This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 13 ANKARA 004387 
 
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:  20032 INVESTMENT CLIMATE STATEMENT FOR TURKEY 
 
 
Ref: STATE 12849488106 
 
 
The following is the 20032 Investment Climate Statement 
for Turkey: 
 
 
¶1.  OPENNESS TO FOREIGN INVESTMENT 
 
 
Turkey has been pursuing liberal and outward-oriented 
economic policies since the mid-1980s.  The Government 
of Turkey (GOT) views foreign direct investment as vital 
to the country's economic development and prosperity. 
Accordingly, on paper Turkey has one of the most liberal 
legal investment regimes for FDI in of the OECD.  With 
the exception of some sectors (see below), areas open to 
the Turkish private sector are generally  open to 
foreign participation and investment.  However, aAll 
companies - regardless of nationality of ownership - 
face a number of obstacles:  political and macroeconomic 
uncertainties, excessive bureaucracy, weaknesses in the 
judicial system, high tax rates, weaknesses in corporate 
governance, arbitrary decisions taken at the municipal 
level, and frequent, sometimes unclear changes in the 
legal and regulatory environment.  As a result, FDI 
inflows, at well below one percent of GDP over the last 
decade, have been far below that of more investor- 
friendly emerging markets as well as of Turkey's 
potential.  The GOT's far-reaching program of economic 
and political reform agreed with the World Bank and IMF, 
and motivated also by multilateral agreements and EU 
accession, should address many of these problems. 
 
 
Regulations governing foreign investment are, in 
general, transparent.  A 1954 law on foreign investment 
(Law No. 6224) was substantially modified and 
liberalized by a 1995 Decree (Decree No. 95/6990) and 
associated communiqu.  Draft lLegislation approved 
bysubmitted to Parliament in June 20032 (Law 4875 on 
Direct Foreign Investment) would further liberalized the 
foreign direct investment regime by:  eliminating 
screening of foreign investors in favor of a 
notification system; providing national treatment in 
acquisition of real estate to foreign-owned entities 
registered under Turkish law; and abolishing the 
specific minimum capital requirement for foreign 
investments (general capital requirements for all 
companies contained in the Turkish Commercial Code will 
continue to apply).  However, implementing regulations 
for the new law are not yet in place. 
 
 
(The text of regulations governing foreign investment 
and incentives can be obtained on the Internet at: 
www.treasury.gov.tr/english/ybsweb  A summary of these 
regulations can be found at: 
www.dtm.gov.tr/english/doing/iginvest/invest/ htm and 
www.igeme.org.tr/introeng.htm 
 
 
The General Directorate of Foreign Investments of the 
Undersecretariat of the Treasury screens foreign 
investments.  Treasury has refused permission for a 
number of small investments because the activity 
involved was deemed to constitute retail trade rather 
than investment, or because of security concerns about 
the individual investors.  Screening mechanisms are 
routine and non-discriminatory, and have not generally 
impeded serious investment.  However, because domestic 
investment proposals are not routinely screened, foreign 
investors are not accorded national treatment in the pre- 
establishment phase. 
 
 
Turkish law included several additionalspecifies several 
other requirements for foreign investors, all of which 
were scrapped in the new foreign investment law.  These 
included:  Real or legal persons resident abroad must 
invest a minimum of USD 50,000 investment requirement to 
establish a corporation, become partners in an existing 
company, or open a branch office; the requirement to . 
Foreign investors wishing to increase their capital must 
seek permission from Treasury if the capital increase 
would change the participation ratio between the foreign 
investor and any local partners; and.  Turkish companies 
wereare required to register with Treasury any 
licensing, management, or franchising agreements 
concluded with foreign persons.  Foreign investors 
owning ten percent or more of a company established in 
Turkey must inform Treasury of their participation in 
any directors' or shareholders' meetings.  Note:  The 
foregoing requirements would be dropped by the draft 
foreign investment law. 
 
 
Foreign investors are subject to restrictions on 
establishment in certain sectors.  Establishment in 
financial services, including banking and insurance, and 
in the petroleum sector requires special permission from 
the GOT.  The equity participation ratio of foreign 
shareholders is restricted to 20 percent in 
broadcasting, and 49 percent in aviation, value-added 
telecommunication services, and maritime transportation. 
However, companies receive full national treatment once 
they are established. Establishment in financial 
services, including banking and insurance, and in the 
petroleum sector requires special permission from the 
GOT for both domestic and foreign investors. 
 
