Capital Controls & Currency Risk: Can Türkiye’s FX Regime Support Bankable Projects?

As of August 2025, Türkiye’s project finance market remains one of the most active among emerging economies—but also one of the most exposed to currency volatility and foreign exchange (FX) risk. With benchmark interest rates holding above 45%, a sustained inflationary backdrop, and a delicate external reserves position, Türkiye’s Central Bank (CBRT) has maintained a set of macroprudential tools that effectively amount to capital controls. For sponsors and lenders structuring infrastructure, energy, and industrial investments, this environment presents a serious legal and financial challenge: how can long-term, FX-denominated debt be reconciled with Turkish lira-based revenues in a way that ensures bankability?

The problem is systemic. The majority of large-scale infrastructure and energy projects in Türkiye—particularly in the renewables, transport, and digital sectors—continue to rely on foreign currency financing, whether through DFIs, export credit agencies (ECAs), or international syndicates. Yet, revenues from these projects are increasingly denominated in Turkish lira, especially in domestic offtake arrangements, availability payments, or regulated tariff structures. Without robust legal mechanisms to absorb FX mismatch, even highly strategic projects risk becoming unbankable.

The tension between capital mobility, currency convertibility, and project bankability is now at the heart of Türkiye’s infrastructure agenda. Legal advisors are being asked to do more than just close deals—they must anticipate cash flow friction, regulatory intervention, and enforceability risks across currencies. This article explores the current state of Türkiye’s FX regime, the legal structures being used to manage currency risk, and how sponsors, lenders, and counsel can align capital controls with commercial expectations. In doing so, it also reflects on the evolving role of legal design in keeping Türkiye’s infrastructure pipeline viable under monetary pressure.

Türkiye’s Current FX Landscape (as of August 2025)

Türkiye’s foreign exchange environment in mid-2025 is shaped by a convergence of macroeconomic stabilization measures and regulatory interventions that directly affect cross-border project finance. In the wake of sustained monetary tightening, the Central Bank of the Republic of Türkiye (CBRT) has aimed to rebuild reserves, stabilize the Turkish lira, and manage corporate FX exposure—all while supporting economic activity through selective credit channeling.

The practical result is a managed FX regime: capital mobility exists, but under layered restrictions. These restrictions are implemented through a combination of regulatory instruments, including Decision No. 32 on the Protection of the Value of the Turkish Currency, multiple CBRT communiqués, and Banking Regulation and Supervision Agency (BDDK) guidelines on FX borrowing eligibility, transaction reporting, and derivative hedging.

As of August 2025, key features of Türkiye’s FX landscape include:

• Eligibility Criteria for FX Loans: Turkish corporates must demonstrate that they have no foreign currency income (döviz geliri) in order to be prohibited from accessing foreign currency-denominated loans, unless the loan amount exceeds USD 5 million or certain exemptions apply (e.g., public-private partnership projects). This directly affects the structuring of project-level SPVs.
• Restricted Use of FX Accounts: While offshore accounts remain possible in project finance transactions (particularly for revenue waterfalls and reserve accounts), they are subject to CBRT approval and may trigger cross-border transaction reporting obligations. Pledges over FX accounts must be carefully structured to comply with Turkish pledge laws and avoid triggering restrictions on revenue repatriation.
• Obligatory FX Conversions: Under the CBRT’s macroprudential toolkit, certain foreign-currency inflows—particularly export proceeds and ECA-backed tranches—must be partially or fully converted into Turkish lira. This has direct implications for drawdown mechanisms and the structure of multi-tranche financings.
• Hedging Oversight: BDDK expects Turkish banks to monitor FX mismatch in borrower cash flows, and in some cases, require hedging as a condition for loan approval. This introduces both structuring complexity and contractual uncertainty, particularly where long-dated swaps are unavailable or uneconomical.
• Capital Repatriation Controls: While Türkiye remains formally open to capital flows, the timing, form, and process of returning capital—whether through dividends, shareholder loan repayments, or asset sales—is increasingly scrutinized, especially in regulated sectors like energy and telecom.

For foreign lenders, these constraints represent more than operational friction—they affect debt service predictability, loan enforceability, and exit flexibility. For domestic sponsors, the need to navigate these controls without violating monetary policy objectives means that legal structuring must be sophisticated, front-loaded, and regulatorily aligned. Failure to do so could stall otherwise viable projects or expose sponsors to currency mismatch that cannot be cured post-financing.

