Turkey focus: Chronology of a crisis

Turkey is still defined as an emerging market economy; over the last 20 years, it established itself increasingly among the top-25 global markets, but could not maintain this upward trend in recent times. Recently, it has had to face a currency crisis due to the Turkish lira decreasing dramatically in value. At the same time, inflation levels are skyrocketing, which is especially reflected in high prices for food and drink. Adding a global pandemic to the mix is certainly another spanner in the works, but according to Osman Ertürk Özel, managing partner at ÖZEL Attorney Consultancy: ‘The economic recession in Turkey existed a year before the beginning of Covid. It just made this situation obvious. Serious fluctuations in currency along with over 100% inflation rate have deepened the existing economic crisis. This has caused a disruption in all kinds of production in the markets. The fact that banks kept up the markets through loans has greatly disrupted the balance.’

To blame for this development, at least in part, is Turkey’s president Recep Tayyip Erdoğan. His name has dominated the Turkish political scene for a long time. In 2001, his party AKP (Justice and Development Party) was created, and it quickly rose to power. Even though Turkey’s constitution established the country to be a secular state, AKP is traditionally favoured by religious conservatives and is in western media often referred to as a (mildly or reformed) Islamist party. At the same time, the party pursued a pro-liberal market economy and is keen to join the European Union. It seemed to be the recipe for victory: only a year after its formation, it had a sweeping success in the 2002 election, gaining an outright majority in parliament. After having a moderate stronghold over the political landscape for several elections, Erdoğan finally became president in 2014. However, only five years later, local elections marked the beginning of the end for the current leader. He and his party lost significant footing in major Turkish cities due to accusations of mismanagement of the Turkish economic crisis, its shortcomings during the Syrian refugee crisis as well as rising authoritarianism. After year-long rule, AKP also lost all support with Turkey’s largest ethnic majority, the Kurds. Officially, 2023 is a year for new elections and opposition parties are gearing up for it, but Erdoğan is doing everything he can to hold on to power.

Over the past few years, his economic approach included consistently lowering interest rates despite spiralling inflation. Erdoğan was convinced it would bring benefits such as generating economic growth and boosting employment to the country. ‘It is possible for Turkey to encounter hyperinflation in the coming period. The issue is that Turkey has to have a grounded short, medium and long-term economic policy and to make moves to bring inflation down,’ says Özel, whose firm is particularly active in technology, corporate and labour law. However, with Erdoğan in power that seems nearly impossible; formerly a rather independent institution, the central bank in Turkey saw personnel overhauls in recent years at the president’s request. At this point in time, he not only holds significant control over the bank but is also threatening the Turkish media with legal action after they reported data on the current economic crisis.

All of this has contributed to making his government widely unpopular with voters but there is no guarantee of a win for the opposition in the next election. It will come down to their choice of presidential candidate, which will only be determined immediately before the election. Local politicians such as Ankara’s mayor Mansur Yavaş and Istanbul’s mayor Ekrem İmamoğlu are gaining popularity.

‘Our particular focus when working with our foreign clients is to reveal the differences between our clients’ own legal systems and the Turkish legal system, and to ensure that our foreign clients are more familiar with the processes.’
Levent Kılınç, Kılınç Law & Consulting

Covid chronicles

Just like the rest of the world, Turkey wasn’t spared by the coronavirus either. The country was hit by four waves over the course of two years, and Covid-19 accounted for more than 97,000 deaths. Several lockdowns hit the tourism sector particularly hard, which is an important source of income for the country. With the help of a successful vaccine rollout most restrictions could be eased by March 2022, and there is confidence the tourists will be back. But like most countries, Turkey also had to overcome and adapt. ‘Delays in international transportation and supply systems due to the pandemic led manufacturers and investors to gravitate towards alternative production destinations closer to final markets such as Turkey,’ says Murat Aygün, founding partner and a M&A and real estate specialist at Abcoo Law Firm. ‘Accordingly, this tendency has led many to execute supply contracts with the parties from Turkey and eventually to partner with Turkish companies. The devaluation of the Turkish lira in the last year has made Turkish companies even more attractive in terms of both purchase prices and production costs. This has increased the appetite of investors towards Turkey and their interest in partnerships and acquisitions in companies even for the ones that are not involved in the manufacturing industry.’