 
The GOT privatizes State Economic Enterprises through 
block sales, public offerings, or a combination of both. 
Foreign investors generally receive national treatment 
in privatization programs. Turkish law allows foreign 
investors to acquire up to 45 percent of Turk Telecom, 
the monopoly provider of voice and other 
telecommunications services, with the Turkish government 
retain a single "golden" (blocking) share, in the 
company's upcoming privatization. 
 
 
The Turkish Parliament also passed legislation in June 
2003 which should streamline the company registration 
process (see Section 8 - Transparency of the Regulatory 
System).  Another new law on work permits for foreign 
citizens which will take effect later in 2003 should 
give the Labor and Social Security Ministry additional 
authority in this area (see Section 5 - Performance 
Requirements/Incentives). 
 
 
This report was prepared in July 2003.  To find the text 
of regulations governing foreign investment and 
incentives, please consult the Internet at: 
www.treasury.gov.tr/english/ybsweb.  A summary of these 
regulations can be found at: 
www.dtm.gov.tr/english/doing/iginvest/invest/ htm and 
www.igeme.org.tr/introeng.htm.) 
 
 
¶2.  CONVERSION AND TRANSFER POLICIES 
 
 
Turkish law guarantees the free transfer of profits, 
fees and royalties, and repatriation of capital.  This 
guarantee is reflected in Turkey's Bilateral Investment 
Treaty with the United States, which mandates 
unrestricted and prompt transfer in a freely usable 
currency at a legal market clearing rate for all funds 
related to an investment.  There is no difficulty in 
obtaining foreign exchange.  There are no limitations on 
the inflow or outflow of funds for remittances. 
 
 
¶3.  EXPROPRIATION AND COMPENSATION 
 
 
Under the 1990 Bilateral Investment Treaty with the 
United States (codifying existing Turkish law), 
expropriation can only occur in accordance with 
international law and due process.  Expropriations must 
be for public purpose and non-discriminatory. 
Compensation must be reasonably prompt, adequate, and 
effective.  Under the Bilateral Investment Treaty, U.S. 
investors have full access to the local court system and 
the ability to take the host government directly to 
third party international binding arbitration to settle 
investment disputes.  There is also a provision for 
state-to-state dispute settlement. 
 
 
As a practical matter, the GOT occasionally expropriates 
private property for public works or for State 
Enterprise industrial projects.  The GOT agency 
expropriating the property negotiates and proposes a 
purchase price.  If the owners of the property do not 
agree with the proposed price, they can go to court to 
challenge the expropriation or ask for more 
compensation. 
 
 
¶4.  DISPUTE SETTLEMENT 
 
 
There are no outstanding expropriation or 
nationalization cases.  However, there are several 
investment disputes between U.S. companies and Turkish 
government bodies, particularly in the energy and 
tourism sectors..  In one case, local authorities have 
shut down an American-owned hotel and restaurant by 
denying operating permission and residency permits, 
apparently without legal basis.  Claimant has reportedly 
initiated four lawsuits against the provincial governor 
and government agencies, but these cases have not yet 
been decided by the courts.  In the energy sector, the 
Government of Turkey has not implemented a number of 
contracts with U.S. firms for build-operate-transfer 
(BOT) and transfer-of-operating-rights (TOR) power 
projects.  One company filed an international 
arbitration case against the GOT in 2002.  A 2002 
Constitutional Court ruling requires the GOT to either 
proceed with the projects according to the signed 
contracts, or cancel them and compensate the companies 
accordingly.  The GOT has indicated it will seek a 
negotiated settlement with those companies, but as of 
mid-June, the GOT had not contacted any of the companies 
to pursue a settlement. 
 
 
Turkey's legal system provides means for enforcing 
property and contractual rights. The court system is 
overburdened, however, which sometimes resultsing in 
slow decisions and judges lacking sufficient time to 
grasp complex issues.  The judicial system is also 
perceived by the public and by business to be 
susceptible to external political and commercial 
influence to some degree.  Judgments of foreign courts 
need to be reconsidered by local courts before they are 
accepted and enforced.  Turkey has written and 
consistently applied commercial and bankruptcy laws. 
Monetary judgements are usually made in local currency, 
but there are provisions for incorporating exchange rate 
differentials in claims. 
 
 
Turkey is a signatory of the Washington Convention, and 
a member of the International Center for the Settlement 
of Investment Disputes (ICSID), also known as the 
Washington Convention, and is a signatory of the New 
York Convention of 1958 on the recognition and 
enforcement of foreign arbitral awards.  Turkey ratified 
the Convention of the Multinational Investment Guarantee 
Agency (MIGA) in 1987. 
 
