Update on Currency Restrictions
On 13 September 2018, Turkish currency regulations were amended to introduce highly controversial restrictions on the use of foreign currency and currency-indexing in certain categories of contracts entered into between Turkish residents and requiring existing contracts to be converted into Turkish Lira within 30 days.
These restrictions and conversion requirements were set out to be subject to exceptions to be determined by the Ministry of Treasury and Finance. The Ministry has finally issued these exceptions on 06 October 2018.
Decree No. 32 on the Protection of the Value of the Turkish Currency (“Decree No. 32”) governs Turkey’s general currency and capital flows regime, amongst other things.
Decree No. 32 was amended by Presidential Decision No. 85 on 13 September 2018 bringing sweeping restrictions on the use of foreign currency and currency-indexing in certain contract categories entered into between Turkish residents and requiring existing contracts to be converted into the Turkish Lira within 30 days. Readers may refer to our 14 September Legal Briefing for a more detailed discussion of the original restrictions.
The Ministry of Treasury and Finance, charged with the difficult task of producing a reasonable set of boundaries to the otherwise unhelpfully categorical restrictions, had issued a statement to calm markets, promising they would give regard to foreign currency exposures and input cost exposures, among other things.
Following over a week of anxious silence, a draft list of exceptions leaking to the public last week, the official list of exceptions have been issued over the weekend on 06 October 2018, presumably intended to allow time to digest before markets open. Following its official release, it remains suspect if the exceptions fulfil the Ministry’s initial promise.
Scope of the original restrictions
To remind readers, Presidential Decision No. 85, provided that Turkish residents may no longer provide foreign currency or currency-indexed “contract considerations” or other related payment obligations in the following categories of transactions entered into with another Turkish resident:
- sale and purchase of movable and immovable assets;
- all types of rental agreements including vehicle rentals, leasing, financial leasing and the rental of immovable properties;
- employment agreements;
- service agreements; and
- construction agreements.
Presidential Decision No. 85 also required all existing contracts falling within the above categories to be converted into the Turkish Lira within 30 days.
Finally, the Presidential Decision No. 85 provided that the restrictions and the conversion requirements would be subject to exceptions to be approved by the Ministry of Treasury and Finance.
The Ministry’s list of exceptions came by way of amendments to Communiqué No 2008-32/43 (the “Ministry Communiqué”), entering into force as of their publication in the Official Gazette dated 06 October 2018.
Contrary to general market expectation for a generally applicable and categorical set of exceptions, the exceptions from the Ministry Communiqué are a relatively detailed patch-work of various sector references, cushioned within some more intuitive general exceptions.
This, and the interpretation and terminology issues discussed below, makes it difficult to provide a wholesome list of contracts that will be affected. Notwithstanding, the table set out in the Annex contains an attempt to provide a reasonable birds-eye of the current state of matters, on a preliminary basis and readers are asked to refer to the Annex for more detail on the scope of the exclusions.
According to the Ministry Communiqué, if the parties are unable to reach an agreement, contracts that do not benefit from an exception will convert to TL as from the expiry of the transition period.
This transition period will expire on 13 October 2018 but, because it falls on a weekend, general rules of law should serve to extent the expiry to the next business day on 15 October 2018.
The Ministry Communiqué provides that the conversion will take effect on the basis of Central Bank reference rates (banknote selling) existing at 02 January 2018 adjusted to the date of conversion on the basis of monthly CPI (TÜFE) changes.
On 2 January 2018, the Central Bank reference exchange rate for the dollar was 3.7776. On the date Presidential Decision No. 85 was published, this rate was 6.3776.
The Ministry Communiqué provides that indexing to precious metals and commodities that are “priced by reference to foreign currency” and any indirect indexing to foreign currency will be treated as “foreign currency indexing” under Decree No. 32.
Reversal of exceptions?
Article 8(25) of the Ministry Communiqué provide, very confusingly, that parties who benefit from the exceptions can “mutually agree” to demand the execution of future contracts in Turkish Lira or convert existing contracts to Turkish Lira.
A previous iteration of the exceptions did not reference “mutual agreement” hinting that there may be intention to give a unilateral termination right. While this appears to be addressed, to an extent, the effect and intention of the provision remains a mystery for the time being.
