take the money, quickly forget its earlier pledges, and the merry-go-round would start again.

            Turkish merchants and businessmen are very clever indeed, and they quickly adapted their operations to the economic realities they faced. Many merchants and hotels simply gave up on the Turkish Lira and began pricing in dollars and Euros. This is still true. The standing joke was that the busiest person in a supermarket was the employee who had to run around the aisles adjusting prices.  Tourists used to marvel at becoming instant millionaires when they exchanged their hard currency for the pillow-soft Turkish Lira.

            This merry-go-round ended abruptly in 2001 when the currency and interest rates exploded out of control. By this time the people were well and truly fed up with the situation.  As soon as they got the chance they voted overwhelmingly for the Justice and Development Party (AKP) by itself to replace the hapless coalition governments that had disastrously mismanaged the economy.

Unfortunately, this chart of the USD/TL tells a very old story

             Now, after almost 17 years of relative stability under a single-party government the country finds itself paying the price for economic follies that had been covered up for years by the global environment of ultra-low interest rates and generous liquidity. Turkish companies loaded up on what was then cheap foreign currency debt, the country benefitted from low oil prices, and relatively cheaper imports began to replace domestic goods. Despite worries about a widening current account deficit the country did not have much trouble rolling over the roughly $250 billion in annual debt re-payments.

            That has all changed within the last year. Suddenly cracks appeared in what once seemed like Turkey’s strong economic foundation. Voices of concern about the country’s debt load grew louder, the current account deficit increased, oil prices began to rise (bad news for a country that has to import every drop of oil and every cubic meter of natural gas), inflation crept back into double digits, foreign direct investment dried up. The once-stable currency began to weaken, and those voices of concern grew louder. Finally, the hapless Central Bank screwed up the courage to raise interest rates. But not enough to support the currency.

            Just like the 1990s you say. Surely the IMF will ride to the rescue and save Turkey from the consequences of its government’s policies. Not at all. This time is truly different. Foreign commentators regularly opine on what the Turkish government should or must do to stem the rout of the currency. Using those words should or must - dripping with righteous condescension – with this particular Turkish government is like waving a red flag in front of a bull. What, you ask, is so different this time? Plenty.

            For openers, the structure of the Turkish government has changed from a parliamentary democracy to a presidential system where the president has supreme – and I mean supreme power. He alone makes all decisions. Ministers may have the power to order their own lunch, but that’s about all. And this president, Tayyip Erdoğan, is a supremely stubborn man with deep-seated – if very bizarre – views about the economy. For one thing, he hates interest rates and only very reluctantly allows the Central Bank to increase them. He has convinced himself – if no one else – that high interest rates create inflation. So much for classical economic theory. It’s also true that higher interest rates would hurt his heavily indebted economic allies in the construction business. But that’s another topic.

The son-in-law, and Finance Minister, tries to explain the unexplainable

            Furthermore, because Erdoğan or his henchmen control virtually every media outlet in Turkey there is very little – if anything -- in the local media about the seriousness of the economic crisis. Erdoğan has successfully changed the narrative from his economic incompetence to the insidious attempts by foreign interests, a.k.a. Americans and ‘Zionists’, to undermine Turkey. Local media love to report how their glorious leader is standing up to American pressure to release the unfortunate American pastor now incarcerated on unspecified, unverified charges of helping the 2016 coup plotters. Trump has played right into Erdoğan’s narrative by slapping additional sanctions on Turkey for failure to release Pastor Brunson who – not incidentally – belongs to the same evangelical wing of the church as Vice President Pence. Furthermore, Trump needs the evangelicals to stay with him for the upcoming mid-term elections.

Whatever happened to this once-cozy relationship?

            In short, it is inconceivable that Erdoğan would resort to the IMF for help in this crisis. To do so would mean admitting his earlier policy errors and undermine his narrative about foreign plots against Turkey. This would amount to an unbearable humiliation. In addition, the IMF would undoubtedly impose conditions that are an anathema to Erdoğan’s  ‘unique’ economic theories.

