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ISTANBULas a Financial Centre
Reforms falteras EU projectcomes unstuck
After more than fourdecades kicking its heels inEurope’s ante-room,Turkey became a candidatemember of the EuropeanUnion five years ago.
To meet the criteria ofthe club, the governmentof Recep Tayyip Erdogancarried out a constitutionalrevolution: deepening andwidening democraticfreedoms, introducingminority rights for theKurds and, above all,starting to subordinateTurkey’s army to civilianauthority.
The European projectworked as a powerfulengine of reform andhelped glue togetherTurkey’s political tribes.
The Kemalists and themilitary saw the EU as afulfilment of the country’swestern destiny foreseenby Mustafa Kemal Ataturk,founder of the modernrepublic, while MrErdogan’s neo-IslamistJustice and Developmentparty (AKP) saw the EU’sdemocratic rules as ashield against the generals.
Put another way, Europemanaged to hold therivalries of these two,competing establishmentsin precarious but realalignment.
The EU was working asthe load-bearing bridge forTurkey’s transition.
But once EU negotiationsstalled – partly becausereluctant partners such asGermany and France thinkTurkey is not Europeanenough and too big, toopoor and too Muslim toabsorb – Turkish reformran out of steam.
The shield against thegenerals was removed. Theglue of political cohesiondissolved. Clashes betweenthe new AKP elites andthe old elites groupedaround the overmightygenerals became a featureof political life, enablingEU naysayers to paint thisas an identity crisis.
Mr Erdogan and the AKPare also to blame. In 2007,after a stand-off with thearmy over the election aspresident of Abdullah Gül,then foreign minister anda former Islamist, MrErdogan called an earlyelection and hugelyincreased the AKP’s shareof the vote, from 34 to 47per cent on an 84 per centturnout.
That was the goldenmoment to relaunchreform. Instead, thegovernment and its
opponents have devotedtheir energies to fightingculture wars and battlingfor political hegemonythrough the judiciary.
That makes it easier foroutsiders to forgetTurkey’s extraordinarysuccess in coming up witha modern but identifiablyMuslim politics – amarriage between Islamand democracy blessed byEU vows.
Indeed, the government’sforeign policy towards itseastern “near abroad” hasemboldened some inEurope to argue Turkeyhas changed its strategicorientation. But there is nonecessary contradiction infacing east and west at thesame time.
Turkey has a clearinterest in fosteringstability to its east andsouth-east. So does the EU.
At one level, theexpansion of Turkishinfluence, including withSyria and Iran, is not justabout stability. Turkey isreasserting itself as aregional power and tryingto demonstrate it hasalternatives to the EU.
But this also highlightsthe value of having Turkeyinside the union, its
creative use of “softpower” contrasting withthe feebleness of the EU’sefforts in the region.
Turkey has not justmended fences with Syria,it has flattened them:abolishing visa restrictions.In 1996 Ankara wassuspected of plantingbombs in Damascus, asretaliation for harbouringKurdish separatists.
Turkey has alsoembraced post-war Iraq,which it had threatened toinvade, also over theperceived threat from theKurds. It has started toaddress the rift withArmenia, over the massmurder of Armenians inthe dying years of theOttoman empire, andstarted devising the firstreal policy of reconciliationwith its own Kurdishminority.
Turkey has at the sametime fallen out with Israelover Gaza, and cosied upto Iran, where Mr Erdoganhas said the west istreating the Islamicrepublic’s nuclearprogramme “unfairly”.
Yet, the turn east, seenby some as neo-Ottoman, is
Ambition yetto be matchedby reality
Search the rows ofgold dealers in Istan-bul’s Grand Bazaarand, on any week-
day, you will find a group ofshabby men packed into aback alley, gesturing andshouting into mobilephones. They are tradingforeign currency, on wafer-thin margins and in largeenough volumes to affectwholesale prices.
A far cry from the glasstowers of Istanbul’s modernbusiness district, the ayakliborsa – or “bourse withlegs” – is a relic from pastdays of currency controlsand runaway inflation.With relative stability, ithas lost its force.
But a market-friendlygovernment is hoping thatthe qualities it embodies –business acumen and anatmospheric setting – canpropel Istanbul to greaterprominence, as a financialcentre with regional appeal.
“Istanbul assumes thetitle of a centre of economyand commerce, in additionto its numerous titles as aprecious centre of arts, sci-ence, culture, history andtolerance,” wrote RecepTayyip Erdogan, prime min-ister, in the effusive prefaceto a government action planaimed at making the city aninternational hub.
Yet so far, such vaguelyworded aspirations haveinspired more scepticismthan enthusiasm amongIstanbul’s investment com-munity.
The city is without con-test the centre of corporatelife in Turkey. Home to 20per cent of the population,it generates 27 per cent ofeconomic output, 40 percent of tax revenues andaround half of exports.
Of some 19,000 foreignfirms operating in Turkey,more than half are based inIstanbul, and several multi-nationals – including Coca-Cola, Nestlé and Microsoft –use it as a base for regionaloperations.
But Turkey’s capital mar-kets do not yet match thesophistication of the corpo-rate backdrop. Foreigninvestors own some two-thirds of shares on thestock exchange, but thedomestic market is domi-nated by short-term trad-
ing. Ordinary people seeshare ownership as the pre-serve of speculators, sothere is very little institu-tional investment, withfund management domi-nated by the big banks.
Less than a fifth of the1,000 largest companies arelisted, and those that areoften float less than a thirdof their shares, givingminority shareholders littleinfluence. There is virtuallyno market in corporatebonds, and many transac-tions that are routine inother jurisdictions – such asshorting stock, or cross-border settlement of equitytrades – are difficult.
Many of these traits, how-ever, stem from Turkey’slong history of economiccrises, which forced compa-nies to put survival beforestrategy, and investors toact with short time hori-zons.
Now, the flashy shopsand nightlife of Istanbul’sricher districts reflect along spell of solid growth.Moreover, the countryemerged from last year’scrisis with an unaccus-tomed reputation for stabil-ity: its economy suffered,but banks proved soundand more stringently regu-lated than many in moredeveloped countries.