 
The Turkish government accepts binding international 
arbitration of investment disputes between foreign 
investors and the state; this principle is included in 
the U.S.-Turkish Bilateral Investment Treaty (BIT).  For 
many years, there was an exception for "concessions" 
involving private (primarily foreign) investment in 
public services.  In 1999, the Parliament passed 
amendments to the constitution allowing foreign 
companies access to international arbitration for 
concessionary contracts.  In 2000, the Turkish 
government completed implementing legislation for 
arbitration.  In 2001, the Parliament approved a law 
further expanding the scope of international arbitration 
in Turkish contracts.  In practice, however, Turkish 
courts have on at least one occasion failed to uphold an 
international arbitration ruling involving private 
companies. 
 
 
¶5.  PERFORMANCE REQUIREMENTS/INCENTIVES 
 
 
Turkey is a party to the WTO Agreement on Trade Related 
Investment Measures (TRIMS). 
 
 
Turkey provides a variety of investment incentives to 
both domestic and foreign investors, though these were 
scaled back in 2003.  These include  corporate tax 
exemptions, with up to 40100 percent of specified 
investment expenses - 200 percent for investments over 
USD 250 million - deductible from future taxable profits 
for investments about 5 billion TL (an incentive 
certificate is not required for this exemption).  In 
addition, there are: ; exemptions from value-added taxes 
for machinery and equipment purchased locally or 
imported for the investment; duty-free import of 
machinery and equipment (though not raw materials or 
intermediate goods) to be used in the investment; and 
soft loans for research and development.  Investment 
incentives are defined in a May 2003 Finance Ministry 
decree. clearly specified in regulations (a government 
decree issued March 25, 1998, and a related communiqu 
dated May 6, 1998 Feb 18, 2001). 
 
 
 
 
In order to take advantage of investment incentives, an 
investor must obtain an "incentive certificate" from the 
Treasury.  The size of the incentive depends upon the 
geographic location, sector, and value of the 
investment.  Investment incentives are greater in the 
less-developed "priority" and "normal" areas or sectors, 
and eligibility depends on a minimum value. According to 
the current incentive regime, a minimum fixed investment 
of  TL200 billion.  (approximately USD 120,000 in July 
2002) is required for priority regions, TL 400 billion 
(approximately USD 240,000 in July 2002) for normal 
regions and 600 billion TL (approximately USD 360,000 in 
July 2002) for  developed regions.  (For more 
information on the Turkish incentive system, please 
visit: www.investinturkey.gov.tr/incentives.htm). 
 
 
The GOT has introduced several special investment 
incentives for the eastern and southeastern regions. 
For example, new investments made in these provinces 
before the end of 2000 are exempt from corporate and 
income taxes for five years, investors can receive 
substantial discounts on electricity payments, and state- 
owned banks will provide reduced rate loans for 
industrial or employment producing investments.The GOT 
is considering further tax and social insurance premium 
reductions for businesses investing in provinces with 
per capita income below USD 1,500. 
 
 
There are no performance requirements imposed as a 
condition for establishing, maintaining, or expanding an 
investment.  There are no requirements that investors 
purchase from local sources or export a certain 
percentage of output.  However, domestic or foreign 
investors who commit to realizing USD 10,000 of exports 
upon completion of the investment may be exempt from 
certain fees and taxes, such as those related to land 
registration or company establishment.  Investors' 
access to foreign exchange has no relation to exports. 
 
 
There are no requirements that nationals own shares in 
foreign investments, that the shares of foreign equity 
be reduced over time, or that the investor transfer 
technology on certain terms. 
 
 
There are no government imposed conditions on permission 
to invest, including location in specific geographical 
areas, specific percentage of local content - for goods 
or services - or local equity, import substitution, 
export requirements or targets, employment of host 
country nationals, technology transfer, or local 
financing. 
 
 
The GOT does not request that investors disclose 
proprietary information, other than publicly available 
information, as part of the regulatory approval process. 
Enterprises with foreign capital must send their 
activity report, submitted to the general assembly of 
shareholders, auditor's report, and balance sheets to 
the Treasury's Foreign Investment Directorate every year 
by May. 
 
 
With the exceptions noted under "Openness to Foreign 
Investment", Turkey grants all rights, incentives, 
exemptions and privileges available to national capital 
and business to foreign capital and business, on a MFN 
basis.  American and other foreign firms can participate 
in government-financed and/or subsidized research and 
development programs on a national treatment basis. 
 