Aygün sees the opportunities in the wake-up effect the pandemic has had: ‘We expect different hubs to be established such as Turkey in order to boost diversity in production and transportation and to prevent any stoppages arising out of mono-centred production and disruptions in international trade.’

Turkey’s economy is dominated by several sectors: notably, the country is among the leading producers of a variety of fruits, vegetables, and legumes. It also exports a high number of consumer electronics and home appliances, textiles and motor vehicles and automotive products. Thanks to signing a customs union agreement with the EU, Turkey has traditionally close trading ties with Germany, Italy, and former member, the UK. Its bonds with countries such as Russia, China and UAE became stronger over the years as well. According to official data, Turkey’s export of goods and services increased by almost 25% in 2021. This meant that after the challenges of 2020 resulted in an annual GDP growth of less than 2%, Turkey was happy to report this number to be up to 11% in 2021. Besides increased exports, accelerated domestic consumption as well as the return of tourism contributed to that heavily. While these numbers look promising at first glance, the strong bounceback is not enough to allow Turks to let go of their worries. The depreciation of the Turkish lira and the resulting inflation risks lead to continuous uncertainty among its residents.

Like their clients, Turkish law firms were also challenged in different ways by the pandemic. Different models and approaches were tested but the overall attitude remained positive. Levent Kılınç, who is the founder and managing partner at Kılınç Law & Consulting, states: ‘We believe the Covid-19 period has given us a time to think and approach the future differently, away from the traditionalised work environment. We have adapted to the new requirements as swiftly and efficiently as possible.’ His team used the calmer moments Covid-19 brought to ‘provide training with expert lecturers from universities, increasing the expertise of our staff, and most importantly, we created a “detailed expert departmentalisation system” that will enable us to work faster and more effectively.’ And Murat Aksu, a founding partner of Istanbul-based dispute resolution boutique ASC Law, adds: ‘As might be expected, of course we have been focusing on maintaining business continuity during the pandemic, but we never lost sight of our main goals of growth and improvement. I always believed that the word “crisis” also can mean opportunity to grow.’

Even the legislature reacted to the changing landscape. In March 2021, the ministry of labour and social security introduced a new remote working regulation. While the concept of remote working has been around in employment law in Turkey for some time, it came under the spotlight when the pandemic started as it enabled many operations to keep going. The new regulation addresses several issues related to remote working that were not previously acknowledged, hoping it will clear up uncertainties.

The legal lowdown

Despite the many hardships Turkey had to face over the last few years, economic activity stayed brisk. That meant that lawyers across the board were able to keep busy. In particular, transactional work held up: according to Deloitte’s annual M&A review of 2021, a new record number of 390 transactions with a total deal volume of $10.1bn were registered. A couple of mega deals signed by financial investors stand out here, and foreign investors accounted for 58% of total deal value. ‘This can be interpreted that Turkey, despite the devastating effects of the Covid-19 pandemic, is still a desirable target for foreign investors,’ say Eda Beltan and Erdem Atilla, senior partners at Pekin & Pekin. They note that the ‘top five sectors in which most of the deals took place can be listed as internet and mobile services, technology, manufacturing, financial services and energy. This is in line with the commercial inclinations keeping pace with the “new normal”. Upward trends on these sectors might have begun with the pandemic, but it is safe to say that they will maintain their pace long after the effects of the pandemic disappear in accordance with the new world order expected to kick in with the lessons learned’.