The International Mone-tary Fund forecasts growthof 5.2 per cent this year, oneof the strongest recoveries
in the region. The govern-ment’s fiscal plans lookrobust in comparison withGreece’s travails across theAegean, and even the ongo-ing feuds between politicalfactions are unsettling mar-kets less than in the past.
“If we take the right stepsfor several years to come, itwouldn’t be a surprise tosee more financial compa-nies with regional head-quarters in Istanbul,” saysAli Babacan, economy min-ister.
Burak Tansan and Franc-esco Pavoni, partners at anewly opened office of theBoston Consulting Group,say consultancy work ispicking up as internationalclients seek to enter a grow-ing market, and Turkishgroups to expand abroad.
“Turkey has been veryvolatile in terms of eco-nomic management, a fac-tor that made Turkish com-panies look to short-termsolutions, not structuralones. Now, I think they willbe able to look at larger per-spectives,” Mr Tansan says.
Mr Pavoni says manyfamily-owned groups areseeking advice on govern-ance, predicting more willappoint directors represent-ing minority shareholdersto boards.
The corporate recovery isalso likely to boost equitymarkets, with many groupsthat had delayed initialpublic offerings during thecrisis seeking to raise capi-tal to fund investments.
The conglomerate Akfenand energy group Aksa areamong several sizeable com-panies launching IPOs thisspring, and the IstanbulStock Exchange says itexpects 15 to 20 new listingsthis year.
The exchange is also run-ning a campaign to per-suade smaller Anatoliangroups to go public, aimingto expand its own businessand raise standards of gov-ernance.
As always, though, Istan-bul’s international appealbegins with its geographyand picture postcard setting– combined now with anincreasingly cosmopolitannightlife, and increasinglyextensive flight connec-tions.
One side-effect of thefinancial crisis has been toprompt skilled Turks work-ing in the US to returnhome; Bulent Celebi, aTurkish-American entrepre-neur, says it is easy to per-suade foreign recruits torelocate.
Omer Aras, chief execu-tive of the lender Finans-
bank, says that easy trans-port links and a pool ofwell-qualified professionalsmake Istanbul a good basefor private equity compa-nies investing in the region,noting that more are nowsetting up offices.
He argues that, just asTurkish groups are activein Balkan, Middle Easternor former Soviet countries,so regional companies couldbe encouraged to list inIstanbul.
Yet despite these possibil-ities, the government’s ownplans for Istanbul’s finan-cial services industryremain ill-defined.
October’s action planidentified the need for morespecialised courts andarbitration arrangements;promised to enact a longlist of legislation that hasbeen drafted but not passed;and set out 23 prioritiesranging from clearer taxlaws to quicker work per-mit applications.
As Mr Babacan acknowl-edges, little has been donesince apart from furtherconsultations.
One obstacle is the diffi-culty of taking legislationthrough a parliament preoc-cupied with bitter debatesover constitutional reform.
A new commercial codethat would raise accountingstandards and smooth sev-eral obstacles for investorswas introduced to parlia-ment in December 2008:there is still no sign of itbecoming law.
There is also a lack of co-ordination between regula-tors: for example, the firstapplication for a bank toissue corporate bonds wasapproved by the CapitalMarkets Board this year,but then rejected by thebanking regulator.
And although Turkishcompanies, including
Sophisticated corporate backdrop: view of Levent business district
Turkey’s creativeuse of ‘soft power’contrasts with thefeebleness ofthe EU’s efforts
Continued on Page 2
InsideGold trading The IstanbulGold Exchange is aimingto expand and diversify,writes David O’ByrnePage 2
Islamic finance Turkey’sfour ‘participation banks’may have an edge overconventional rivals in aneconomic upswing, writesDelphine Strauss Page 3
Corporate governanceTurkey has made boldstrides, writes AnthonySkinner, but some issuesremain a concern Page 3
Commercial propertyHigh prices are reducingdemand as the focusshifts to the Asian side ofthe city, writes MichaelKuser Page 4
‘Ask [local banks]to settle a tradein Morocco or inBulgaria and theygo crosseyed’
InsidePelin Turguton thechefscooking up arenaissancein the city’seateries
Page 4
www.ft.com/istanbul2010 | twitter.com/ftreports
The city is thecentre of corporatelife in Turkey butcapital marketslack depth, writesDelphine Strauss
FINANCIAL TIMES SPECIAL REPORT | Wednesday May 5 2010
David Gardner
banks, are increasinglyactive regionally – in theBalkans, Middle East,former Soviet Union andNorth Africa – analystsdoubt whether Istanbul canbeat rivals in the Gulf oreastern Europe as a finan-cial hub.
“It’s the unglamorousstuff they need – unglamor-ous settlements, custodyarrangements,” says onebanker.
“Ask [local banks] to set-tle a trade in Morocco, inBulgaria, and they go cross-eyed. Can I borrow stockfrom you? Can I borrownon-Turkish stock? No. Thelaws are not geared for aninstitutional market.”
Ercan Uysal, analyst atUnicredit, concurs. “I don’tthink Istanbul is going tobe a financial hub for theMiddle East – the money isfrom that region and it’sgoing to stay there,” hesays. “You need massivetax concessions to attractforeign capital. I don’t thinkTurkey’s competitive edgeis in financial services. It’sa nice dream.”
2 ★ FINANCIAL TIMES WEDNESDAY MAY 5 2010
Istanbul as a Financial Centre
ContributorsDelphine StraussTurkey Correspondent
David GardnerInternational Affairs Editor
Michael KuserDavid O’ByrnePelin TurgutFT Contributors
Anthony SkinnerPrincipal analyst atMaplecroft, theresearch company
Andrew BaxterCommissioning Editor
Steven BirdDesigner
Andy MearsPicture Editor
For advertising details,contact: Ekin IlyasogluTel +0212 27 310 27 / 13Fax +0212 273 27 29Email [email protected].
All editorial content in thissupplement is producedby the FT. Our advertisershave no influence over,thearticles or online material.
EU project comes unstuckdriven by interests morethan ideology. Trade withthe Middle East is fastexpanding to take up theslack of the EU downturn,while Turkey wants tobecome a hub for energyfrom the Caspian andEgypt. All this could beturned into a strategicasset for Europe, and forthe broader Middle East.