 
With one exception noted under "Dispute Settlement", 
vVisa, residence, or work permit requirements have not 
generally inhibited foreign investors.  Expatriates may 
be assigned as managers or technical staff.  We are 
aware of one case in the tourism sector in which denial 
of a residence permit has hindered operations for a 
foreign investor.  A 2003 law (no. 4817) on work 
authorizations for foreign nationals should give the 
Ministry of Labor and Social Security more authority 
over work permits.  Implementing regulations are to be 
issued later this year. 
 
 
Turkey has a liberal foreign trade regime.  There are no 
discriminatory or preferential export or import policies 
directly affecting foreign investors.  Turkey harmonized 
its export incentive regime with the European Union in 
1995, prior to the start of the Customs Union.  Turkey 
currently offers a number of export incentives, 
including credits through the Turkish Eximbank, energy 
incentives, and research and development incentives. 
Cash incentives for exporters have been eliminated. 
Foreign investors can participate in these export 
incentive programs on a national treatment basis.  More 
information on Turkey's trade regime can be found at 
www.foreigntrade.gov.tr. 
 
 
Military procurement generally requires an offset 
provision in tender specifications when the estimated 
value of the imported goods and/or services exceeds five 
million dollars. Turkish procedures provide little 
incentive for U.S. companies to satisfy offset 
requirements (the obligation to invest or buy Turkish 
exports as a condition of winning defense contracts) by 
investing in non-defense industries. 
 
 
¶6.  RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT 
 
 
Foreign and domestic private entities have the right to 
freely establish and own business enterprises and engage 
in all forms of remunerative activity.  As noted above, 
restrictions exist in the establishment of firms in 
certain sectors where the share of foreign ownership is 
limited to 20 percent in broadcasting and up to 49 
percent in aviation, maritime transportation, and value- 
added telecommunication services.  Certain activities 
are reserved for GOT owned enterprises.  For example, by 
law, Turk Telekom has a monopoly until December 31, 2003 
on providing basic telephone services.  Beyond these 
areas, private entities may freely establish, acquire, 
and dispose of interests in business enterprises, and 
foreign participation is permitted up to 100 percent. 
 
 
However, non-resident investors in companies with 
foreign capital must seek permission from the Treasury 
prior to selling part or all of their shares to real or 
legal persons resident in Turkey.  Treasury approval is 
not required for sales to other foreigners or for sales 
of securities or capital market instruments through a 
financial intermediary.   Note:  This restriction would 
be removed by the draft foreign investment law currently 
before parliament. 
 
 
Competitive equality is the standard applied to private 
enterprises in competition with public enterprises with 
respect to access to markets, credit, and other business 
operations.  Turkey is adopting the EU's competition 
policy; a Competition Board was established in 1997 to 
implement the 1994 competition (anti-monopoly) law. 
 
 
¶7.  PROTECTION OF PROPERTY RIGHTS 
 
 
Secured interests in property, both chattel and real are 
recognized and enforced.  There is a recognized and 
reliable system of recording such security interests. 
For example, there is a land registry office where real 
estate is registered.  Turkey's legal system protects 
and facilitates acquisition and disposal of property 
rights, including land, buildings, and mortgages, 
although some parties have complained that the courts 
are slow in rendering decisions and that they are 
susceptible to external influence (see "Dispute 
Settlement"). 
 
 
In 1995, the Turkish Parliament approved new patent, 
trademark and copyright laws in connection with 
preparations for Turkey's customs union with the EU. 
Turkey also acceded to a number of multilateral 
intellectual property rights (IPR) conventions, 
including the 1971 Paris Act of the Berne Copyright 
Convention.  In 2001, the Parliament enacted amendments 
to the copyright law, which provide retroactive 
protection, expand the list of protected items and 
include deterrent penalties against piracy.  These 
amendments brought Turkey into compliance with the WTO 
Agreement on Trade Related Aspects of Intellectual 
Property Rights (TRIPS) in most areas.  In recognition 
of Turkey's progress in the IPR area, USTR removed 
Turkey from its Special 301 Priority Watch List and 
placed the country on its Watch List in 2002, where it 
remains in 2003.1. 
 
 
Although iIntellectual property holders have praised 
Turkey's 2001new legislation as a significant 
improvement in the legal regime, implementing 
regulations in the area of broadcasting include an 
arbitration provision which could lead to compulsory 
licensing of musical and possibly other works.   In the 
software area, piracy rates have come down in recent 
years following an anti-piracy campaign and a directive 
to legalize software used in government bodies. 
However, piracy rates for recorded music remain 
persistently high.  Trademark holders contend that there 
is widespread and often sophisticated counterfeiting of 
their marks in Turkey. 
 