            So what happens now? First, he will thrash around and plead with the Russians, Chinese, Qatar and anyone else who will listen for assistance. The Russians can’t – or won’t -- do anything. The Chinese are much too intelligent to get caught in that mess. And I’m not sure that even Qatar wants to get that deeply entangled. Then he could print money and ignore the ensuing inflation. Or he could impose capital controls and/or force conversion of the foreign currency bank accounts into Turkish Lira. Both of these steps would cripple the economy and send it back to pre-1980s when the Turkish economy was essentially closed. But Erdoğan could justify these moves by saying the country is in an ‘economic war’ and he has to impose these measures for national defence. Enough people would buy that rationale to keep him in power. Just look at how long Maduro has remained in power in Venezuela despite the economic disaster there.

            Unlike 2001 there is not even the glimmer of political opposition to Erdoğan. The main opposition party CHP is busy eviscerating itself with internal feuds, and the nationalists are rallying around the flag. That leaves the Kurds, who are torn in several different directions. So Erdoğan is pretty much free to do what he wants. Unfortunately, the main losers will be the Turkish people who will suffer severe declines in income. But as long as Erdoğan can maintain the ‘evil foreigners’ narrative national pride will trump (as it were) economic realities.

How Much Will Erdoğan's Victory Cost The Country?

Turkish voters have just made their country the model for every dictator and the envy of every wanna-be dictator in the world. President Tayyip Erdoğan convinced 52% of the voters to give him unprecedented powers to run the country exactly as he sees fit. Separation of powers? Forget it. Independent journalism? Independent judiciary? Forget it. Parliamentary checks and balances? Forget it.

Erdoğan now has the power to rule by decree, appoint cabinet ministers and senior officials answerable only to him, and appoint senior judges. In short, Erdoğan is free to impose his 19^th century vision on Turkey. I was going to say 16^th century, but there were some very enlightened Ottoman rulers during that period.

With his absolute power where will he take Turkey?

The opposition put up a spirited fight, but in the end they were no match for the sheer organizational skills of the ruling Justice and Development Party (AKP) and the charismatic power of a ‘strong man’ who said the dictatorial rule was necessary to restore Turkey to its rightful place in the world – wherever that might be. He has the typical autocrat’s disdain for the necessary, messy compromises or checks and balances of real democracy. Why bother with other people’s opinions when your own ideas are so good? Waste of time, really.

One sure thing was Erdoğan’s determination to use every means – fair or foul -- at his disposal to win this election. And after 16 years of near absolute control it is fair to say he has many more weapons at his command than the opposition to control the outcome of an election.

While the physical act of voting may have been more or less free, it would be a serious mistake to call these elections ‘free and democratic’ in the true sense of the phrase. All Erdoğan’s opponents faced severe restrictions on media exposure during the campaign. In addition to the media outlets owned by Erdoğan’s henchmen or by people intimidated by him, even the state TV station found reasons to keep the opponents off the air. The campaign of Meral Akşener, leader of the IYI Party, also faced frequent assaults and attempts by local Erdoğan supporters to prevent her election rallies. Selahattin Demirtaş, leader of the Kurdish-based HDP party, had to run his campaign from the prison where he has been kept for a couple of years on unspecified charges. In these circumstances it’s a minor miracle that the opponents performed as well as they did. A cynic would say it was all part of Erdogan's game plan. Let Ince run relatively free, but inhibit and intimidate the other two so their vote total won't challenge Erdogan. Crude, but effective.

Ince did well, but got no help from the other opposition parties

Other than Erdoğan’s personal victory there were a few interesting election results:

1.     Erdoğan’s main opponent, Muharrem Ince, performed exactly as he predicted, winning just under 31% of the presidential vote. He ran well ahead of his party, the CHP, raising the expectation that he may assume leadership of the party and inject some much-needed vitality. His problem was that Akşener and Demirtaş combined did not get enough votes to help force the presidential election into the second round. But, given the restrictions their campaigns faced, that is no surprise.