Turkey is the most suc-cessful country in theregion, with a big foot inEurope. The ability of itssecular republic to accom-modate (so far) a govern-ing party with Islamistroots, and embed constitu-tional reform, mesmerisesthe Arab world.
“Since the end of thecold war, Turkey has beenshifting its foreign policypriority from hard securityconcerns to soft power andcommercial interests, andmoving away from being aNato-backed regional gen-darme to a more independ-ent player determined touse a plethora of regional
integration tools in orderto be taken seriously on itsown account,” says HughPope of the InternationalCrisis Group.
“Turkey’s US and EUpartners should supportthese efforts towards stabi-lisation through integra-tion.” But Brussels needsto come up with something
to unblock the accessiontalks.
Six years ago, two-thirdsof Turkish Cypriots votedfor a United Nations planto reunify the island butthree-quarters of GreekCypriots – whom the EUhad foolishly guaranteedentry – voted against. Withthe Greek Cypriot govern-ment exerting pressurefrom inside, the EU has
failed to deliver on itspledge to open up tradewith isolated TurkishCyprus, and Ankara hasresponded by refusing toopen its ports to GreekCypriot ships and aircraft.
Under the new LisbonTreaty, however, the Euro-pean Parliament jointlydecides with the council ofministers on trade treatiesand the direct trade regula-tion for the Turkish part ofthe island may be revivedin a way that bypasses theGreek Cypriot veto.
It may even nudge asidea new obstacle: the recentelection in northernCyprus, in which national-ist Dervi Eroglu replacedPresident Mehmet AliTalat, who supported a fed-eral solution. Mr Erdogancould use his visit to Ath-ens next month to presenta package with his Greekcounterpart, George Papan-dreou.
Getting past the obstaclepresented by Cyprus wouldbe a good place to startreviving Turkey’s fraughtrelationship with the EU.
Continued from Page 1
Exchange builds on millenniaof tradition as market changes
For a man who has watchedthe core indicator of hisbusiness drop by 86 per centin less than five years,Yunus Aloglu, the deputyhead of Istanbul GoldExchange, seems remarka-bly relaxed.
Turkey, a centre of goldtrading for millennia, hadby 2005 become the world’sthird biggest importer ofgold, after India and China,and the second biggestexporter of gold jewellery,after Italy. Such was thedemand that in 2008 theIstanbul exchange becamethe second in the world tomove to 24-hour electronictrading.
But as gold prices soaredlast year, Turkish importsof the metal fell to only37,000kg – compared with ahigh of 270,000kg in 2005.
Mr Aloglu, however,argues that the currentslump in imports masks ahealthy if rapidly changingmarket driven by jewelleryexports and increasingdomestic gold production.
“Turkey has alwaysbeen a centre for goldtrading – the first gold coinwas minted here by theLydians and during theOttoman Empire Istanbul’sGrand Bazaar was one ofthe world centres for thegold business. That’s notgoing to change overnight,”he says.
Mr Aloglu points out thatin Turkish society, gold inthe form of jewellery – espe-cially women’s bangles –has traditionally beenviewed as a safe invest-ment.
In the last year, these sav-ers have been cashing intheir investments, and ahigh volume of gold jewel-lery is still entering the
market as scrap, soaking updemand from the jewellerysector and hitting imports.
“There’s a widespreadbelief that gold is over-priced,” Mr Aloglu says.“Some are selling anythingthey have, but others arestill buying,” he says, sincetradition still demands goldas a gift at weddings, birthsor even the purchase of anew house.
But while the tradition isto buy physical gold in theform of jewellery or coins,Mr Aloglu says many Turksare now opting for gold-based financial instru-ments.
“We launched the world’sthird exchange-traded fundin 2006. Now investors canchoose between these andmutual funds and gold-based deposit accounts –they cost less as there is noworkmanship involved andthey don’t have to worryabout security,” he says.
This year’s wedding sea-son, which starts in Mayand continues throughAugust, will show to whatextent local demand isrecovering, but Mr Aloglu is
not expecting a big jump inimports.
“There’s still a lot ofscrap gold entering themarket and local producersexpect production to risefrom 15,000kg last year to40,000kg next year,” hesays.
He also cites jewelleryexports steady at around$3bn a year, and recentmining surveys estimatingTurkey may have as much
as 6,500 tonnes of gold wait-ing to be extracted, as evi-dence of the exchange’sprospects.
“The market is changingand we’re changing too,” hesays, explaining that in afew months the exchangewill begin “customer-basedtrading”.
Long mooted, the move
will expand trading fromthe exchange’s 83 members,which buy and sell gold bykilos, to allow any of theircustomers to trade inweights of down to a singlegram. The aim is to boostmarket turnover.
Mr Aloglu expects furthergrowth as the Turkish gov-ernment acts on plans forthe exchange to expand tocover products other thanprecious metals.
“We’re a governmentinstitution, we’re not profitoriented but we have both atradition and experienceand we think we canexpand our operations intoa more general commodityexchange,” he says.
As a first step theexchange has qualified as amember of the World Feder-ation of Diamond Bourses(WFDB). It now requires alegislative change, slatedfor later this year, to allowit to expand operations intoprecious stones.
“It’s a logical step,demand for precious stonesis growing rapidly bothfrom local consumers andfrom the jewellery sectorfor exports,” Mr Aloglusays. “First diamonds, thenwe plan to expand intoother precious stones.”
Longer term plans aretied to government effortsto promote Istanbul as aglobal financial hub. “Basemetals are one possibility,and also as 35 of our mem-bers are exchange traderswe have been looking at thepossibility of establishing aforex market,” says MrAloglu. Both these changeswould require new legisla-tion that may take sometime to draft.
A more ambitious plan,however, is to launch intocarbon emission trading.“Obviously it will dependon what replaces the Kyotoprotocol in 2012, but as Tur-key is a signatory whatevercomes in will involve reduc-tions in emissions and willresult in trading,” MrAloglu says. “It’s just up tous to be ready.”