 
Turkey's 1995 patent law replaced a law originally 
passed in 1879.  New trademark, industrial design, and 
geographic indicator laws were passed at the same time, 
completely revamping Turkey's foundation for industrial 
property protection.  Turkey also adhered to a number of 
international conventions in 1995, including the 
Stockholm Act of the Paris Convention, the Patent 
Cooperation Treaty, and the Strasbourg Agreement.  The 
Turkish Patent Institute (TPI) was established in 1994 
as an independent legal entity (Law No. 4004, June 16, 
1994) under the Ministry of Industry and Trade.  TPI's 
mission is to support technological development in 
Turkey, establish and protect intellectual property 
rights and provide public information on intellectual 
property rights.  Currently, TPI is understaffed to 
affect countrywide protection. 
 
 
In accordance with the 1995 patent law and Turkey's 
agreement with the EU, patent protection for 
pharmaceuticals began on January 1, 1999.  Turkey has 
been accepting patent applications since 1996 in 
compliance with the TRIPS agreement "mailbox" 
provisions.  The patent law does not, however, contain 
interim protection for pharmaceuticals in the R&D 
"pipeline."  Lack of data exclusivity protection, which 
is required by the TRIPS agreement, is the key IPR 
concern for research-based pharmaceuticals companies. 
 
 
¶8.  TRANSPARENCY OF THE REGULATORY SYSTEM 
 
 
 
 
The GOT has adopted policies and laws, which in 
principle should foster competition and transparency. 
However, foreign companies in several sectors claim that 
regulations are sometimes applied in a nontransparent 
manner.  In 2002, the GOT published a report on 
transparency and good governance in Turkey's public 
sector and established an interagency steering committee 
to implement it.  The plan calls for:  greater public 
access to information from the government and public 
sector entities; financial disclosure by elected public 
officials; and decentralization of most public services. 
 
 
The government in principle follows competitive bidding 
procedures.  In 20032, Law 4734 on Public Procurement 
entered into force.  The Turkey's Parliament approved 
amendments to the state procurement law law, which 
established a board to oversee public tenders, and 
lowered the minimum bidding threshold at which foreign 
companies can participate in state tenders.  However, 
the law restricts preferences for local bidders to 
Turkish citizens and legal entities established by them. 
The public procurement law may be further amended in the 
future. 
 
 
In general, labor, health and safety laws and policies 
do not distort or impede investment, although legal 
restrictions on discharging employees may provide a 
disincentive to labor-intensive activity in the formal 
economy.  Certain tax policies distort investment 
decisions.  High Turkish taxation of cola drinks 
discourage investment in this sector.  Generous tax 
preferences for free zones provide a stimulus to 
investment in these zones, perhaps at the expense of 
investment elsewhere in Turkey.  These preferences may 
be trimmed under legislation currently under 
considerationNew free zones law being drafted could 
consider limiting tax-free status of these zones. 
 
 
On paper, Turkey's foreign investment regime is liberal. 
However, pParticularly beyond the establishment phase, 
bureaucratic "red tape" has been remains a significant 
barrier to companies, both foreign and domesticproblem. 
Parliament passed Law 4884 in June 2003 which should 
simplify company establishment procedures.  The law 
repeals the permit requirement from the Industry and 
Commerce Ministry for certain firms, institutes a single 
company registration form and enables individuals to 
register their companies through local commercial 
registry offices of the Turkish Union of Chambers and 
Commodity Exchanges.  The goal is to enable registration 
to be completed in as little as one day and to encourage 
electronic sharing of documents.  Turkish government 
agencies are expected to issue implementing regulations 
needed to bring the law into force.  The government is 
also considering other imeasures mplementing an action 
plan designed to streamline procedures for establishing 
and operating a business in Turkey, based on 
recommendations made in a World Bank-funded study on 
administrative barriers to investment. 
 
 
¶9.  EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT 
 
 
Turkey's financial system and policies facilitate the 
free flow of financial resources.  The private sector 
has access to a variety of credit instruments.  Legal, 
regulatory and accounting systems are transparent and 
consistent with international norms. 
 
 
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 midend-2001, 3102 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 the ISE- quoted 
companies, and securitiesy and investment houses. 
 