‘Due to the pandemic, the demand for consulting in digital commercial activities and fintech sector is increasing day by day.’
Nihat Erciyas, Erciyas Law Office

Clients also tend to request more than just plain M&A support. Zeynep Şener from Liner Law notes that: ‘The experience of our team in regulated sectors has been an enormous asset, not only in the transactions we have advised on but also when giving regulatory advice to our clients regarding their commercial activities or relations with the authorities, which has been another significant area of activity for our firm. In Turkey, currency fluctuations and geopolitical developments have and will continue to have a direct effect on the market.’ Her colleague Yegân Liaje, with whom she founded the firm specialising in business law, adds: ‘We are also busy serving the ongoing corporate governance needs of our foreign clients with Turkish investments. The Covid-19 pandemic also leads us to revisit the concept of force majeure and material adverse change, the two material provisions we use in commercial agreements to mitigate the potential risks our client may face.’

Çiğdemtekin Çakırca Arancı (CCA) partner Gamze Çiğdemtekin also observes: ‘Over the past couple of years we have really seen Turkey blossoming into a substantial M&A and venture capital investment destination, in particular the US, UK and Asia. We have smart, hungry, young entrepreneurs who are building up tech companies in sectors from retail platforms, casual gaming, big data/AI and a host of other areas. This has created a very strong tech hub centred in Istanbul, Ankara and other cities with ideas and concepts that can be rolled out across other markets. This ecosystem is being supported by sophisticated angel investors, venture capitalists and also more recently, private equity investors.’ Venture capital and angel investor deal value jumped up significantly to around $1.9bn across 217 deals.

The crucial role foreign investors will play in the coming years in Turkey cannot be overstated. Levent Kılınç notes: ‘Foreign direct investment and strategic investments are the most common business areas for our law firm. Our particular focus when working with our foreign clients is to reveal the differences between our clients’ own legal systems and the Turkish legal system, and to ensure that our foreign clients are more familiar with the processes. In fact, we have witnessed many times that investors can make faster and more accurate decisions if they focus on the differences, rather than trying to learn the new market from nothing.’

Most foreign investors interested in Turkey are from the Netherlands, UK, US and the Gulf region, but investment from Asia is steadily on the rise. As Zeynep Çakmak, partner and energy specialist at Çakmak Attorney Partnership, sums up: ‘It is not possible to isolate Turkey from the overall economic and political environment in the world. If there is an increase in the investment appetite, as always Turkey will continue to be a target for international investors and lenders as well.’

Given the current uncertainty around the Turkish currency, many look for alternatives to the mainstream financial system, especially cryptocurrencies. In particular, Bitcoin has gained quite a following among younger people who consider reinvesting in it rather than in US dollars or gold. This trend is a real thorn in the side for the government, so much so that Erdoğan declared war on the cryptocurrency.

‘We are anticipating some regulations regarding cryptocurrencies. Given the volatile nature of the Turkish lira, a growing number of our clients are interested in alternative methods for conducting their business. Thus, the prospective regulations could potentially yield significant consequences,’ says Görkem Gökçe, managing partner at Gökçe Attorney Partnership. The government prohibited the use of cryptocurrencies to pay for goods and services in April last year, while trading them is still permitted.

The Covid pandemic affected different sectors in various ways and the level of impact ranged broadly. ‘Without any doubt, the aviation industry is one of the most-affected sectors by the pandemic. We are glad that our major clients in this sector have minimised the adverse effects through the successful series of precautions and are returning to their operations even stronger. We regularly draft, review and negotiate commercial agreements regarding airport operation, aircraft sale agreements (both local and cross-border), aircraft lease agreements, separate engine and spare parts sale agreements and advice in relation to aviation procedures before the Civil Aviation Authority,’ reports Çiğdem Bal Ilgın, founding partner at corporate firm Şenol & Şahin & Ilgın Law Firm.

Onur Alper, partner at Alper Law Office which specialises in media and entertainment law, is well positioned to comment on recent developments in the space: ‘As a result of the pandemic, the way we consume digital content has also been reshaped. Now we are looking for much faster content; we want to have many more alternatives. The media and entertainment sector is one of the areas where the market is expanding with increasing demand every day, especially with the increasing orientation towards digital broadcasting platforms. Accordingly, digital broadcasting platforms have significantly increased their investments to meet these demands.’