Gold tradingDavid O’Byrne onan institution withambitious plansfor expansion
Crown jewel’s shineis lost in the smog
The 2,500-year-old city famouslybridging east and west knowshow to roll with the times.Istanbul’s 21st century make-
over – sleek skyscrapers, chic hotels,a state-of-the art airport terminal andaward-winning national carrier – isdrawing in global companies such asGE, Nestlé, Coca-Cola, Microsoft andPepsiCo, which have made it theirheadquarters for multiregional opera-tions.
But beyond the glass-and-steelfacades, the city of about 15m peopleis riddled with infrastructure chal-lenges that loom large over its bid tobecome a global powerhouse.
While Istanbul’s position as aregional crown jewel is undisputed,its quality of life rankings are closerto those of a third-world city than toLondon, Paris or Stockholm. Rapidpopulation growth, traffic jams, poorpublic transport, earthquake risk andlack of a cohesive urban developmentstrategy are all pressing issues. At5,343 sq km, it is one of the largestmetropolitan areas in the world.
The city is governed by the IstanbulMetropolitan Municipality (IMM) witha directly elected mayor, Kadir Top-bas, who belongs to the ruling Justiceand Development Party (AKP). Theposition is an important one in Turk-ish national politics. Recep TayyipErdogan, the prime minister, beganhis ascendancy as mayor from 1994 to1998.
The IMM has 39 elected local munic-ipalities but no overarching plan toco-ordinate development betweenthem. In 2005, the mayor set up theIstanbul Metropolitan Planning andDesign Centre (IMP), a public-privatepartnership, but its efforts to developa plan have been dogged by contro-versy.
Unchecked population growth is thebiggest strain on the city’s resources.The Organisation for Economic Co-op-eration and Development (OECD) esti-mates that Istanbul’s population willgrow to 16m by 2017, and to 23m by2023. Density levels are high com-
pared with other European, or US cit-ies. The city’s peak density of 68,602people per sq km is well above Man-hattan’s.
Congested, smog-choked roads are aproblem, with almost 1.8m cars andan additional 84,000 every year.Although there are only 139 cars per1,000 inhabitants – low compared withEuropean rates – the average traveltime for motorised trips increasedfrom 41 minutes in 1996 to 49 minutesin 2006. Carbon emissions from Istan-bul traffic rose 37 per cent between1990 and 2007, from 6.5m tonnes peryear to 8.9m.
“The severe traffic congestiondespite low car ownership levels is atypical feature of developing coun-tries,” says Haluk Gercek, a transpor-tation engineering professor at Istan-bul Technical University and plan-ning consultant.
“It means that there hasn’t been apublic transport policy in place and sowhat public transport there is, isbased on buses and minibuses.”
Istanbul has spent the past decadetrying to catch up by investing heav-ily in its infrastructure. A metro sys-tem began operating in 2000. Con-struction is under way to expand theexisting network to 231km by 2015,although funding to complete it is notyet secured. Since 2007, a Metrobus(BRT) system has been operating atfull capacity along a dedicated lanecrossing the Bosphorus Bridge. Aplanned €751m, 22km metro rail linewill service much of the Asian side ofIstanbul along another congested traf-fic corridor.
A $3.5bn rail tunnel running underthe Bosphorus is due to open in 2013.Construction was held up for monthswhen underwater excavations uncov-ered a Byzantine harbour and morethan 30 ancient ships. “The municipal-ity’s effort is there but you also haveto recognise their challenge. Wher-ever you dig in Istanbul, you hit lay-
ers and layers of history,” says Shah-baz Mavaddat, director of southernEurope and Central Asia for the Inter-national Finance Corporation, basedin Istanbul.
The IMM has finally drafted a trans-portation master plan up to 2023, inconjunction with the Japan Interna-tional Co-operation Agency (JICA). Itaims to increase rail and sea-basedpublic transport from their currenttiny fraction of the total. “It is notgoing to happen overnight,” cautionsProf Gercek. “We are 100 years behindother metropolises.”
Part of the problem is that Ankaratoo wants a piece of Istanbul. TheTransport Ministry is backing twodeeply controversial projects that didnot appear in any of the municipal-ity’s own draft development plans.One is to build a third bridge acrossthe straits, despite criticism that thiswill destroy reservoirs and the fewremaining forests, as well as createunwanted additional traffic.
The second is the Bosphorus High-way Tube Tunnel, a $1bn underwatertunnel whose goal of bringing 80,000cars to the historic heart of the cityeach day has also been criticised. Itwas tendered to a Turkish-Koreanconsortium with a 30-year operatingconcession but has stalled overfinancing difficulties.
There is also the ever-present threatof a massive earthquake. In 1999, a bigquake 50 miles east of Istanbul caused20,000 deaths. A new report by JICAbased on four years of research esti-mates that a quake with an expectedsize of 7.0 on the Richter scale couldkill 35,000 people, destroy 5,000 build-ings and cause losses of $100bn.
The city has an earthquake readi-ness master plan that was developedin 2006 with several universities, butthere has been little progress on retro-fitting poor housing stock.
Nevertheless, analysts are upbeatabout the outlook for Istanbul’s globalambitions, as long as officials con-tinue to invest in infrastructure andplanning.
“A young, dynamic population,Istanbul’s efforts to become a finan-cial hub and the increased volume ofinternational trade conducted herebode well for a bright future,” saysErsun Bayraktaroglu, real estateexpert and partner at PwC in Istan-bul. “But Turkey needs to prepare forthis by doing its homework.”
Dig this: the remains of a Byzantine ship found during excavations for a rail tunnel under the Bosphorus Reuters
InfrastructurePopulation growth is thebiggest strain on resources,writes Pelin Turgut
Underwater excavationsfor a $3.5bn rail tunneluncovered a Byzantineharbour and morethan 30 ancient ships
A cart of gold flakes at Istanbul Gold Refinery Getty
Trade with theMiddle East is fastexpanding to takeup the slack of thedownturn in Europe
The exchange hasqualified as amember of theWorld Federation ofDiamond Bourses
FINANCIAL TIMES WEDNESDAY MAY 5 2010 ★ 3
Istanbul as a Financial Centre
Profile STFA emerges from ‘nightmare’When Ilker Keremoglu took the helm11 years ago at STFA, one of Turkey’smost venerable family companies, thehalfbuilt ski resort was the least ofhis problems.