 
Commercial credit in Turkey is allocated according to 
market terms.  However, 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 September July 20031, there were 512 commercial banks 
(including 1714 foreign banks) and 16 14 development or 
investment banks operating in Turkey.   Total sectoral 
assets were approximately USD 130.111.8 billion, or 
about 75 percent of GNP, as of July September 20031 
according to data from the Banking Regulation and 
Supervision Board. of Turkey.  The threefour state-owned 
commercial banks and the top six privately capitalized 
banks hold approximately 69 percent of total assets. 
 
 
The parliament passed a new bank regulatory law in June 
1999, which was amended in December 1999 and May 2001. 
The law created an independent agency, the Banking and 
Regulation and Supervision Agency (BRSA), 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 BRSA was established in August 2000 to monitor and 
supervise Turkey's banks under the new law.  The Central 
Bank transferred to it the State Deposit Insurance Fund. 
Since 1997 the SDIF has taken over 21,  banks, 
includingtogether with the Imar Bankasi which was , a 
bank owned by the Uzan Group, taken over on July 4, 
2003., which had supervisory control of seven private 
insolvent banks.  In October 2000, the BRSA declared 
another three banks insolvent and put them under the 
Deposit Insurance Fund.  During the November 2000 
financial crisis, Demirbank, one of Turkey's ten largest 
banks, became insolvent and was taken over by the 
Deposit Insurance Fund.  BRSA took over another two 
banks in February 2001 and five more in July 2001, 
bringing the total number of banks under its control to 
¶19.  The Government of Turkey has recapitalized the 
private banks under its control, and is committed to 
either selling or liquidating them by year-end 2002. 
The process still continues for Pamukbank, Turkey's 
sixth largest private bank. A Bbanking auditing and 
recapitalization program in the first half of 2002 
resulted in increased transparency, and better 
accounting for non-performing loans, and the takeover of 
Pamukbank, Turkey's sixth largest private bank.  The 
Bank Capital Restructuring program of the BRSA led to 
more transparency in banks financial statements as a 
result of application of athe 3-stage auditing process, 
and application of international standards. 
 
 
The BRSA is proceeding to issue new regulation limiting 
the extent of connected lending (between a bank and 
related corporate entities), modernizing banks' 
accounting practices, 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 
 
 
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 leftist and fundamentalist groups.  Although 
these groups have not completely disbanded, their 
operational capabilities have greatly diminished.  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.  The PKK retains a residual presence in 
certain parts of southeastern Turkey, where two 
provinces remain under a state-of-emergency, and several 
are deemed "sensitive" by the GOT. 
 
 
Although the Turkish government takes air safety very 
seriously and maintains strict controls, particularly on 
international flights, hijacking attempts have occurred 
as recently as 2001, when a flight attendant was killed 
during a hijacking by Chechen terrorists.  There have 
been two hostage-taking incidents at luxury hotels in 
Istanbul in the past year, both staged by pro-Chechen 
terrorists and resolved without casualties. 
 
 
¶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 appears to be most problematic 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 has ratified the OECD antibribery convention, and 
but has not yet passed the relevant implementing 
legislation in January 2003 to which would explicitly 
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 BoardDepartment, 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 Ssupreme Ccourt 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 65 79 
countries.  Forty-three 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 150 million Southeast Europe 
Equity Fund (SEEF) can make direct equity investments in 
private sector projects in Turkey.  In 1987, Turkey 
became a member of the Multinational Investment 
Guarantee Agency (MIGA). 
 
 
The U.S. Government annually purchases approximately USD 
11.319 million of local currency.  Embassy purchases are 
made at prevailing market rates, which fluctuate in 
accordance with Turkey's free floating exchange rate 
regime. 
 
 
¶14.  LABOR 
 
 
The Turkish labor force numbers around 20.24 million 
persons, with nearly 35 percent employed in agriculture. 
With an official unemployment rate of 12.31.8 percent in 
the first quarter of 20032 and an average school-leaving 
age of 14, Turkey has an abundance of unskilled and semi- 
skilled labor.  However, there is a shortage of 
qualified workers for highly automated high-tech 
industries.  Individual high-tech firms, both local and 
foreign-owned, have generally conducted their own 
training programs for such job categories.  Vocational 
training schools for some commercial and industrial 
skills exist in Turkey at the high school level. 
Traditional apprenticeship programs, both formal and 
informal, are also common.  Turkey's labor force has a 
reputation for being hardworking, productive and 
dependable. 
 
