A FEDERAL court in New York is not the obvious setting for a trial that has sent panic through the Turkish establishment. But since he began testifying on November 29th, Reza Zarrab, a 34-year-old gold trader, has pled guilty to violating American sanctions against Iran; implicated Halkbank, a Turkish bank, and Recep Tayyip Erdogan, Turkey’s president, in his scheme; and confessed to bribing a former economy minister who, alongside an executive from Halkbank and six others, is a suspect in the case. In Turkey, a prosecutor has placed one current and one former US attorney under investigation, and Mr Erdogan has accused an Islamic sect of using America’s judiciary to stage a coup against his regime.
The charges against the gold trader, who was arrested during a trip to Florida in 2016, and the substance of his own allegations will sound familiar to most Turks. In 2013 police in Turkey arrested dozens of people, including Mr Zarrab, the sons of three cabinet ministers, and Halkbank’s general manager. Then as now, Mr Zarrab was accused of operating a laundering scheme that involved converting revenues from sales of Iranian gas to Turkey into gold, shipping the bullion to Dubai, and selling it for billions of dollars.
Mr Erdogan labelled the investigation a plot by a secretive Islamic movement, the Gulenists, to topple his government. He had it dismantled in the courts, the evidence dismissed as forgery, and the main suspects, including Mr Zarrab, released. He then sacked or reassigned thousands of alleged Gulenists from the police and the judiciary, the start of a purge that swelled to vast proportions after Turkey’s failed coup in 2016. Many Turks share Mr Erdogan’s view that the investigation was the work of the Gulenists. Yet few appear as eager as their president to overlook the evidence of wrongdoing it exposed. The shenanigans in an American courtroom risk becoming an embarrassment for Mr Erdogan.
The president has so far contained the damage to his reputation by muzzling the media. A day after Mr Zarrab confessed to paying Zafer Caglayan, the former economy minister, more than $60m in kickbacks and said Mr Erdogan ordered two banks to take part in his scheme, most of the country’s biggest newspapers, as well as the state news agency, censored the story. The day before, when the leader of the main opposition party accused Mr Erdogan’s family of depositing millions of dollars in offshore accounts, the state news channel cut its live broadcast of his speech.
The more immediate risk is to Turkey’s economy and its banks. In the event of a guilty verdict, Halkbank faces the prospect of major fines over its alleged role in the sanctions-busting, says Inan Demir, an economist at Nomura Bank. “We might be looking at something in the area of $5bn,” he says, an estimate almost double the bank’s market value. Halkbank has denied taking part in any illegal transactions.
On December 5th Mr Erdogan called the case “an international coup attempt”. His foreign minister has claimed that Gulen supporters have “infiltrated” America’s institutions, including its courts. Turkish prosecutors, meanwhile, have seized Mr Zarrab’s assets, including a private jet and property worth some $80m, opened an investigation into the American officials who put him on trial, and issued an arrest warrant for a former opposition lawmaker who is meant to appear as a witness.
Yet Turkey may have no choice but to accept the court’s verdict and pay any penalties. Its currency, the lira, has lost more than a tenth of its value against the dollar over the past year, partly due to anxiety about the Zarrab case and its consequences for Turkish banks. Failure to comply with American fines would send the currency into a nosedive. Mr Erdogan might risk a fresh row with America, but not that. “Right now,” says one banker, “the lira is the only check on his power.”
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