While many lawyers are keeping busy with corporate and commercial assistance to their clients, other areas also saw an uptick due to the economic circumstances. Özlem Bulut Penezoğlu and Yusuf Gökhan Penezoğlu, partners at Penezoğlu Law Firm, comment: ‘The economic hardships increased the public costs of the Turkish government. Therefore, additional taxes such as a digital service tax, valuable residence tax and digital stoppage were created, and the rates and scope of the current taxes were also increased. The number of tax inspections have gone up significantly.’

This has led to many full-service law firms having to call upon their full breadth of expertise. ‘We believe this will lead to a significant increase in demand for our tax consultancy and tax controversy services, which is another important service line of our firm,’ say Penezoğlu and Penezoğlu. They also believe that ‘there will be significant movement in the capital markets with the public offerings that recently took place as well as those that will take place in the years ahead’.

The same is true for competition law. ‘In times of high exchange rate fluctuations, competition law complaints and competition authority inspections tend to increase both globally and in Turkey. This has been experienced similarly in the 2008 economic crisis. Therefore, our firm has seen an increased amount of work both in representing our clients in Turkish competition authority (TCA) investigations and in providing competition compliancy consultancy in order to prevent possible competition law violations,’ observes Haluk Arı, who is managing partner at specialist boutique Arı Attorneys at Law. According to him, the TCA almost doubled its already all-time-high level of fines in 2021.

Lastly, the shipping sector has seen an uptick in activity which has not been halted by the pandemic. Commenting on this is Çağlar Coşkunsu, managing partner at Cavus & Coskunsu Law Firm: ‘Given that about 80% of the transport is by sea, the shipping side has been and is very busy. The Covid-19 impact on the transport and logistics sector has been significant. In addition, there have been an increasing trend in salvage cases in Turkey and we handled major collision cases.’

Disputes developments

Turkey is a civil law country and traditionally, its most common method of dispute resolution is litigation. With the heightened stakes in the Turkish market at the moment, it comes as no surprise that those services are in high demand: ‘As a firm mainly involved in commercial disputes, our experience suggests that by the effect of regional and global economic fragilities, combined with developments related to the Covid-19 pandemic and unpredictable fluctuations in Turkish lira, we have been observing an increasing number of contractual claims for non-performance or non-payment involving force majeure arguments,’ report Beltan and Atilla. In order to combat the closure of courts at the beginning of the pandemic, articles in the civil procedure code were amended to allow virtual hearings. This follows earlier developments of taking the Turkish judicial system online.

Despite the introduction of these measures, market participants are wary of the longevity of a dispute resolution process in Turkey. Proceedings taking several years is the rule rather than the exception. Many parties therefore turn to alternative dispute resolution methods, such as mediation. Murat Uyanık and Selim Yavuz are founding partners at dispute resolution boutique Yavuz & Uyanık. They observe that ‘mediation is gradually expanding among other alternative dispute resolution methods. This is very beneficial in terms of taking the burden off the judicial authorities and providing faster and better legal service’. Turkish mediation legislation is mainly influenced by the UNCITRAL Model Law on International Commercial Conciliation of 2002. Even though this ADR-method has been around in Turkey for less than ten years, mediation has become mandatory for certain lawsuits including labour law, commercial law and consumer law disputes.

Another common alternative to litigation is arbitration. ‘Dispute resolution has picked up over the last few years, as usual in downward economic trends, and we have had an increased activity in arbitration, representing clients before both Turkish and international arbitration tribunals,’ reports Murat Yazıcı, founding partner at Yazıcı Attorney Partnership. The two most popular national arbitral institutions in Turkey are the Istanbul arbitration centre (ISTAC) and the Istanbul chamber of commerce arbitration centre (ITOTAM), which were both established in 2014. Even newer to Turkey than mediation, taking the arbitration route has been reinforced significantly in 2021 – the ITO (Istanbul chamber of commerce) shared a model arbitration clause to be included in the articles of association providing that a range of corporate disputes should be settled by arbitration under the ITOTAM arbitration rules.