 
Labor-management relations have been generally good in 
recent years.  Employers are obliged by law to negotiate 
in good faith with unions that have been certified as 
bargaining agents.  Strikes are usually of short 
duration and almost always peaceful.  Since 1980 Turkey 
has faced criticism by the International Labor 
Organization (ILO), particularly for shortcomings in 
enforcement of ILO Convention 98 (right to organize and 
collective bargaining).  In May 2001 the Turkish 
Government and public sector workers reached agreement 
on collective agreements through 2002.  In 2003, 
Parliament approved The government is currently 
considering a Job Security Bill, which will ensure 
consultation between employers and labor groups over job 
cuts and safety standards while easing some restrictions 
on private employers' ability to lay off staff.  The 
constitutional right to strike is restricted.  In 1995 
and 2001 constitutional amendments were passed which 
allow "civil servants" (defined broadly as all employees 
of the central government ministries, including 
teachers) to form trade unions and to engage in limited 
collective bargaining, but prohibits them from striking. 
Workers in the free zones are prohibited from striking 
for the first 10 years following establishment of a 
company. 
 
 
¶15.  FOREIGN TRADE ZONES/FREE PORTS 
 
 
Since passage of the Turkish law on free zones in 1985, 
210 zones have been established (Defne - can you check # 
of zones).  The zones are open to a wide range of 
activity, including manufacturing, storage, packaging, 
trading, banking, and insurance.  Foreign products enter 
and leave the free zones without payment of any customs 
or duties.  Income generated in the zones is exempt from 
corporate and individual income taxation and from the 
value-added tax, but firms are required to make social 
security contributions for their employees. 
Additionally, standardization regulations in Turkey do 
not apply to the activities in the free zones, unless 
the products are imported into Turkey.  In contrast to 
most other free zones, sales to the Turkish domestic 
market are allowed. 
 
 
GGoods and revenues transported from the zones into 
Turkey are subject to all relevant import regulations. 
There are no restrictions on foreign firms operations in 
the free zones.  Indeed, the operator of one of Turkey's 
most successful free zones located in Izmir is an 
American firm. 
 
 
¶16.  FOREIGN DIRECT INVESTMENT STATISTICS 
 
 
(Aysem - Please update entire section 
According to Turkish Treasury data, as of April 
November 2002, 5,938  6,311 foreign firms invested and 
are operating in Turkey.  Total authorized foreign 
capital since 1980 was USD 31.9 34.0 billion, and 
aggregate actual inflows reached USD 15.2 15.7 billion. 
In 20012, EU countries accounted for 65.9 63.6 percent 
of authorized new foreign investment, OECD countries 
accounted for 90.2 90.4 percent, and Islamic countries 
for 3.1 2.6 percent.  Over the past two decades, France 
(17.7 16.6 percent) has been the top source of foreign 
investment, followed by the Netherlands (13.6  15.7 
percent), Germany (12.8 12.7 percent) and the U.S. (11.6 
percent)  (Note: these figures are based on the amount 
of authorized investment, not on actual capital 
inflows).  Because of the absence of a bilateral tax 
treaty until 1998, much U.S.-origin capital has been 
invested in Turkey through third-country subsidiaries. 
By unofficial estimates the U.S. is actually the largest 
source of foreign investment in Turkey. 
 
 
In 20012, about 48.2 58.0 percent of authorized foreign 
investment were in services, 45.9  39.8 percent in 
manufacturing, and about 6.0 2.2 percent in mining and 
agriculture combined.  The sub-sectors with the greatest 
amount of authorized foreign investment include banking 
(18.9 10.3 percent); communications (10.9 percent); 
trade (8.1  11.4 percent); food, beverage and tobacco 
processing (5.3 11.9 percent); and insurance (7.7 
percent)  motor vehicles (6.5 percent); and electronics 
and electrical machinery (1.5 percent).  Between 1980 
and November March 2002, 43.0 45.0 percent of actual 
capital inflows were invested in services, 54.2  52.0 
percent in manufacturing, 1.8  2.0 percent in 
agriculture, and 0.98 1.0  percent in mining.  The 
finance, automotive and telecommunications food 
industry, trade and finance  sectors received the 
highest share of increased foreign direct investment 
permits in 20012002.  British HSBC Bank's purchase of 
Demirbank shares, Japanese Toyota S.A.'s investment in 
the automotive sector, and investments made by Turkcell 
with its Finnish partner Sonera  Koc Financial Services 
and Kent Food Products Industry participation 
investments were the major foreign direct investment 
activities in 20012. 
 