Interpretation and terminology issues
One of the main practical issues in the interpretation of Presidential Decision No. 85 and the Ministry Communiqué is their less than careful use of technical terminology.
A serious question remains as to what, for example, the term “service agreement” is intended to capture. In a technical sense, this would be understood to refer to employment-type relationships. The Ministry Communiqué on the other hand groups in consultancy, brokerage and transportation contracts. A prudent interpretation could be to take this as a reference to all agreements that relate to the provision of a service, in an employment capacity or otherwise.
Another burning question is how commercial parties are expected to reliably place their contracts into the plain contract categories that are referenced in the regulations. Often, a modern contract would incorporate elements from multiple contract categories and its characterisation is rarely straightforward.
These questions can be expected continue to haunt commercial parties for the foreseeable future.
Looking beyond the glaring interpretation issues of the new suite of regulations, which add to the overall confusion and market upset, there are still a number of key questions to discuss on Constitutionality, limits of Presidential authority and their effects on the overall legality of the new regulations.
These are critically important and, for lawyers, not easily overlooked. They will need to be discussed and considered in more detail and in the context of any potential substantive effects of the regulations to existing contracts.
However, at this stage, many commercial parties are feeling a more pressing need to make a practical assessment of their contracts and overall business models.
The approach set out in this Legal Briefing is in appreciation of that business need, and accordingly takes the new currency restrictions on their face value pending a formal court decision to stay or cancel their application.
Annex – Summary Exceptions
- All contracts (other than contracts for the sale and rental of immovable properties) executed by public entities and institutions and companies of the Turkish Armed Forces Foundation. (see para. (12) of Article 8 of the Ministry Communiqué).
- Third party contracts (other than contracts for the sale and rental of immovable properties and employment contracts) executed by contractors within the scope of the performance of tenders and contracts initiated or executed by public bodies and institutions and intergovernmental agreements that are in foreign currency or foreign-currency indexed. (see para. (13) of Article 8 of the Ministry Communiqué).
- Contracts entered into by banks within the scope of treasury transactions executed by the Ministry of Treasury and Finance within the scope of Law No. 4749. (see para. (14) of Article 8 of the Ministry Communiqué).
- Contracts for the issuance, sale and purchase and related transactions in connection with capital markets instruments. (see para. (15) of Article 8 of the Ministry Communiqué).
- Contracts (other than contracts for the sale and rental of immovable properties and employment contracts) executed by commercial airline companies, companies providing maintenance services to aircraft their engines and other components, and companies providing airport ground services, and their subsidiaries. (see para. (17) of Article 8 of the Ministry Communiqué).
Sale contracts – immovable property
Sale contracts – movable property
Unless they relate to motor vehicles and construction vehicles.
Rental contracts – movable property
Unless they relate to motor vehicles and construction vehicles.
However, rental contracts for motor vehicles and construction vehicles executed before 13 September 2018 will not need to be converted.
Rental contracts – immovable property
Financial leasing contracts
If they relate to ships.
If permitted under Article 17 and 17/A of Decree No. 32.
If they relate to the construction, maintenance and repair of ships.
If they relate to employment services to be performed abroad.
Expat contracts (i.e. where the employee is not a Turkish national).
If employed by a branch, representative office or agency of a foreign resident or by a company whose majority capital is, directly or indirectly, owned by a foreign resident.
If they are entered into with non-Turkish nationals.
If they relate to export, transit trade and services deemed as exports and foreign currency generating services.
If they relate to services to be performed abroad.
If they relate to electronic communication services ending or originating from abroad.
If they relate to software or hardware manufactured or developed abroad.
If entered into by a branch, representative office or agency of a foreign resident or by a company whose majority capital is, directly or indirectly, owned by a foreign resident.
For more information, please contact us:
Yeşim Bezen, Senior Partner | [email protected] | +90 (212) 366 6804
Murat Soylu, Partner | [email protected] | +90 (212) 366 6802
Can Özilhan, Senior Associate | [email protected] | +90 (212) 366 6811
This material is for general information purposes only. It does not constitute legal advice and should not be relied upon as such. You should always seek specific legal advice about your specific legal circumstances before taking any action based on the contents of this material. While we make all reasonable efforts to ensure that all factual information set out in this material is obtained from external sources which we reasonably believe are reliable, we do not guarantee their accuracy or completeness.
© Bezen & Partners 2018