‘The increasing pressure from all stakeholders requiring businesses to comply with ESG principles, is already impacting the decision making in choosing investments as well as business partners.’ Gamze Çiğdemtekin, Çiğdemtekin Çakırca Arancı

After overcoming the hurdles of a conflict, another challenge can be debt collection. Already a complex endeavour in Turkey, especially for foreign creditors, Murat Uyanık and Selim Yavuz from Yavuz & Uyanık report: ‘Unfortunately, there is a serious increase and blockage in debt collection procedures due to the economic crisis. We commonly encounter such disputes.’

New spotlights

Covid-19 prominently left its mark on the labour and employment market. Large numbers of companies based in Turkey turned to legal practitioners for a variety of contentious and non-contentious assistance. Turkey is dominated by independent, local law firms, most of them with a full-service offering. The core pillars of their business used to be corporate and commercial as well as banking and finance and dispute resolution; but through Covid, it was employment lawyers’ time to shine. As mentioned above, the ministry of family, labour and social services of Turkey responded to the switch to working from home by publishing the remote-working regulation. It not only determines the procedures and principles of remote working but also the kind of jobs where remote working cannot be done and the implementation of the business rules regarding the protection and sharing of data. ‘As we have many clients with a large number of employees, this regulation affects all of them. On this basis, we regularly advise our clients on their remote-working arrangements and on occupational health issues regarding remote working,’ says Ilgın.

‘Due to the increase in union awareness and intensity, union consultancy and collective bargaining negotiations have gained momentum in our office,’ reports managing partner Ersin Nazalı at Nazalı Tax & Legal. ‘Moreover, following the tax exemption applied on the minimum employee wages legislation, which was promulgated at the end of 2021, we have provided our clients with a comprehensive harmonisation on the new tax rules.’

In April 2016, Turkey finalised its data protection law, which is modelled after EU regulation; prior to that, it had no specific legislation addressing personal data protection. After an adjustment period, enforcement became much more common in recent years – and then Covid-19 accelerated the call for legal support even more. ‘Due to the economic transformation caused by the pandemic itself, the demand for consulting in digital commercial activities and the fintech sector is increasing day by day. Accordingly, big data management and personal data protection issues, which are controlled by the supervisory board with strict deadlines, are the frequently consulted areas,’ says Nihat Erciyas, who is managing partner at Erciyas Law Office.

E for energy – or environment?

Recent events in Ukraine have made the dangers of energy dependence undeniably clear and many countries are taking action. The energy supply in Turkey includes less than 50% oil and gas, which is almost all imported. While it made conscious efforts to diversify its energy mix over the past decade, Turkey is focusing on it now more than ever: ‘With the increase in oil prices, and the new gas discoveries in the Black Sea, we are expecting exploration and production activities to pick up from the significantly low levels over the last decade,’ says Yazıcı. ‘The recent war in Ukraine is already increasing the push towards renewables even more as the regulator recently announced a capacity increase of almost 3,000 MW to be implemented in the next two years. The government also aims to speed up the development of nuclear power plant projects and has been laying down the regulatory ground for it.’

Caner Durgut, founding partner at Işıkal Law Office adds to that: ‘Turkey has big potential for renewable energy, not just within its own borders but also to support its development in neighbouring countries. Turkey’s location in the world and its governmental support and incentives are foundations upon which the country is building its renewable energy capabilities.’

Alper particularly praises the developments in the nuclear space: ‘The nuclear regulation law no. 7381 entered into force in March 2022. It’s the most important step taken so far in Turkey regarding nuclear energy activities
and preparing the legal basis for the establishment of new nuclear power plants. We will see what this new law will bring to the energy sector and our country in the coming years. Despite public concerns about nuclear energy production, the diversification of alternative energy production methods that are sustainable and environmentally friendly, and their domination of the energy market is very important due to both economic and ecological advantages.’

Besides their desire to reach energy independence, countries around the world have a new awareness for climate change and environmental issues. Turkey is making efforts to keep up as well: ‘The increasing pressure from all stakeholders requiring businesses to comply with ESG principles, as well as increasing supply chain regulations that require the suppliers to adhere to ESG principles, is already impacting the decision making in choosing investments as well as business partners,’ says Çiğdemtekin. CCA is one of the first Turkish law firms to establish a dedicated practice group on ESG, sustainability and climate change.