 
 
 
Total Foreign Direct     1999       2000       2001 
2002(*)         2003(*) 
Investment Stock 
USD millions           10,185     11,892     15,180 
18,500 15,749   18,000 (*) 
Sources:  General Directorate of Foreign Investment 
(*) U.S. Embassy estimate 
 
 
 
 
 
 
Cumulative Total Foreign Direct Investment Permits 
By country of origin, NovemberMarch 2002 
 
 
Country          Value ($mil.)       Share 
 
 
France              5,545.6 5,665      16.6     17.4 
Netherlands         4,331.6 5,336      15.7     13.6 
Germany             4,129.1 4,329      12.7     12.9 
United States       3,710.2 3,929      11.6     11.6 
United Kingdom      2,497.9 2,669       7.9     7.8 
Switzerland         2,125.8 2,261       6.7     6.7 
Italy               1,941.3 1,883       5.5     6.1 
Japan               1,745.4 1,819       5.4     5.5 
Belgium               385.6   485       1.4     1.2 
Saudi Arabia          318.1   321       1.0     1.0 
Others              5,142.1 5,308      15.6    16.1 
Total              31,872.7 33.995         100.0 
 
 
Source: General Directorate of Foreign Investment, 
Treasury. 
 
 
 
 
Foreign Direct Investment by Year (million USD) 
 
 
FDI permissions 
 
 
Year        Cumulative   Annual    Actual     No. Firms 
             Permits     Permits   Inflow 
 
 
To:  1988     3,050                              1,172 
1989          4,562      1,512       855         1,525 
1990          6,423      1,861     1,005         1,856 
1991          8,390      1,967     1,041         2,123 
1992         10,210      1,820     1,242         2,330 
1993         12,274      2,063     1,016         2,554 
1994         13,751      1,478       830         2,830 
1995         16,690      2,938     1,127         3,163 
1996         20,527      3,837       964         3,582 
1997         22,205      1,678     1,032         4,068 
1998         22,629      1,646       976         4,533 
1999         24,319      1,701       817         4,950 
2000         27,379      3,060     1,707         5,328 
2001         30,118      2,739     3,288         5,841 
2002 (*)     31,872        523       N/A         5,938 
             33,995      2,243       569         6,311 
Source: General Directorate of Foreign Investment,; (*) 
As of March November 2002. 
 
 
Actual FDI Inflow as Percentage of Turkish GDP 
 
 
Year              FDI flow        FDI flow/GDP 
                  (USD mil.)         (Pct.) 
 
 
Up to 1988        3,229 
1989                855             0.80 
1990              1,005             0.67 
1991              1,041             0.69 
1992              1,242             0.78 
1993              1,016             0.56 
1994                830             0.64 
1995              1,127             0.66 
1996                964             0.53 
1997              1,032             0.54 
1998                976             0.49 
1999                817             0.41 
2000              1,719             0.85 
2001              3,288             2.21 
2002                569             0.48 
 
 
Source: General Directorate of Foreign Investment, and 
the State Planning Organization. 
 
 
 
 
Turkey's FDI by Country (As of December 20021) 
 
 
Country           Amount (USD millions)    Share 
 
 
Netherlands       1,916.51,868.2       30.9 
40.2 
United Kingdom      519.4  523.1        8.9 
10.9 
Germany             440.6  532.7        8.8 
9.2 
Luxembourg          236.9  245.8        4.1 
5.0 
Russia              181.4  163.7        2.7 
3.8 
Azerbaijan          156.6  741.8       12.3 
3.3 
Kazakhstan          170.6  431.5        7.1 
3.6 
United States       185.8  192.6        3.2 
3.9 
Romania             117.9  122.7        2.0 
2.5 
Others              839.7 1,218.6      20.1 
17.6 
                  4,765.4 6,040.8                 100.0 
 
 
 
 
Source: General Directorate of Banking and Foreign 
Exchange, Treasury 
 
 
Major foreign investors 
 
 
Turkey's largest foreign investors include Telecom 
Italia, Renault, Toyota, Fiat, Castrol, Enron Power, 
Citibank, Pirelli Tire, Unilever, RJR Nabisco, Philip 
Morris, United Defense, Honda, Hyundai, Bosch, Siemens, 
DaimlerChrysler, Chase Manhattan, AEG, Bridgestone- 
Firestone, Cargill, Novartis, Coca Cola, Colgate- 
Palmolive, General Electric, General Motors-Opel, ITT, 
Ford Motor Co., Lockheed Martin, Gillette, Goodyear, 
Hilton International, Aventis, McDonald's, Nestle, 
Mobil, Pepsi, Pfizer, Procter and Gamble, InterGen and 
Shell. 
 
 
Pearson