Legal Structures for FX Exposure Management

Faced with an environment of fluctuating interest rates, restricted capital movement, and mandatory currency conversions, both sponsors and lenders are increasingly relying on sophisticated legal mechanisms to manage foreign exchange (FX) exposure in Turkish project finance. These structures aim to mitigate the impact of currency mismatch between FX-denominated debt and lira-based revenue streams—without violating Türkiye’s capital controls or banking regulations.

1. Currency Matching and Indexed Loans

Turkish law permits FX-denominated loans under specific eligibility criteria, but it also allows for “FX-indexed Turkish lira loans”. In these structures, loans are disbursed and repaid in Turkish lira, but their value is indexed to a foreign currency (typically EUR or USD). This provides legal workarounds for borrowers who are ineligible for direct FX lending, especially in mid-size infrastructure projects.

Legal considerations include indexed amounts must be clearly defined in loan agreements and supported by contractual FX reference mechanisms (e.g., CBRT daily rate); any revaluation gains or losses are treated as financial income/cost under Turkish tax law; and  indexed loans are typically subject to CBRT and BDDK reporting, and may still trigger scrutiny in the case of back-to-back hedging or related-party structures.

2. Multi-Currency Revenue Waterfalls

To reconcile multi-currency cash flows with project debt, many project finance documents now incorporate dual-currency waterfall provisions. These are typically structured through:

• Onshore FX collection accounts, where permitted, pledged in favor of lenders under Turkish movable pledge law (Law No. 6750),
• Tiered waterfall clauses that allocate FX revenues to FX debt service first, with excess converted into lira for local payments or dividends,
• Explicit conversion triggers and timelines to avoid delays in currency availability during high-volatility periods.

Importantly, these waterfall models are enforceable in Türkiye only if structured with proper assignment of receivables (alacak temliki) compliant with the Turkish Code of Obligations, Account pledge agreements signed before notaries and registered (if applicable), and CBRT & tax compliance for intra-group or cross-border FX flows.

3. Hedging Requirements in Loan Agreements

In 2025, Turkish and international lenders increasingly demand mandatory hedging undertakings as part of financial covenants, especially for: projects with domestic offtake agreements denominated in Turkish lira, or borrowers with no natural FX revenue but who must borrow in EUR/USD due to funding constraints.

Legal implications include sponsors must contractually commit to entering into FX forward or swap agreements, typically prior to the first drawdown, hedging ratios (e.g., 80% of scheduled debt service) are specified in the finance documents, and inability to maintain hedging coverage may trigger cash sweep obligations, reserve replenishments, or even events of default.

Counsel must ensure the hedging instruments are governed by enforceable ISDA agreements, Turkish regulatory rules on derivative usage (as per SPK regulations) are complied with, and any termination value under a hedging contract is clearly treated in intercreditor and enforcement provisions.

4. Use of Standby Letters of Credit (SBLCs) and Debt Service Reserve Accounts

To backstop FX payment risk, lenders may require; SBLCs issued by first-tier banks to cover FX debt service shortfalls, often tied to DSCR breach or hedging failure, FX-denominated debt service reserve accounts (DSRAs) funded upfront or via monthly cash sweeps.

Legally, these arrangements must be fully assignable under Turkish law, ensure the SBLC call rights do not violate capital outflow restrictions, and be ring-fenced from insolvency proceedings under Turkish execution and bankruptcy codes.

Hedging – Legal Obligations and Structuring Limits

In today’s project finance environment, hedging is no longer a supplemental strategy—it is a bankability requirement. Lenders active in Türkiye’s infrastructure and energy markets, particularly development finance institutions (DFIs) and foreign banks, now routinely require sponsors to hedge currency risk throughout the loan life cycle. However, doing so within the constraints of Türkiye’s regulatory environment introduces critical legal considerations that must be addressed early in the structuring process.

1. Regulatory Constraints on Hedging Instruments

Under Turkish law, hedging transactions must be executed in compliance with the Capital Markets Law No. 6362, and communiqués issued by the Capital Markets Board of Türkiye (SPK) governing derivatives and financial risk instruments.

Derivatives—such as FX forwards, options, and swaps—may only be entered into by legal entities authorized under Turkish law (e.g., banks, financial institutions), or Foreign financial institutions operating with notification and compliance under SPK regulations.