Having signed the Paris Agreement in 2016, Turkey only ratified it five years later. Recent legislative efforts have included putting a sustainability principles compliance framework for listed companies to follow in place. Companies now have to indicate in their annual report whether they comply with the sustainability principles. If not, they must give detailed reasons for this and list the social and environmental risks arising from non-compliance.

Beltan and Atilla note: ‘Parallel to global trends, Turkish companies and banks have been implementing their ESG strategies to prioritise sustainability in their business. Various Turkish leading banks have issued green bonds, adopted gender equality and climate change policies with the view to progressing their own management and started publishing sustainability and ESG reports and risk ratings from reputable rating companies in the world. With such momentum, more milestones are expected to be fulfilled in the next few years.’

Diversity – work in progress

Even though there is an increased focus on best practice, Turkey, like many other countries, does not have one standard ESG legal framework. The standards against which ESG issues are measured is always a combination of hard law, voluntary undertakings, regulatory requirements, and accepted industry practices driven by social pressure and reputational risk. Diversity poses a continued challenge for the country, and Turkey’s government sends very mixed signals on this topic. As an example, the presidential decision to withdraw from the Istanbul Convention – the Council of Europe’s treaty on preventing violence against women and domestic violence – was announced as recently as 2021. Contrary to that, there have been several pieces of legislation addressing discrimination and human rights but not necessarily in the workplace. Market participants acknowledge both the efforts but also the struggles. ‘The diversity and inclusion issue is problematic as much as it is important for creating an efficient and creative ecosystem. Turkey’s legislators have been neither sensitive nor productive enough to fight against gender inequality and diversity. However global companies in Turkey and prudent Turkish companies set their own standards as part of their corporate undertakings to their stakeholders,’ says Çiğdemtekin.

Liaje makes a similar observation: ‘When we look back, we observe that not only private companies but also administrative authorities respect more and more the fundamental principle of treating everyone equally and offering everyone equal opportunities. We see that women, people from different backgrounds, and immigrants are more frequently integrated into working life.’ Zeynep Şener, also from Liner Law, adds to that: ‘The legal profession has always been one of the relatively more gender-balanced professions in Turkey and leading corporate firms and in-house legal departments reflect this diversity. National policy is much more conservative but at the local and municipal level, we can also point to an increased visibility and initiatives catering to the LGBTQ community.’

The future?

Law firms acknowledge that they must stay dynamic to prepare themselves for how the next few years could pan out. Efforts regarding digitalisation, flexible working and fees, as well as specialisations and ESG can be observed across the board. The pandemic gave people worldwide time to reflect and sometimes re-route. According to Şener: ‘The Turkish legal business market has been going through a period of fragmentation, with not only experienced partners but also senior and junior associates departing established law firms to start their own practices. While the pandemic may have hastened some of these departures, the current trend is much more influenced by the appetite to found more dynamic and adaptive enterprises that can follow global trends. The next few years will be a sink-or-swim period for these young firms and a litmus test for the Turkish legal business market to see whether the next generation of leading law firms will be able to benefit from global best practices in terms of corporate management, client relations and use of technology. In the end, both the established law firms of today and the next generation law firms will emerge stronger or necessarily fade.’

This presents its own challenges, as Çakmak points out: ‘At the moment, there are too many sole practitioners spinning off from larger law firms and trying to establish a position in the market with very small teams. These efforts result in unrealistic price cuts that cannot be matched by more established larger law firms whose overheads are larger than the small ones.’ However, this means that ‘the firms are competing mostly on employee satisfaction, where the qualified lawyers connect with the firm strongly and feel valuable and deserving. The competition between the legal firms, especially in Istanbul, has been developing in a good way’, highlights Kılınç.

The consensus through the interviews for this feature is a feeling of confidence. Turkish lawyers are looking forward to a future of recovery and intense market activity. LB