2.     HDP, the Kurdish party, secured enough votes (11.7%) to enter parliament with 67 MPs, making them the third largest group. HDP’s vote was undoubtedly helped by voters from other parties who voted tactically just to make sure HDP passed the 10% threshold. 

Selahattin Demirtas: Tough to run a campaign from behind bars

                       

3.     Erdoğan ran way ahead of his AKP that received just over 42% of the vote, down from previous elections. This reconfirms the president’s star power while demonstrating that at least some of the party’s former voters are beginning to lose faith with the party.  AKP now has 293 MPs, below the 300 required to give them total control of parliament. They will have to rely on the 50 MPs from the ultra-nationalist party MHP to exercise what little authority left to the parliament. Look for Turkish policy to become even more anti-Kurdish and bellicose.

4.     The two rival nationalist parties, MHP and the newly-formed, IYI party combined received more than 20% of the vote, far above the usual result for the nationalists. Perhaps the government’s strident anti-Kurdish rhetoric and military incursions into Syria and Iraq inspired this burst of nationalist fervour. Things don't look good for Demirtaş's early release.

Assaults and boycott by most media hurt her campaign

It remains to be seen just what Erdoğan will do with his sharply enhanced powers. One would like to think he might use them to help unite a badly fractured country and society. Nice, but, given past performance, not too likely. He might also move aggressively to counter the country’s mounting economic problems. Unfortunately, he has shown absolutely no sign that he even understands the gravity of the situation, let alone have any idea how to solve the problems.

During the campaign he re-iterated his plan to force the Central Bank to reduce interest rates as the best way to fight the increasing inflation and depreciating currency. This will not have a happy ending.

He also stressed his commitment to huge, budget-busting public works projects that will do little except feed his fervent contractor allies while putting great stress on an already weakened budget. One of his pet projects is the so-called Kanal Istanbul, a canal rivalling the Suez Canal to run from the Black Sea to the Sea of Marmara bypassing the Bosphorus Straits. It’s not clear where the $20 billion or so funding will come from, but the hapless and overstretched state banks will undoubtedly be called upon to provide the funds.

While he is touting grandiose projects, the real problems of inflation, unemployment, mounting current account deficit, depreciating currency and a tattered education system designed more for quill pens and rote memory than computers are only getting worse. On top of this the once-strong agriculture sector is reeling, forcing Turkey to import more and more basic food products like onions and potatoes.

At some point, these problems will snowball into a real economic and social crisis. But for the moment Erdoğan is free to delude himself that they are all the fault of the usual suspects – ‘foreign interests’ that are afraid of Turkey. This plays well in domestic elections, but doesn’t do much to convince those same ‘foreign interests’ to lend you a hand when you desperately need it.

Tariffs Alone Are Only A Small Part Of International Trade Imbalances

            President Trump’s recent shallow, sound-bite tirades about trade tariffs, as usual, miss the much larger point that tariffs, by themselves, are merely the smallest weapon in the powerful armoury of schemes used by several nations to protect and promote their own companies.

            In fact, there are few more mind-numbing, dizzyingly complex subjects than foreign trade. To get a clearer picture of the realities of international trade I highly recommend a book called The Travels of a T-Shirt in the Global Economy by Georgetown professor Pietra Rivoli. She says Chinese T-shirts may flood the American market, but the vast majority of the cotton used in those T-shirts comes from the United States, West Texas to be precise. Indeed, the United States is one of the leading cotton exporters in the world. Rivoli notes the impotence of tariffs to stop world trade by pointing out that “Though only about 2 percent of Americans’ clothing is made in the United States, tariffs remain among the highest of any manufactured goods.”

Much to be learned from the the humble T-shirt

            Rivoli notes that in addition to the ingenuity and incredible hard work of the West Texas cotton farmers they have been very adept at utilizing the vast array of research support from nearby Texas Tech University and the bright people at Monsanto who develop varieties of cotton seeds that can withstand the harsh climate of that part of Texas.

