Wed, Dec 18, 2013

http://online.wsj.com/news/articles/SB10001424052702303949504579263601010522432

ISTANBUL—Police detained dozens of Prime Minister Recep Tayyip Erdogan's allies in a corruption investigation, sending shock waves through Turkey as a power struggle within the ruling party dramatically intensified three months before crucial elections.

In a series of dawn raids, police took 27 people into custody Tuesday including a municipal leader, the sons of two cabinet ministers and the chief executive of a state bank, the state-run Anadolu news agency reported.

They were being questioned about allegations of money laundering, gold smuggling and bribery after a two-year investigation, the agency said.

Enlarge Image

Baris Guler (center, with sunglasses), the son of Interior Minister Muammer Guler, was among more than two dozen high-profile figures picked up Tuesday. EPA

News of the probe—which snared executives influential in key sectors of Turkey's economy—pushed Istanbul's benchmark stock index almost 3% lower, and saw the lira fall 0.7% against the dollar.

The Interior Ministry and police force released no details and couldn't be reached to comment. A suspect can generally be held up to 24 hours for questioning without charge in Turkey.

The arrests come amid an increasingly public battle within the ruling Justice and Development Party, or AKP, pitting supporters of the prime minister against a faction loyal to Fethullah Gulen, an influential U.S.-based cleric who has helped anchor the party's political dominance for more than a decade.

Over the past month Mr. Erdogan has accelerated a yearlong effort to curb the power of the Gulen faction, a moderate, loosely knit Islamic movement that is estimated to have at least one million followers in Turkey.

Analysts say the cleric's network controls key positions in the police force and judiciary, which have been used to wield influence over the government and attack political opponents.

"We now have waves of uncertainty and dense fogs spreading over Turkey….The AKP's unity is broken," said Atilla Yesilada, an Istanbul-based analyst for Global Source Partners."Erdogan will likely now move to consolidate his power."

Mr. Erdogan struck a defiant tone, characterizing the probe as designed to split the party and the country and suggesting opponents challenge him at the ballot box.

"We won't bow to any threats. Those who are backed by some dark forces inside and outside Turkey cannot chart this country's course," the prime minister said to tens of thousands of supporters at a rally in Konya. He later told reporters in televised comments that he wouldn't comment on the specifics of the case until the judicial process had concluded.

The arrests also come ahead of March local elections—considered a litmus test of Mr. Erdogan's popularity ahead of his expected bid to become Turkey's first directly elected president in August.

The AKP comfortably remains the country's most popular political party, but its internal rifts have become increasingly public in recent months, emboldening government opponents.

Mr. Erdogan faced the biggest public challenge to his rule during demonstrations in the summer that drew millions of people, but those protests have yet to boost the divided opposition or dent the government's support in opinion polls, which has been steady at around 50%.

The list of those questioned by police Tuesday included some of the prime minister's most high-profile allies in business and politics.

Among them was construction magnate Ali Agaoglu, one of Turkey's richest men and a key player in the decadelong building boom that has underpinned Turkey's robust economic growth.

The Anadolu news agency also reported that police had detained the sons of two cabinet ministers: Economy Minister Zafer Caglayan and Interior Minister Muammer Guler. Both ministers unexpectedly canceled meetings on Tuesday morning. Neither man's spokesman was available to comment.

The probe also snared the chief executive of state lender Turkiye Halk Bankasi, HALKB.IS -2.53%  or Halkbank, causing shares to fall as much as 8%. Halkbank confirmed that security services had requested documents from its headquarters.

The bank drew headlines last year by processing payments for government purchases of Iranian oil and natural gas, allowing Ankara to circumvent U.S. sanctions designed to stop financial institutions from working with Iran's central bank.

Analysts said the morning raids illustrated a growing tendency for political tensions to spill into the business world, threatening economic stability and investor confidence.

"Erdogan is expected to fire back, and when he feels cornered he may not limit his attacks to the Gulen community alone but to a broader range of interests to shore up his domestic support," said Naz Masraff, an analyst at political risk consultancy Eurasia Group. "Overall we may be heading into a much more volatile business climate as a result of today's events."

Formed in 2001, the AKP was for years famed for party discipline, settling numerous disagreements among its broad coalition behind closed doors to preserve the unity that has been seen as a bellwether of Turkey's stability.

But a much bigger rift was apparently triggered last month when the prime minister announced plans to shut private college-preparatory schools, more than a quarter of which are associated with the Gulen movement.

On Monday evening, hours before the investigation became public, a Gulen-aligned lawmaker, Hakan Sukur, resigned from the AKP in a sign observers said marked the start of open warfare between Erdogan loyalists and the imam's followers.

Mr. Sukur, a former national soccer team striker whose first term in parliament was characterized mostly by his soccer commentaries, cited a continuing operation against Gulenists for quitting the party.

"Turkey and the Turkish economy are set to lose in this conflict environment," said Cenk Sidar, managing director of Sidar Global Advisors, a Washington-based advisory firm.

—Fercan Yalinkilic contributed to this article.

Corrections & Amplifications

The U.S.-based cleric Fethullah Gulen leads a faction within Turkey's Justice and Development Party. An earlier version of this article misspelled his first name as Fetullah.