By the death aged 90 of SezaiTurkes, who cofounded the group in1938, its core construction activitiessprawled across 20 countries.Besides the ski centre, it owned43 businesses ranging from a granitetile factory to a small port. Most madelosses, but longserving executivespicked by the founder were avoidingreality.
“He was a very respectable but oldperson who had relied on others,appointed people heknew . . . expecting them to run thecompany and tell him what was goingon. But at the end of the day it was amanagement problem,” Mr Keremoglusays.
STFA’s troubles were similar tothose of many Turkish familyownedconglomerates, built by powerfulfounding fathers, which diversified intothe wrong areas and struggled withthe transition to the next generation.
Some have sunk without trace, butothers, large and small, are working tochange corporate culture. MrKeremoglu, appointed by Mr Turkes’daughter as the group slid towardsbankruptcy, is one of a new breed ofprofessional chief executives workingalongside family owners to effecttransformation.
“I was parachuted into a companywith a 70year history and 9,000employees, most of them with 20 or30 years in the company,” he says.“They need a big boss, they need afamily . . . there was a queue of peoplebefore Mrs Turkes complaining aboutthis person who was going to ruineverything and didn’t understandconstruction.”
Mr Keremoglu’s first task at STFAwas to dismantle its unwieldy empirebefore its debts overwhelmed it, sellinglossmaking businesses to focus oninfrastructure projects, especiallyports; construction machinery; and aless cyclical catering jointventure.
But the financial situationsoon became acute. By2001, with Turkey’s economyin crisis, STFA owed moneyto banks, suppliers, taxauthorities and employees. Itcould not even cutstaff as it did not
have enough cash for redundancypayouts.
That year, overdue debts totalled$500m, against group revenues of$200m, and Mr Keremoglu persuadedthe family to approach creditors for arescheduling.
“For a couple of years it was reallya nightmare,” he says. As lawsuits andpayment deadlines multiplied inTurkey, STFA all but abandoned itshome market, instead targetingprojects in the Gulf wheregovernments paid more promptly.
It also applied for bankruptcyprotection, using new laws similar toChapter 11 arrangements in the US.Even so, it owes its survival partly toADM Capital, a specialist investor indistressed companies, which paid$65m for a 21 per cent stake in theholding company at the end of 2007.
Now, the last group company hasemerged from bankruptcy; operatingprofits reached $140m in 2009; andMr Keremoglu says revenues will top$1bn in 2010 – mostly from marineconstruction, a niche where tendersare less competitive.
STFA is now one of several largeTurkish groups that are preparing aninitial public offering. Plans to float thisspring were frustrated by aqualification in STFA’s accounts, sothe IPO is now delayed to 2011: it willlargely be a rights issue, though ADMCapital could sell half its 21 per centstake.
Going public will help finance energyinvestments, but Mr Keremoglu insistsit has been his aim throughout, as“the only way to upgrade corporategovernance”.
The presence of ADM Capital wasan opportunity to toughen governance,he says. The new partner hascommitted to attend board meetingsof the holding company and itssubsidiaries, with veto powersdisproportionate to its minorityholding.
“In Arabic countries, clients whoused to know the grandfather are now
pleased to see the grandchildren.It’s important that the family is
still there,” Mr Keremoglusays.
But their role is no longerto manage. “Before, therewas a strong, fatherly bosswho has the final say, all the
money is in his pocket. We’retrying to change all of
that.”
DelphineStrauss
Ilker Keremoglu:‘I wasparachutedinto thecompany’
Ambitious growth targets set bycountry’s ‘participation banks’
Turkey has one of the world’sbiggest Muslim populations,but religion has until recentlyplayed little part in its bank-
ing system. Islamic finance has pow-ered ahead in Gulf countries, wheresharia-compliant institutions accountfor almost a third of banking assets –more than $5,000 per capita.
Yet Turkey’s four so-called “partici-pation banks” held just 4 per cent ofthe sector’s assets at the start of 2010– or less than $250 per capita.
“In Turkey, interest is not consid-ered to be a sin in Islamic terms asstrictly as in the Middle East. Manypeople are believers but don’t considerinterest unethical,” says Can Demir,analyst at the brokerage ExpresIn-vest.
Now, though, the participationbanks – publicly traded AlbarakaTurk and Bank Asya, and unlistedKuveyt Turk and Turkiye Finans –are gaining prominence, aided bysocial and political change, and abusiness model that gives them anedge in an economic upswing.
They have grown at almost doublethe rate of commercial banks over thepast three years, and want to win amarket share of 10 per cent of bank-ing sector assets within the next dec-ade – a target that analysts think isachievable.
Over the next year, one advantageover mainstream rivals will be thelikelihood of the central bank raisinginterest rates as the economy recov-ers. Rising rates hurt Turkish banks,which have big holdings of govern-ment bonds and cannot adjust rateson lending as quickly as on short-termdeposits. Participation banks, how-ever, cannot invest in interest-bearinggovernment securities, and theyreward depositors with a share ofreturns on investments rather thanwith a fixed interest rate.
“When conventional banks are suf-fering from rising interest rates, par-ticipation banks can be very aggres-sive in pricing,” says Ercan Uysal,analyst at Unicredit.
Some went on the offensive even inthe worst stages of last year’s finan-cial crisis, rapidly expanding lendingto small businesses at a time whenthe biggest banks were calling inloans, and offering high returns todepositors in order to fund it.
The strategy may pay off in winningcustomers’ loyalty. “It’s not a goodidea to withdraw credit when cash-flow is bad, clients see it as the last
nail in the coffin,” says Melisah Utku,general manager at Albaraka Turk,the most conservative of the four.
“In this latest crisis, many smallbusinesses applied to us. Some werealready in dire straits, but there weremany we could easily work with.”
In the long term, though, the sec-tor’s fortunes will depend on morefundamental changes: the role of reli-gion in Turkish society, the risingprosperity of conservative Anatolia,and strengthening ties with MiddleEastern economies.