            But it is in rallying the political support for millions of dollars of federal subsidies in the form of disaster relief, price supports, insurance, export credits, and many other details that give American cotton a huge advantage in the world trade. Some of America’s poorer competitors in Africa have complained to the World Trade Organization  (WTO) that American cotton subsidies amount to more than their entire GDP. These subsidies and technological advantages help explain why fabric manufactures in countries like Turkey prefer to import American cotton rather use local cotton grown just a few miles from their factories. "It's cheaper and better," one of them explained to me.

West Texas cotton - a powerful force in global textiles

            Brazil, another large sophisticated cotton producer, had a unique and successful response to what it termed unfair cotton subsidies. Rather than institute countervailing higher tariffs that would ultimately punish Brazilian consumers, the clever Brazilians won permission from the WTO to impose other penalties on other American goods. Brazil won the right to suspend normal intellectual property protections – a subject dear to American companies – for goods such as pharmaceuticals and engineered seeds, and to institute trade protection for Brazilian service firms. This cross-retaliation shifted the cost of American cotton subsidies to other companies like Microsoft, Monsanto, and Intel. Not surprisingly, the day before these measures were to take effect a settlement was reached with Brazil on the issue of cotton subsidies. The European Union might want to think about this Brazilian approach rather than simply slap higher tariffs on various American goods.

            These subsidies are part of $500 billion Farm Bill that covers several types of agriculture as well as nutrition programs like Food Stamps for low-income Americans. This farm bill is due to expire in September 2018, and its replacement is a ticking time bomb for politicians running for re-election in November. The replacement faces a very hard road, and it is by no means clear that Congress will be able to draft something that will please one of Trump’s constituencies – the farm belt. The nutrition part of the bill is one of the more contentious items as many of the die-hard conservatives hate the idea of using federal subsidies for low-income families. And many Blue State members of Congress won’t agree to any farm bill that doesn’t include such subsidies. This fight will rival the noise of the health care debate.

           

            This federal largesse is by no means limited to agriculture as a wide swath of American business benefits from federal, state, and local assistance. A report published by Good Jobs First highlightsthe scope of these benefits.

            Topping the list of those receiving federal grants, tax credits, or cash payment in lieu of tax credits is not an American firm at all. The Spanish energy company Iberdrola has invested heavily in wind farms in the United States, and now bills itself as the second largest wind farm operator with more than 40 projects from California to New England. Iberdrola has collected $2.2 billion in federal grants and/or tax credits. This staggering sum raises the question of whether renewable energy like wind power can exist without these handouts.

            American tax payers should have no fear, however, because the champion for federal, state, and local subsidies is Boeing. Boeing has received $457 million in non-repayable federal grants, $64 billion in federal loan guarantees, and $13 billion in state and local subsidies. This is a very bi-partisan effort. In 2014 the Democratic governor of Washington signed a bill giving Boeing an $8.7 billion tax break over the next 27 years in an attempt to keep the 777X production in Washington state. This has become a hot issue as Boeing returned the favor by continuing to ship jobs out of state despite all the local assistance.

Took off with the massive help of U.S. taxpayers

            These types of tax-payer give-aways are by no means an American invention, however. The European Union has a huge program of agricultural assistance – similar to the American farm bill -- known as the Common Agricultural Policy (CAP) that takes about 35% of the entire EU budget. A French farmer friend grumbles that those payments are directed primarily at large industrial farms and omit smaller operations like his. And Airbus, like Boeing, receives considerable subsidies.

            The conclusion, as Pietra Rivoli points out, is that so-called ‘free trade’ is a myth that many love to talk about but no one really dares to practice. Uncle Sam doesn't just put his thumb on the scales. He puts his entire heavy leg. If Trump is really serious about levelling the playing field he would address all these federal, state, and local handouts instead of focusing merely on tariffs. But don’t hold your breath.

Can The Perfect Economic Storm Change Turkey's Leadership?

