US embassy cable - 03ANKARA4545

UNCLAS SECTION 01 OF 03 ANKARA 004545 
 
SIPDIS 
 
 
STATE FOR EB/IFD/OIA 
TREASURY FOR OASIA 
DEPT PLEASE PASS USTR 
FAS FOR ITP/THORBURN 
USDOC FOR ITA/MAC/DDEFALCO 
 
 
E.O. 12958: N/A 
TAGS: EINV, KTDB, EFIN, TU 
SUBJECT:  2003 INVESTMENT CLIMATE STATEMENT FOR TURKEY - 
PART III 
 
Ref: STATE 128494 
 
 
The following is the third of four cables transmitting the 
2003 Investment Climate Statement for Turkey: 
 
 
9.  EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT 
 
 
The government has taken a number of important steps in 
recent years to strengthen and better regulate the banking 
system, whose weaknesses had contributed to macroeconomic 
instability over the previous decade. 
 
 
Parliament passed a law in June 1999 creating an independent 
agency, the Banking and Regulation and Supervision Agency 
(BRSA), to monitor and supervise Turkey's banks.  BRSA is 
headed by a board whose seven members would be appointed by 
the cabinet for six-year terms.  The law's provisions also 
toughen conditions for establishing new banks or branches, 
set credit limits to protect bank solvency, and strengthen 
regulatory and sanctioning powers, including authorizing the 
board to merge weak banks with stronger ones. 
 
 
The State Deposit Insurance Fund, under BRSA's management, 
has taken over 21 undercapitalized or failing  banks, 
including Imar Bankasi which was taken over on July 4, 2003. 
It has recapitalized these banks, and has been selling or 
liquidating them 
 
 
BRSA launched an auditing and recapitalization program in 
early 2002 that resulted in increased transparency and 
better accounting for non-performing loans  The BRSA also 
has issued regulation limiting the extent of connected 
lending (between a bank and related corporate entities) and 
requiring frequent BRSA on-site monitoring. 
 
 
One of the most significant achievements of the reform 
program has been to restructure the state banks, which 
continue to control more than one-half of Turkish banking 
assets.  The government liquidated one state bank (Emlak 
Bank), is trying to privatize another (Vakif Bank), and has 
significantly downsized (Ziraat Bankasi and Halkbank). 
Also, it largely eliminated state bank duty losses - 
unreimbursed subsidized loans from these banks - which had 
created an enormous financial hole that helped bring about 
the most recent financial crisis 
 
 
Because of high local borrowing costs (real interest rates 
can exceed 25 percent), short repayment periods, and limited 
liquidity condition during the current economic crisis, both 
foreign and local investors frequently seek credit from 
international markets to finance their activities.  As of 
July 2003, there were 51 commercial banks (including 14 
foreign banks) and  14 development or investment banks 
operating in Turkey.   Total sectoral assets were 
approximately USD 130.1 billion, or about 75 percent of GNP, 
as of July 2003 according to data from the Banking 
Regulation and Supervision Board.  The three state-owned 
commercial banks and the top six privately capitalized banks 
hold approximately 69 percent of total assets. 
 
 
There is a regulatory system established to encourage and 
facilitate portfolio investments, though it needs 
improvements in transparency, accounting, and enforcement 
provisions to bring it up to EU and US standards.  The 
Istanbul Stock Exchange (ISE), formed in 1986, is becoming 
one of the major players among emerging markets.  As of end- 
2001, 310 companies were listed on the exchange. However, 
Turkey has yet to develop other capital markets.  The 
Capital Markets Board is responsible for overseeing the 
activities of capital markets, including activities of ISE- 
quoted companies, and securities and investment houses. 
 
 
The Turkish private sector is dominated by a number of large 
holding companies, whose upper management is controlled by 
prominent families.  Most large businesses continue to float 
publicly only a minority portion of company shares in order 
to limit outside interference in company management. 
Hostile takeovers are unknown in Turkey.  There has been no 
attempt at a hostile takeover by either international or 
domestic parties in recent memory. 
 
 
There are no laws or regulations that specifically authorize 
private firms to adopt articles of incorporation or 
association to limit or prohibit foreign investment, 
participation, or control.  Neither is there any attempt by 
the private sector or government to restrict foreign 
participation in industry standard-setting consortia or 
organizations. 
10.  POLITICAL VIOLENCE 
 
 
The general security situation throughout Turkey is stable, 
but sporadic incidents involving terrorist groups have 
occurred.  The Turkish government is committed to 
eliminating terrorist groups such as the Kurdistan Workers' 
Party (PKK - now renamed Kadek) and various other militant 
groups. These groups have used terrorist activity to make 
political statements, particularly in Istanbul and other 
urban areas of Turkey.  In 2000 and 2001, terrorists 
targeting Turkish officials and various civilian facilities, 
such as fast food restaurants, in Istanbul were responsible 
for the deaths and injuries of several dozen people.  In 
2002 and 2003, civilian venues such as fast food restaurants 
have been the targets of minor bomb attacks.  Operation 
Iraqi Freedom triggered largely peaceful demonstrations in 
most major Turkish cities, but a series of bombings also 
occurred in several of Turkey's larger cities. 
 
 
Although the Turkish government takes air safety seriously 
and maintains strict controls, particularly on international 
flights, hijacking attempts have occurred as recently as 
2003.  In 2001, a flight attendant was killed during a 
hijacking by Chechen terrorists. 
 