Mr Utku estimates 70 to 80 per centof Albaraka’s depositors choose thebank for religious reasons and willnot defect to commercial banks. Thispattern could be reinforced, as morebranches open in rural, conservativeareas where many people previouslyshunned banks altogether.
“Participation banks are instrumen-tal in bringing these funds into thesystem,” he says.
Customers for loans have more var-ied motives. But many of them aredrawn from a prosperous class of con-servative, Anatolian businessmen,natural supporters of the Islamist-rooted Justice and Development party(AKP), and increasingly successfulsince it took power in 2002.
“The AKP has risen on the shoul-ders of Anatolian capital… their sharein economic activity has been grow-ing,” Mr Uysal says. “The customerbase for Islamic banking is solid, and
has got richer and more influential inthe past 10 years.”
The participation banks’ clients alsoseem to include businessmen of moreflexible principles, switching fromcommercial banks in order to curryfavour with politicians.
“Every government has its owntrend. Businessmen who want to dobusiness should act in accordancewith it,” says the owner of a mid-sizedconstruction company in Ankara, whodid not want to be named.
Although religious, he had workedwith commercial banks before, butnow had an account at one of theparticipation banks.
The main constraint on growth,analysts say, is funding. Turkey’s sec-ular state has not yet developed therange of sharia-compliant fundingproducts available to Islamic bankselsewhere, so participation banksfund their activities almost entirelyfrom deposits, with loan to depositratios of 90 to 95 per cent.
This is slowly changing: last year,the treasury began twice-yearly salesof sukuk-style bonds, indexed to therevenues of government agencies,which the participation banks caninvest in without breaching religiousrules.
Mr Utku says that although therewas little interest in the first issue,even commercial banks had boughtthe bonds in this year’s latest auction,and he predicted that a secondary
market would develop once banksbegan selling their holdings.
Regulators have also published newrules for issuing sukuk-style corporatebonds, secured on assets, calling thema safe alternative for investors.
Even so, the participation banksmay seek swifter means to raise capi-tal. All except Bank Asya are control-led by Middle Eastern strategic inves-tors, and could seek closer ties withtheir parents so as to tap more devel-oped markets for Islamic finance.
Both Kuveyt Turk and Turkiye Fin-ans are likely to launch initial publicofferings on the Istanbul StockExchange, this year or next.
Yet the limits to participationbanks’ expansion may ultimately bepolitical, not financial. “If Turkeybecomes more conservative… theirbase will increase,” Mr Uysal says. “Ifthe AKP and all its philosophy isderailed, if there’s a secular backlash,it will be the opposite”.
Additional reporting by Funja Güler
Islamic financeDelphine Strauss on thegrowing role of religion inTurkey’s banking system
Taking growth into account: a branch of Albaraka Turk, one of the country’s four ‘participation banks’
Concerns remain despiteimprovement in standards
Ask the owner of a com-pany in Anatolia about thestrength of corporate gov-ernance in Turkey and youare likely to get a blanklook. While Turkey hasmade bold strides in thepast decade, it still lagsbehind many developedeconomies in corporate gov-ernance.
This is reflected in theWorld Bank’s Doing Busi-ness 2010 survey, whereTurkey ranks 73rd out of183 economies. The countryscores a disappointing 5.7out of 10 for the strength ofinvestor protection, despiteboasting an impressive nineout of 10 for the transpar-ency of transactions. Itsaverage number of 35 proce-dures to enforce contractsis above that of the OECDas a whole (30.6).
Two primary concernsrelating to corporate gov-ernance in Turkey are theprotection of minorityshareholders and the highdegree of cross-ownershipbetween family firms. Tur-key scores 3.9 out of sevenfor the protection of minor-ity shareholders’ interestsin the World EconomicForum’s 2009-2010 GlobalCompetiveness Report –placing it 98th out of 133economies.
“More regulatory safe-guards are needed in Tur-key to protect minorityrights,” says Erkan Savran,head of research at AKSecurities. In addition, theboards of Turkey’s largefamily-owned businessescontinue to consist largelyof family members.
“We often don’t know if‘independent’ board mem-bers are in fact selectedfrom an independent pool,”says Botan Berker, generalmanager of Fitch RatingsTurkey.
But the most intractablechallenge for companiesthat seek a level playingfield is the size of the blackeconomy. Having to com-pete against unregisteredenterprises – which accountfor approximately 44 percent of Turkey’s employedlabour force – remains achief source of complaintfor companies that paytheir taxes.
“Unfair competition per-sists in Turkey when I, as acompany, am paying taxesand the social security con-tributions of my employees,but the competition is not,”says Baturalp Candemir,chief economist of EFGIstanbul Securities.
Despite the ruling Justiceand Development party’s(AKP) initiative to cutemployers’ social securitypremium payments by 5 percent in 2008, more than 40per cent of gross salariesstill go to the government.
The majority of unregis-tered businesses thereforestill have insufficient incen-tive to register with the taxauthorities.
“Turkey should focus onsolving bureaucratic prob-lems and initiate morereforms in the employmentmarket, including reducinglabour costs and increasinglabour market flexibility,”according to Hakan Aklar,chief economist of AK Secu-rities.
This is not to deny theprogress that Turkey hasmade over recent years inimproving its corporategovernance profile. Theadoption of internationalstandards in accountingand auditing has been par-ticularly notable.
“We have definitely seenprogress in disclosure andtransparency, particularlyamong listed companies,although small unlistedfirms are lagging behind,”says Tayfun Bayazit, chair-man of Yapi Kredi Bankand chairman of the boardfor the Corporate Govern-ance Association of Turkey.
The level of awarenessamong Turkey’s top compa-nies of the benefits of adopt-ing more stringent corpo-rate governance standardshas grown meanwhile.
“Turkey is experiencing apositive evolution towardscorporate governance. Lead-ing companies are using itas a tool to increase theirvalue and ensure the sus-tainability of their busi-ness,” says Mr Bayazit.
He adds that it also helpscompanies gain betteraccess to finance, whileplacing them on a solidfooting should they seek toacquire other entities.