For the first time in his long reign, Turkish President Tayyip Erdoğan is facing strong headwinds in his re-election bid. For one thing, the opposition has finally acquired some common sense and formed a coalition to run in the parliamentary elections. A second thing causing Erdoğan problems is that his main opponent in the presidential race – separate from the parliamentary election -- is not afraid of a fight. Muharrem Ince is copying Erdoğan’s play book by travelling around the country holding rousing rallies in the same small cities and towns that brought Erdoğan to power 17 years ago. His campaign of blasting the corruption, nepotism, and dictatorial style of Erdoğan’s regime has been gaining traction.

Can Muharrem Ince dethrone the Reis?

But it is the failing economy that has caused the major problem for the president this time. Basically, Erdoğan is making the same miscalculation of everyone who thinks good economic fortune was due to his skill rather than pure luck. For more than a decade Erdoğan enjoyed the fruits of the global economic conditions of extremely low interest rates, sharply declining oil prices, low inflation, and – most of all – plentiful liquidity, i.e. lots and lots of money sloshing around the world looking for a home that offered slightly better returns than the near-zero percent U.S. Treasury yields. A great deal of that money found its way to Turkey. How much of that money subsequently found its way to hidden off-shore bank accounts is a hot issue in this campaign.

These global conditions stabilized the Turkish lira at relatively high levels. Many Turkish businesses and government officials thought they were geniuses and started to load up on what appeared to them ‘cheap’ foreign currency debt. The favourable exchange rates encouraged all economic players to import ‘cheap’ imported goods rather than rely on local manufacturing. This was to have disastrous consequences for many Turkish businesses. But it wasn’t just manufacturing that was hit. Agriculture, once one of Turkey’s strong points, has been hard hit as well. A recent report in Al-Monitor notes that the government’s ‘cunning plan’ to limit inflation by increasing imports of ‘cheap’ agricultural goods has decimated the country’s once-powerful agricultural sector. Production is down to the point where the country has to import straw from Bulgaria and sacrificial animals for the Feast of the Sacrifice. There are even reports that one region had to import a shepherd.

Erdoğan’s economic policies are rather like the game of musical chairs. Everything is fine until the music stops. And Turkey’s economic music came to a crashing halt when those once-favourable global conditions suddenly changed. Despite the president’s constant bluster many people were well aware of the risks that Turkey was running. The country has many fine economists who have been sounding alarm bells for a long time. But inside the sound-proof bubble that surrounds Erdoğan no one heard a thing. Even if some faint sound penetrated the thick walls of flattery supporting the grandiose presidential palace it was dismissed merely as ranting of Turkey’s ‘enemies’ trying to keep the country down.

Consequently, Turkey now faces a perfect storm of economic problems:

1.     Rapidly depreciating currency.

2.     High private sector foreign currency debt

3.     Rising inflation

4.     Rising unemployment

5.     Growing current account deficit requiring even more foreign currency to cover

6.     Rising oil prices

7.     Increasing global interest rates

Despite this reality Erdoğan and his group of sycophants still try to peddle the very bizarre economic theory that reducing interest rates and boosting consumer spending is the real way to beat inflation. This is roughly equivalent to pouring gasoline on a roaring fire. A few weeks ago Erdoğan took this theory to London where he held a series of disastrous meetings with institutional investors. After politely listening to this nonsense for a while the investors quickly hit the ‘Sell’ button for the Turkish Lira sending it to historic lows. This set off alarm bells even in the presidential palace. Deputy Prime Minister Mehmet Şimşek and hapless Central Bank Governor Murat Çetinkaya were sent back to London in an effort to repair the damage. As one wag put it, it was not clear if Şimşek – who used to work at Merrill Lynch – was seeking political asylum or trying to explain the unexplainable. The currency has precariously settled at a very low level as investors wait for the next round of inflation numbers with their fingers hovering over the ‘Sell’ button on the Turkish Lira.

Tayyip Erdoğan -is the same fire there this time?