 
11.  CORRUPTION 
 
 
CORRUPTION IS PERCEIVED TO BE A MAJOR PROBLEM IN 
TURKEY BY PRIVATE ENTERPRISE AND THE PUBLIC AT LARGE. 
THE TURKISH GOVERNMENT CONDUCTED TWO SIGNIFICANT ANTI- 
CORRUPTION OPERATIONS IN 2001, ONE IN THE ENERGY 
MINISTRY AND THE OTHER IN THE PUBLIC WORKS MINISTRY. 
SEVERAL INDIVIDUALS WERE CHARGED WITH CORRUPTION AND 
WRONGDOING IN GOVERNMENT CONTRACT TENDERS.  THE 
OPERATIONS RESULTED IN THE RESIGNATION OF BOTH 
MINISTERS AND THE ARREST OF MANY HIGH-LEVEL 
OFFICIALS.  PARLIAMENT CONTINUES TO PROBE CORRUPTION 
IN THE ENERGY MINISTRY AND OTHER GOVERNMENT BODIES. 
 
 
Corruption is reputedly a serious  problem in public 
procurement, with frequent allegations that contracts are 
awarded on the basis of personal and political relationships 
of businesspersons and government officials.  The judicial 
system is also perceived to be susceptible to external 
political and commercial influence to some degree. 
 
 
Turkish legislation outlaws bribery and some prosecutions of 
government officials for corruption have taken place, but 
enforcement is uneven. 
 
 
Turkey ratified the OECD antibribery convention, and passed 
implementing legislation in January 2003 to provide that 
bribes of foreign officials, as well as domestic, are 
illegal and not tax deductible.  Bribes cannot be deducted 
from taxes as a business expense. 
 
 
The Turkish government became a party to three conventions 
of the Council of Europe in 2001: the Strasbourg Convention 
on Laundering, Search, Seizure and Confiscation of the 
Proceeds from Crime; the Criminal Law on Corruption; and the 
Civil Law on Corruption. By becoming a party to these 
conventions, the Turkish government agreed to define 
corruption as a predicate offense for money laundering and 
to address private sector corruption, as well as public 
sector corruption, as a crime.  The Turkish government has 
signed the UN Convention against Transnational Organized 
Crime in 2001 and has submitted a draft proposal to become a 
party to the UN Convention Against Corruption. 
 
 
U.S. firms have sometimes alleged that corruption, or at a 
minimum nontransparent practices, have been a barrier to 
direct foreign investment.  American companies operating in 
Turkey have complained about contributions to the community 
solicited, with varying degrees of pressure, by municipal or 
local authorities. 
 
 
The Prime Ministry's Inspection Board, which advises a new 
Corruption Investigations Committee, is responsible for 
investigating major corruption cases.  Nearly every state 
agency has its own inspector corps responsible for 
investigating internal corruption.  The National Assembly 
can establish investigative commissions to examine 
corruption allegations concerning Cabinet Ministers for the 
Prime Minister; a majority vote in the parliament is needed 
to send these cases to the Supreme Court for further action. 
 
 
Transparency International has an affiliated NGO in 
Istanbul. 
 
 
12.  BILATERAL INVESTMENT AGREEMENTS 
 
 
Since 1985, Turkey has been negotiating and signing 
agreements for the reciprocal promotion and protection of 
investments.  Turkey has signed or initiated negotiations on 
bilateral investment treaties with 79 countries.  Forty- six 
of these agreements are now in force, including with the 
United States, United Kingdom, Germany, the Netherlands, 
Belgium Luxembourg, Denmark, Austria, Sweden, Switzerland, 
Spain, Hungary, Poland, Romania, Tunisia, Kuwait, 
Bangladesh, China, Japan, South Korea, Indonesia, Croatia, 
Cuba, the Czech Republic, Estonia, Russian Federation, 
Kazakhstan, Georgia, Tajikistan, Ukraine, Uzbekistan, 
Belarus, Macedonia, Pakistan, Turkmenistan, Moldova, 
Kyrgyzstan, Albania, Bulgaria, Argentina, Bosnia, Malaysia, 
Egypt, Mongolia, Greece and Israel. 
 
 
Turkey's bilateral investment treaty with the United States 
came into effect on May 18, 1990.  A bilateral tax treaty 
between the two countries took effect on January 1, 1998. 
Turkey has signed avoidance of double taxation agreements 
with 59 countries; 39 of these are in force. 
 
 
13.  OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS 
 
 
The Overseas Private Investment Corporation (OPIC) offers a 
full range of programs in Turkey, including political risk 
insurance for U.S. investors, under its bilateral agreement 
with Turkey.  OPIC is also active in financing private 
investment projects implemented by U.S. investors in Turkey. 
OPIC-supported direct equity funds, including the USD 200 
million Soros Private Equity Fund can make direct equity 
investments in private sector projects in Turkey.  Small- 
and medium-sized U.S. investors in Turkey are also eligible 
to utilize the new Small Business Center facility at OPIC, 
offering OPIC finance and insurance support on an expedited 
basis for loans from USD 100,000 to USD 10 million.  In 
1987, Turkey became a member of the Multinational Investment 
Guarantee Agency (MIGA). 
 
 
The U.S. Government annually purchases approximately USD 19 
million of local currency.  Embassy purchases are made at 
prevailing market rates, which fluctuate in accordance with 
Turkey's free floating exchange rate regime. 
 
 
Pearson