The growing awarenessabout corporate governanceissues among Turkey’s com-panies has, to some extent,been reflected in the Istan-bul Stock Exchange’s (ISE)Corporate GovernanceIndex, which was launchedin late August 2007.
Whereas 25 companieshave qualified for the indextoday, fewer than 15 compa-nies cut the mustard priorto 2009. The fact that about9 per cent of the 275 compa-nies listed on the ISE haveregistered a sufficientlyhigh corporate governancescore (six out of 10 or
above) to be included in theindex is noteworthy, how-ever.
“This does not mean thatthe performance of listedcompanies is bad, althoughit does reflect that manysuch entities are not, as yet,giving particular impor-tance to corporate govern-ance,” says Mr Candemir.
More significantly, corpo-rate governance standardsare likely to receive anessential boost with theeventual passage throughparliament of Turkey’sdraft commercial code.
“This has been on theagenda for more than twoyears and its adoptionwould greatly strengthenlegal requirements relatedto governance,” says EceGüner, managing partner ofGüner Law Office.
“It is also likely toincrease the protection ofminority shareholders andimprove transparency lev-els.” In addition to corpo-rate transparency, the com-mercial code’s primary pil-lars are fairness, accounta-bility and responsibility.
But a swift overhaul ofcorporate governance prac-tices is unlikely in the shortterm. The adoption of thecommercial code is likely tobe phased in gradually.
“Implementation takestime. Small and mediumsized enterprises are lesswilling to support fulltransparency in their audit-ing and accounting, as theyfear this may affect theircompetitiveness,” saysMustafa Alper, secretary-general of Turkey’s Interna-tional Investors Associa-tion.
The significance of suchresistance derives from thefact that more than 90 percent of Turkey’s companiesare small and mediumsized. Yet, precisely suchcompanies are being tar-geted by the draft law.
GovernanceAnthony Skinneron the need fortighter regulationof companies
‘More regulatorysafeguards areneeded in Turkeyto protectminority rights’
4 ★ FINANCIAL TIMES WEDNESDAY MAY 5 2010
Istanbul as a Financial Centre
Culinary revival finds f lavour with diners
The Ottoman imperialkitchen was one of theworld’s earliest exam-ples of fusion food, a
melting pot of ingredients andcooking techniques from acrossthe Empire, which spread in itsheyday from Budapest to Cairo.
Dishes such as Circassianchicken, Albanian liver, stuffedmussels or roe tarama harkback to that heritage.
Yet the Ottomans’ modern-day heirs have long been con-servative about their cuisine.Like Italian food, Turkish cook-ing was, until recently, domi-
nated by tradition. But a culi-nary renaissance is under wayin Istanbul, growing alongsidethe city’s new-found stature asone of Europe’s hippest culturalcapitals.
Several internationallytrained chefs have returnedhome to run restaurants thatreinvent local food with a con-temporary twist, professionalcookery schools are opening andthere is a movement to restoreregional ingredients.
“Things are changing, we arestarting to rediscover our owntraditions and ingredients,” saysHande Bozdogan, founder of theIstanbul Culinary Institute, aschool for chefs with an adjoin-ing acclaimed daytime restau-rant that opened two years ago.
Ms Bozdogan trained at sev-eral schools in Europe beforereceiving her diploma from theFrench Culinary Institute andreturning home to adapt the
model she saw there. “Just afew years ago, up-scale eatingout meant imported trends, likeJapanese food. Now people aregoing back to the basics andTurkish cooking traditions.
“Local ingredients are becom-ing valuable. Young profession-als are more interested in seek-ing out slow-grilled Thracianspecialty lamb, say, than sushi.”
Changa, an elegant restaurantin a four-storey Art Nouveaubuilding just off Istanbul’s cen-tral Taksim Square, is an undis-puted pioneer. It is owned byTarik Bayazit and Savas Ertunc,two widely travelled formerexecutives who returned toIstanbul 11 years ago andsought to create a restaurantthat would reinvent Turkishfood. The pair hired Peter Gor-don, a New Zealand chef fromLondon’s Sugar Club, to designa Turkish fusion menu.
“When we opened, one Turk-
ish newspaper called us a freakrestaurant,” recalls Mr Bayazit,laughing. “We wanted to dosomething creative and newwithout necessarily breakingwith the past. People thoughtthis was a laboratory.”
The restaurant – open only inthe evenings – now has adevoted clientele and is listed inZagat’s guide of Europe’s toprestaurants. A second location,Muzede Changa, in the SabanciMuseum on the shore of theBosphorus is equally popular.
The changing menu featuresintriguing riffs on local ingredi-ents, such as scallops wrappedin pastırma (a spicy Anatoliancured meat), delicate zucchiniflowers stuffed with crumbly lorcheese and herbs or Turkish cof-fee-flavoured ice cream servedwith biscotti and bitter almondliqueur.
Some of Changa’s signaturestaples, such as grilled vine
leaves with halloumi cheese, arenow offered at cafés across thecity.
“Both supply and demand forchange are on the increase,”says Mr Bayazit. “Travel hasbecome easier, so consumers aremore aware and open-minded.Simultaneously, the food indus-try, which used to be lookeddown upon and seen as second-class, is now seen as an art,attracting well-educated youngtalent who are doing goodthings.”
“It used to be that there wasonly one correct way to makethese dishes, but that’s chang-ing,” says Refika Birgul, the 29-year-old author of Cooking NewIstanbul Style, which featurescreations such as “Turkishsushi” made by rolling yufka, awafer-thin pastry.
“The main ingredient is Turk-ish cuisine, but we’re bringingglobal influences to it,” says Ms
Birgul. “We’re also lucky in thatwe grew up with great foodbeing cooked at home, so ourconnection to food is very differ-ent from someone growing up inNew York.”
At 360, a sleek, highly popularrooftop restaurant with pano-ramic views across the Old Cityand Bosphorus, South Africanchef and co-owner Mike Normansays the best-selling dishes onhis fusion menu are those thatare Turkish inspired.
Specialities such as the “Soci-ety shish kebab remix” ortandır-baked lamb confit servedwith an artichoke begendi (apurée) are favourites.
“It’s not so much the ingredi-ents,” he says. “The world is sosmall now, you can get any-thing, anywhere. It is Turkishcuisine as a whole that is inspir-ing, especially the techniques.”