 Does all this bad economic news mean Erdoğan will lose the election? Not at all. His base of support, like Donald Trump’s true believers, is rock solid, laps up everything he says and generally accepts his version of reality. Plus, he has complete control of the media and can effectively shut out the opposition. In many ways this situation reminds me of Edwin Edwards, the former governor of Louisiana – whose politics closely resemble Turkey’s, who once bragged that  "The only way I can lose this election is if I’m caught in bed with either a dead girl or a live boy."

But for the first time the opposition is putting up a fight, chipping away at the edges of Erdoğan’s support, using his own words to taunt him and forcing him into unaccustomed mistakes. Many opposition figures estimate they will have to win well over 50% of the vote to overcome anticipated vote rigging by Erdogan’s ruling party. About 60 million people have the right to vote, and the difference created by even a small amount of rigging could shift a close result. But for the first time in many years the results are not a foregone conclusion. The June 24 election night will be interesting indeed.

Welcome To Montana Mr. Zarrab

If the producers of the hit TV show Sopranos are looking for a sequel they have no further to look than a federal courtroom in lower Manhattan. There, before disbelieving journalists and other onlookers, a young Iranian/Turkish gold trader is outlining a brazen money-laundering, Iran sanctions busting scheme involving a cast of characters that would guarantee the show several successful seasons. The trail leading to this courtroom began in Iran and wound its complicated way through Turkey, Dubai, West Africa, China, India, Miami and now a federal court in New York.

Is the sequel coming up?

            The cast of characters would grow to involve not just one Reza Zarrab, but would include several corrupt Turkish ministers, bent banks, an enraged and uncomprehending Turkish president, relatives of this president, and a shadowy Muslim cleric now living in the U.S. who is accused of orchestrating an attempted coup in Turkey in 2016. Bit parts are reserved for former CIA officials and the now disgraced former National Security Adviser Michael Flynn. One final character would be Zarrab’s business partner in Iran who now sits in prison hoping against hope that the authorities change their minds about his execution. Oh, and in a wonderful bit of irony no script-writer would dare include, one of the Turkish ministers used by Zarrab is well acquainted with American courtroom procedures because he used to be a court-approved translator while living in New York.

As if this drama were not enough, in the middle of Zarrab’s testimony the leader of Turkey’s opposition party revealed what he said were bank statements showing that Turkish President Tayyip Erdoğan’s relatives had shifted several million U.S. dollars to the tax haven of the Isle of Man. There’s plenty here for several seasons.

            The scheme described by Zarrab – once hailed as a national hero in Turkey – involved running billions of dollars through the Turkish financial laundromat he helped create in a mind-boggling plan to help Iran gain access to funds it was receiving from oil and gas sales. This was a crucially important to Iran because UN and US sanctions had blocked its ability to trade in much of the international market place. Meanwhile, billions of US dollars which Iran received for its oil/gas trade were piling up in Turkish banks. The only problem was that under the sanctions regime and US Treasury rules there was no way for Iran to use those dollars. Enter our bright Mr. Zarrab.

            He was a modestly successful foreign exchange trader who saw an opportunity. The plan he designed to free up those dollars for Iran grew into a multi-billion-dollar business involving massive gold transactions, several countries, countless front companies, and banks with easy virtue. The scheme was so complex that it took him the better part of two days in the courtroom to draw an incredibly complicated diagram with multiple boxes, circles, lines, arrows, and names in an effort to show how it was done. Jurors struggling to follow all this could be excused for requesting a couple of aspirin.

 

Zarrab attempts to diagram his complicated scheme

            None of this could have worked without the active compliance of Turkish ministers and senior officials in state banks. Zarrab said he paid one of the ministers €40 - €50 million to get him to lean on the state banks to go along with the scheme. The general manager of the major state bank Halkbank kept $5 million in cash in a shoe box in his closet. Another one of the ministers involved recently thought it prudent to become a citizen of the Turkish Republic of Northern Cyprus – from which there is no extradition.