For project SPVs, this means only Turkish-incorporated companies meeting financial criteria and reporting standards can legally enter into these hedging agreements, and contracts executed with offshore banks must meet cross-border enforceability standards and may be subject to CBRT reporting under Decree No. 32.

2. Hedging Obligations in Finance Documents

Most project finance facilities in Türkiye now include mandatory hedging undertakings, with clear legal obligations for coverage thresholds (e.g., hedging at least 70–90% of FX-denominated scheduled debt service), duration alignment with the debt amortization profile, and counterparty eligibility and minimum credit rating clauses.

The facility agreement will typically include a condition precedent to first disbursement requiring the execution of hedging agreements, impose a representation and warranty that the borrower is, and will remain, fully hedged per required ratios, and define events of default for hedging non-compliance, including early termination or failure to renew instruments.

3. Termination Risk and Legal Remedies

One of the most underappreciated legal risks in project finance hedging is the treatment of early termination amounts—particularly if the project SPV defaults on its debt or breaches FX coverage ratios.

Under Turkish law:

• Hedging contracts with offshore counterparties must be enforceable in Türkiye—requiring careful jurisdiction and governing law clauses,
• Any payment of early termination amounts to offshore banks may be subject to capital controls or require CBRT clearance, and
• Set-off mechanisms and termination netting must be clearly integrated with the intercreditor arrangements and collateral enforcement rules.

Well-structured deals will include a hedging policy annex approved by all lenders, direct agreements with hedge providers ensuring coordination on termination events, and step-in rights or novation provisions to replace hedges upon project company distress.

4. Legal Challenges in Accessing Hedging Markets

Another practical concern is the limited availability of long-dated FX hedging instruments in the Turkish market. Turkish banks may be reluctant or unable to offer cost-effective derivatives over 5–7 years, especially for projects with backloaded repayment schedules. In such cases:

• Sponsors must engage foreign hedge counterparties and navigate cross-border derivatives regulation,
• Facility documents must address termination triggers, margin calls, and liquidity stress, and
• The legal team must ensure enforceability of ISDA Master Agreements under Turkish bankruptcy law, including priority and security issues.

Capital Controls & Lender Protections in Practice

Legal structuring of project finance transactions in Türkiye must now account for not only the availability of foreign exchange, but also the ability of lenders to control, secure, and repatriate FX-linked payments over the full lifecycle of a project. Türkiye’s soft capital controls—ranging from CBRT account regulation to BDDK supervision of banking flows—introduce real constraints on standard lender protections, especially in multi-currency transactions.

To preserve bankability, legal advisors must tailor security packages, disbursement mechanics, and enforcement rights around these evolving realities.

1. Ring-Fencing FX Revenues through Assignments & Pledges

Lenders commonly seek receivables assignments (alacak temlikleri) and account pledges to secure repayment. However, in Türkiye FX receivables must be clearly defined and legally assignable without requiring debtor consent (where possible), Onshore FX accounts must be pledged under Law No. 6750 (Movable Pledge Law), and FX inflows from offtakers, particularly public entities, may require additional consents or contractual adjustments to enable revenue capture.

CBRT reporting rules also apply to cross-border assignments of receivables, and transfers from onshore FX accounts to offshore repayment accounts.

To be enforceable, these assignments must be properly notarized, registered (if needed), and disclosed to all relevant parties—including banks holding the pledged accounts.

2. Offshore Payment Structures and Repatriation Limits

Lenders often seek to structure FX debt repayment through offshore collection or reserve accounts—especially when sponsor equity, ECA tranches, or revenues originate outside Türkiye. Yet:

• Opening offshore accounts for Turkish SPVs requires specific contractual authorization and may trigger CBRT approval,
• Repatriation of funds to offshore lenders must comply with Decree No. 32 and CBRT Communiqués, including tax clearance for dividend or loan payments, and
• Payments to non-resident lenders must often be reported through the borrower’s intermediary bank under CBRT instructions.

Legal protections must include detailed flow of funds diagrams appended to the loan agreements, contractual safeguards ensuring CBRT-compatible repatriation, and flexibility to adjust structures in case of tightening regulation or currency interventions.

