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Will Turkish Group Be A Casualty of Unrest?

Jul. 8, 2013 - 02:31PM   |  
By BURAK EGE BEKDIL   |   Comments
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ANKARA — The defense business of Turkey’s largest conglomerate could be a casualty of a row between the prime minister and one of its top executives over monthlong civil unrest that has battered the Turkish government, according to analysts and industry sources.

The prime minister has accused the Koc conglomerate of helping protesters, whom he referred to as “terrorists.” At stake, observers said, could be billions of dollars worth of government contracts in the portfolio of Koc’s two large defense companies — shipyard RMK Marine and armored vehicle manufacturer Otokar.

“It should come as no surprise if the government decided to thoroughly scrutinize all Koc-related contracts, including defense deals,” an analyst based here said.

An industry source said that some of the RMK and Otokar contracts may face revisions and some future deals may change course.

“It won’t be the first time a company becomes the victim of a political feud with the prime minister,” he said.

In 2009, Turkish tax authorities fined the country’s largest publishing group, Dogan Medya, US $3.2 billion over accounting irregularities, a fine that was larger than the company’s market value. The government denied any links between politics and the fine, although Prime Minister Recep Tayyip Erdogan had publicly called for a boycott of Dogan outlets and accused them of being politically hostile to his government.

What started May 31 as a demonstration by environmental activists in Istanbul has mushroomed into nationwide protests against Erdogan’s government in 80 cities. More than 2.5 million Turks have since protested Erdogan’s growing authoritarianism and Islamist governance. Four people have been killed in the demonstrations and more than 8,000 have been injured.

In one incident, protesters tried to escape police tear gas and pepper spray and took refuge in a posh Istanbul hotel, Divan, owned by Koc. Hotel management admitted the protesters to its lobby, which quickly turned into a makeshift first aid room.

The police fired more tear gas and pepper spray into the hotel lobby, although it is illegal to fire these chemicals into indoor spaces. It was reported that Ali Koc, a board member and third-generation family member, had ordered the hotel to help the protesters.

On June 16, an angry Erdogan said in a public rally: “We know which hotel owners helped terrorists [protesters]. It is a crime to abet terrorists. And those crimes will not remain unpunished.”

A senior government official close to Erdogan’s office said: “It is true that Erdogan got very upset by Koc’s open support for the protests. But I cannot tell how his anger would surface in this case.”

A procurement official familiar with Koc companies’ contracts denied any government intervention. “These are highly credible companies involved in most strategic programs. We have not yet received any political opinion regarding Koc-related contracts. And I cannot comment on how the prime minister will choose to behave in this matter.”

Erdogan chairs the Defense Industry Executive Committee (SSIK), the ultimate decision-maker on procurement. The procurement official admitted that Erdogan has a “powerful personal touch” when it comes to final decision-making at that panel.

Koc’s RMK Marine, based in Istanbul, is one of Turkey’s largest private shipyards. In January, the SSIK opened contract negotiations with RMK Marine to produce six corvettes under Turkey’s first national warship program, Milgem. The contract is worth $2.5 billion.

The corvettes are the smallest warships in the Turkish Navy. The largest ship is a frigate, and Turkey plans to use the experience gained in the Milgem project to design, develop and construct its first national frigate, the TF-2000, in the 2020s. Earlier, RMK Marine won a contract to build four search-and-rescue ships for the Coast Guard.

Otokar is the top supplier of armored vehicles to the Turkish Army. In 2008, Otokar signed a $500 million contract for Turkey’s first indigenous tank, the Altay. Under the deal, Otokar will build four prototypes that will undergo performance tests this year. The deal is for the prototypes only, and Otokar hopes to win the main production contract after performance tests.

Ironically, only 20 days before the unrest broke out, Koc announced that defense would be the fifth priority sector in the group’s strategic business planning, in addition to energy, finance, durable consumer goods and automotive production.

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