In the labyrinthine alleyways of this ancient city’s Grand Bazaar, currency dealer Sardar Kaya glanced around before making an impromptu confession: Even those like him, who daily turn volatility into profit, wonder if Turkey’s biggest corruption scandal in recent memory has become too jarring a ride.

“Sure, a crisis like this is good for business, if you are clever enough,” he said, lounging against a column in the sprawling market’s informal gold-and-currency trading district, where chaotic scenes unfolded last week as the Turkish lira touched an all-time low. “But you can also fall on the wrong side of it.”

Many in Turkey are feeling the same way as they try to sort through the implications of a vast and many-tentacled graft inquiry that has jeopardized Turkey’s once-thriving economy and shaken the foundations of state control -- most particularly, the near-absolute power that Prime Minister Recep Tayyip Erdogan has enjoyed for more than a decade.

The burgeoning scandal, fueled by splits within Erdogan’s Islamist-leaning Justice and Development Party, has ensnared members of the prime minister’s inner circle, and analysts say Erdogan’s increasingly authoritarian response to the inquiry has eroded Turkey’s already fragile democracy.


The turmoil’s chilling effect on personal freedoms has also stirred concern in Washington, particularly after the prime minister took a veiled swipe at the U.S. envoy to Turkey last month, in the scandal’s early days -- a blunt warning against outside meddling. As a member of the North Atlantic Treaty Organization, Turkey is a key U.S. ally in the Middle East, and President Obama has attempted to cultivate relations with Erdogan, especially in regard to U.S. policy toward Syria.

“This is the biggest crisis of the Erdogan era, without any doubt,” said Steven Cook, a senior fellow for Mideast studies at the U.S.-based Council on Foreign Relations. But the repercussions could take time to build, he said, with municipal elections in March the next looming test for Erdogan and his party.

The corruption inquiry became public nearly a month ago, when a series of early-morning police raids netted dozens of arrests and triggered a plethora of lurid news reports, including accounts of $4.5 million in cash discovered stuffed in shoe boxes at the home of the chief executive of a state-run bank. Those rounded up also included the sons of three Cabinet ministers (who quickly resigned) and a billionaire construction magnate with close ties to the prime minister.

Erdogan, previously lionized in the West as living proof that democracy and an Islamist outlook were not incompatible, promptly went on the offensive. His camp blamed a Turkish religious figure who lives in self-exile in the United States, alleging he orchestrated the investigation, and Erdogan began systematically purging the ranks of police and prosecutors involved in the inquiry. One prosecutor was pushed out after announcing that Erdogan’s son Bilal was under investigation.


By early January, the Hurriyet newspaper said, nearly 2,000 in the police force, including 15 provincial police chiefs and the deputy head of the national police, had been removed or reassigned. Some police investigators with high-profile units reportedly were transferred to traffic duties. Erdogan’s party -- known as the AKP in Turkish -- also launched a push to tighten government control over the appointments of judges and prosecutors.

The campaign against law enforcement officials and judicial figures was apparently spurred by the perception within the Erdogan camp that those targeted were under the sway of the Islamic cleric Fethullah Gulen, who lives in Pennsylvania. The ranks of Turkish public servants include substantial but uncounted numbers of “Gulenists,” many of them products of a chain of preparatory schools run by his movement, called Hikmet, or Service.

Gulen and Erdogan, once politically close, had been drifting apart, but the breaking point seemed to come in November, when the government began laying legal groundwork for closing Hikmet’s schools in Turkey, an important source of revenue and prestige for the movement. Within weeks, the scandal was in full bloom.

The investigation in some ways tracks with the dramatic transformation of Turkey’s social and economic landscape over the last decade. Erdogan’s ascension set the stage for the rise of a wealthy Turkish entrepreneurial class, particularly in the lucrative construction industry. Many of its members were overtly pious Muslims like him, but the AKP’s backers also included personalities such as the flashy real-estate tycoon Ali Agaoglu, who was among those swept up in the Dec. 17 raids.


Agaoglu, known for his love of luxury cars, beautiful young women and appearing in his company’s TV ads, was one of the prime movers behind what critics have called the rapacious development of historically or environmentally sensitive areas in Istanbul over the last decade.

Willy-nilly but enormously profitable building projects, with bribes often paid to authorities to turn a blind eye to zoning rules, have spurred pushback from a broad cross-section of Turks. A plan to pave over Gezi Park, one of the last bits of green space in the city center, was the spark for large antigovernment demonstrations that broke out in June.

With the corruption scandal coming six months after that outbreak of street unrest, Erdogan’s backers have again been hammering away at a theme long familiar in Turkey’s times of trouble: that of a sinister foreign hand at work.

A columnist for the conservative Akit daily newspaper, Abdurrahman Dilipak, recently deemed the investigation the fruit of an “international conspiracy” by the United States, Israel and several European nations -- plus the Vatican.


“Turkey is not the only target,” the columnist said. “This scheme is threatening the whole Muslim world.”

Erdogan employed bellicose rhetoric last month in a televised speech in which he warned against “provocative” actions by foreign envoys. “We don’t have to keep you in our country,” he said. “Do your job.”

That was widely interpreted as a slap at U.S. Ambassador Francis J. Ricciardone, coming after Turkish media reported the American had told European diplomats that Turkey’s state-owned Halkbank had been warned by Washington not to circumvent sanctions against Iran. Allegations against the bank are now an element in the multi-pronged scandal.

Publicly, the State Department has hewed to carefully worded commentary on the inquiry and its reverberations. But signs of an increasingly repressive climate in Turkey emerge almost daily, including new Internet controls on top of already considerable user restrictions. The video-streaming service Vimeo was shut down in Turkey last week.


And chronicling the government’s woes can be a perilous business: Last month, the Committee to Protect Journalists reported that Turkey was the world’s biggest jailer of journalists in 2013.

“There’s not a word in Turkish for ‘opaque,’ ” said Cengiz Aktar, a senior associate at the Istanbul Policy Center. “There’s only the opposite of transparency. And right now, nothing is transparent.”

In classic “enemy of my enemy is my friend” strategy, Erdogan has signaled that he is seeking a rapprochement with Turkey’s still-powerful military, whose authority he had always strived to curtail. That raises what is for many an uneasy scenario: that Erdogan could seek the presidency in summer elections, with the military helping to prop him up and stave off Gulenist influence.

The use of so-called black money to lubricate Turkish politics and business dealings is nothing new, but the sheer scope of the current scandal is deeply disillusioning to many who had bought into the “clean” image promulgated by the AKP when Erdogan first came to power.


Those feeling the economic squeeze are not only anxious, but also resentful. Istanbul car dealer Mert Korkmaz attributes his shrinking profit margins to a government-imposed tax that more than doubles the cost of most of the mid-range Nissan models in his showroom.

The supposedly temporary levy, imposed in 1999, has remained in place and steadily increased -- including a new hike he learned of only at the start of the year, and blames on the government’s current struggles.

“I work hard, and I play by the rules, but some people do it the easy way,” Korkmaz said. “So when I see all of this is happening, so much money flowing where it does, I just feel stupid. I feel stupid.”

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laura.king@latimes.com