Mr Norman is about to launcha restaurant by the Bosphorus,
where he plans to improvisesimilarly with fish dishes.
It is not just up-scale dining.A number of good quality Turk-ish chains such as Saray, Sutisand Ozsut have emerged froman age-old tradition of puddingand sweetshops.
There is also growing aware-ness of local ingredients. Thou-sands of people supported arecent Slow Food campaign toend the fishing of prematurelufer, local blue fish, and effortsare under way to introduce anappellation system.
“Turkish cooking is still mak-ing the transition from streetand home food to a more com-mercial stage, so there is still away to go before it establishesitself in the world alongsideThai, Chinese or French food,”says Changa’s Mr Bayazit.
“But there is movement –we’re looking in the right placesand going back to our roots.”
Eating outPelin Turgut on howlocal food is beingreinvented with acontemporary twist
Making a meal of it: Muzede Changa, in the Sabanci Museum on the shore of the Bosphorus
High prices curb demandas focus turns to Asian side
Investors have again settheir sights on Istanbul, butthis time round it is more atrickle of interest than aflood. Demand is soft,rather than nonexistent.
The crisis of 2001 causedthe Turkish lira to devalueby half, which made prop-erty prices attractive to for-eign investors.
The market recoveredfast in 2004 and 2005: pricesincreased, investors roaredin. Yields, too, were attrac-tive then: 10 per cent inTurkey compared with 3 to4 per cent in the UK. Themarket topped out in 2006and prices have stagnatedsince.
“The recession that beganin 2008 did not create thesame opportunity as before,because there was no deval-uation in the lira,” saysKerem Cin, country man-ager for Colliers in Turkey.
“As a result, prices nowlook high. Rents dropped,and also more contracts areshort term. Returns in Tur-key are now 1 percentagepoint higher than in west-ern Europe, say 6 to 7 percent in the UK and 8 percent in Turkey.”
Projects are under way allover the city, but construc-tion and leasing momentumhas shifted to the Asianside, especially Ümraniye,on the main Trans Euro-pean Motorway. Prices arelower and there is moreroom for custom-built facili-ties, which suits manufac-turers and logistics compa-nies that do not need aprestigious address so muchas affordable space.
The move to the Asianside has another advantage:look at any company of 200people or more and 60 percent of the workers will liveon the Asian side. Istan-bul’s commuter traffic isnotoriously snarled on bothbridges, so any step thatlessens employees’ exposureto it saves time and money.
Local conditions drive thefate of the market, and thecrucial factor is not trafficbut the owner profile.
“Istanbul is dominated byindividual rather than insti-tutional investors,” says MrCin. “Most owners are notleveraged and don’t borrowto buy their property, so thelocal market is detachedfrom the global market. Ittakes time to change theowner profile.”
Property owners in theUK cut prices by as muchas 25 to 50 per cent in 2009,but Turkish owners, usu-ally family-controlled com-panies, preferred to wait.Now, the market is reviv-ing, commercial vacancyrates have begun decliningand rents are inching upagain.
Any middle-aged businessperson in Istanbul has seena lot of ups and downs.Indeed, no European cityhas changed more in thepast 20 years than Istanbul– just a few years ago thedistrict of Ümraniye – nowthe hottest new office mar-ket on the Asian side – wasa suburban slum whereglue-sniffers ran amok.
In 1990 Istanbul had onlyone mall; today it has 77,with the newest competingto differentiate themselvesfrom their peers, as IstinyePark did with the unveiling
of its Imax cinema. Overthat period the populationhas doubled from 7.5m to anestimated 15m and the aver-age yuppie’s purchasingpower has trebled to $36,000(based on a common mid-manager’s salary of TL5,300per month at 1.5TL to thedollar).
Twenty years ago therewas little demand for supe-rior office space, and only acouple of buildings stoodmore than a dozen storeyshigh. Today, Istanbul has
1.7m sq m of A Class officespace.
Residents say you couldonce hear wolves howlingat night in Levent, a neigh-bourhood on the Europeanside that is today the pre-mium office address in thewhole city. No wild animalsroam the streets of Leventtoday, but it does have itsown metro stop. An A Classoffice in Levent fetches $33per sq m, compared with$12 per sq m near the air-port.
One reason for slackdemand is that multina-tional companies do nothave the same presence inTurkey as in Russia, forexample. The Turkish econ-omy looks big on paper, butRussia tops Turkey interms of size.
Turkey’s advantagesinclude tax incentives andmore transparent bureau-cratic procedures than Rus-sia, but size is key. WhenErnst & Young, for exam-ple, opens an office in Mos-cow it is serving a hugedomestic market, as well asthose of Central Asia, theCaucasus and Balkans.
Even central and easternEurope look good comparedwith Turkey, with greaterper capita purchasingpower in most countries,except Romania and Bul-garia. But then Istanbul is aspecial case: the only largeA Class office market inTurkey.
Foreign capital may notreturn until prices drop, butAlan Robertson, managingdirector of Jones LangLaSalle in Turkey, saysinterest is reviving.
“In 2009, the institutionalinvestors were saying theycould find less risky bar-gains in their home mar-kets in the US or UK, butthose bargain days areover,” says Mr Robertson.
“Now they’re interested,sometimes specifically inTurkey, sometimes justopen to internationalinvesting. There is a mis-match in the market interms of net initial yield,but not as much as lastyear. I suspect we’ll seemore interest from foreigninvestors; not a flood, butcontinued and growinginterest.”
And multinationals thathave not looked at Istanbulfor a few years may be infor a pleasant surprise.
“The dynamics are differ-ent and the situation ischanging,” says Mr Cin.“The labour market isdeveloping fast, with theamount of educated labourincreasing exponentially.Compared with a decadeago Istanbul has betterhealthcare, enhanced socialstability and infrastruc-ture . . . it just takes time.”
Commercial property
Michael Kuser ona market driven bylocal, rather thanglobal factors
Residents say youcould once hearwolves howling inLevent, now thetop office address
It’s bazaar: Istanbul’s Cevahir shopping mall Alamy