            Zarrab’s scheme was working like clockwork until an explosive series of wire-taps was released in December 2013 by unknown persons – later claimed by Erdoğan to be accomplices of the aforementioned shadowy Moslem preacher now living in the United States. These tapes blew the lid off the operation and riveted the attention of the Turkish public. The government quickly buried the news and the ministers got off with a slap on the wrist and dismissal from their jobs. The minister later accused of taking the €40 - €50 million protested loudly – in true Mafia fashion – his complete innocence and that he was ‘set up’. His case might have been stronger had he not displayed a watch that cost $700,000 while loudly protesting his innocence. Tough to do that on a minister’s salary.

"This is a gift, I tell you! A gift!"

            Zarrab himself spent a few days in jail but was soon released as a hero of Turkey who helped reduced the staggering Current Account Deficit through his gold trades. Nonetheless he began to feel a little uncomfortable when some of his calls were not returned and his partner in Iran was arrested, tried, and sentenced to death. That tends to focus one’s mind. It didn’t take Zarrab long to realize how much he was exposed to the whims of Turkish justice. He knew just how easily and how far he could fall from grace. In the spring of 2016 he decided to take his family to visit Disneyland in Florida. Imagine his surprise – or relief – when upon landing in Miami was met not by Mickey Mouse but by a couple of unsmiling FBI agents who promptly arrested him on multiple charges of money laundering and breaking the Iranian sanctions.

            Now, the conspiracy theorists have had a field day saying his trip to America was a set-up from the start with Zarrab deciding that life in U.S. prison was safer than being in either Turkey or Iran. Maybe, maybe not. But one interesting question is how a person with his record could get a U.S. visa. Anyway, he spent almost two years in custody while prosecutors prepared their case. Their job was made inexplicably easier when for some very bizarre reason Turkey decided to send the deputy general manager of the deeply implicated Halkbank to New York for a conference. This hapless individual was promptly arrested on the same charges and thrown into the slammer to be tried with Zarrab.

            By this time Turkey was caught up in the attempted coup that Erdoğan claims was orchestrated by his one-time ally Fethullah Gülen from his farm in Pennsylvania. Erdoğan pleaded vainly with Obama and later Trump to extradite Gülen. Also, recognizing the risk of a singing Zarrab, he pleaded with them to send Zarrab back. No luck.

            When it became clear that, again in true Mafiosi fashion, Zarrab was going to plead guilty and testify against the defendant from Halkbank rather than face decades in prison, Erdoğan began to play the national sovereignty card. “We are an independent country! This trial is a violation of our national sovereignty! We can trade with whomever we want!” True enough. But if you use U.S. dollars in those transactions you break U.S. regulations and your banks risk huge fines. Just ask BNP Paribas, Standard Charted, HSBC, and several others who had to eat massive fines imposed by the U.S. Treasury. In his anger and impotence Erdoğan is lashing out blindly, and ordered the Istanbul prosecutor to indict two former CIA officials on grounds that they helped in the coup attempt. “Anything you do we can do better!”

            So what next for Turkey? For a start, American/Turkish relationships have hit a new low. Erdoğan will do his best to play the nationalist card and portray all this Zarrab testimony as yet another plot against Turkey. Given his almost total control of the media in Turkey this may work with his really hard core supporters and limit his internal political damage. But Turkey’s international reputation has taken a serious hit. “We’ve been reduced to one level below banana republic,” lamented one friend.

            It’s not clear yet how big a fine, if any, Turkish banks involved in the sanctions busting scheme will have to pay. Erdoğan will probably make a big deal out of refusing to pay any fine as a violation of Turkish pride and sovereignty. But saner heads may remind him that failure to pay could result in the Turkish banks being excluded from the international financial system. That nuclear option could force him to climb down and negotiate. Also, banks with an unpaid fine hanging over them would find it almost impossible to roll over their massive foreign exchange debt each year. No one would touch them. 

Reza Zarrab's new home?

            And what of the one-time national hero Mr. Zarrab? Well, the Witness Protection Program beckons. He may learn to love the wilderness of some place like Montana rather than return to Turkey and face the possibility of becoming part of the infrastructure of the runways at the new Istanbul airport.