3. Step-In Rights and Enforcement Mechanics under Capital Controls

In distressed scenarios, lender step-in rights are critical. For FX-backed projects, however, enforcement faces additional legal hurdles:

• Direct agreements with off takers, EPC contractors, and operators must clearly allow substitution or novation without triggering consent rights or FX-related breaches,
• Enforcement of pledged FX accounts or receivables may be subject to administrative restrictions, including temporary suspensions of capital movements in a crisis scenario,
• Bankruptcy administrators or courts may delay or challenge the execution of cross-border security—especially if it appears to disadvantage local creditors.

Well-structured projects therefore include local enforcement triggers under Turkish law to minimize cross-border delays, governing law and jurisdiction clauses that preserve enforceability in Türkiye, and direct assignment of project rights to lenders through pre-agreed templates, fully registered under local law.

4. Negative Covenants and Lender Consent Rights

Lenders protect their FX position through a broad set of contractual prohibitions, including no new indebtedness in foreign currencies without lender approval, no amendments to offtake, EPC, or revenue contracts that would materially affect FX revenue streams, and no dividend or shareholder distributions until DSCR thresholds are met and FX reserves are funded.

From a legal standpoint, these covenants must be clearly drafted, tied to objective financial metrics (e.g., minimum DSCR of 1.20), and be enforceable under Turkish contract law, with remedies that do not require court intervention unless necessary.

Practical Trends – What Projects Are Doing Now

In response to regulatory tightening, exchange rate volatility, and lender pressure, project sponsors in Türkiye are adopting new legal and financial structuring models that reduce FX exposure and align with capital control constraints. These trends reflect a maturing market—one where enforceability, resilience, and risk sharing are being prioritized over aggressive leverage or simplified assumptions about currency flows.

Below are the most notable legal structuring trends observed in Türkiye’s infrastructure and energy project financings in 2025:

1. TL-Tranche Senior Debt with FX-Linked Mezzanine

To reduce currency mismatch, several project developers—especially in the renewable energy and logistics sectors—have structured their financings with:

• A Turkish lira-denominated senior debt facility, often underwritten by domestic participation banks, state banks, or development institutions, and
• An FX-linked mezzanine layer, typically backed by DFIs, ECAs, or international climate funds, that absorbs project risks with subordinated security.

Legal documents must allocate waterfall and intercreditor rights between the two tranches, rights of cure and acceleration tied to DSCR breaches in either tranche, and priority of enforcement and distribution in case of FX default or TL shortfall.

2. Pre-Funded FX Reserve Mechanisms

To navigate FX convertibility risks, lenders increasingly demand fully funded debt service reserve accounts (DSRAs)—often in foreign currency. These accounts are funded upfront by the sponsors or from initial drawdowns, and pledged to lenders with drawdown triggers tied to DSCR shortfall, conversion delays, or swap unavailability.

Such structures mitigate the need for real-time FX transactions during market stress, and enable payment continuity without violating capital controls, provided CBRT reporting and local bank custody are satisfied.

3. SPV Equity Buffer with Back-to-Back Hedging

Sponsors now prefer to increase equity contributions at the SPV level—frequently exceeding 35–40%—as a buffer against FX volatility. This is often coupled with:

• Back-to-back hedging agreements executed at the sponsor group level,
• Pass-through covenants requiring margin calls or termination liabilities to be covered by parent companies, and
• Legal undertakings from shareholders to maintain hedging even if derivatives markets tighten.

Counsel must ensure that hedging obligations and equity maintenance are legally enforceable under Turkish law, no conflicts exist with capital repatriation restrictions, and any upstream guarantees do not breach foreign currency loan eligibility criteria under BDDK regulations.

4. Direct Agreements Emphasizing FX Revenue Flows

Lenders now routinely insist on direct agreements with offtakers, O&M contractors, and key counterparties, explicitly addressing:

• Currency of payment,
• Conversion timelines,
• Cure rights in case of currency shortfalls, and
• Step-in triggers to allow lender intervention before currency defaults crystallize.

These agreements are enforceable under Turkish law when properly structured under the Code of Obligations and Commercial Code, and often include arbitration or foreign jurisdiction clauses to address investor-state or bilateral enforcement risks.

5. Staged Drawdowns and FX Flexibility Clauses

To prevent exposure during periods of high FX volatility, projects are now structured with:

• Staggered disbursements tied to engineering and procurement milestones, and
• Loan agreement clauses allowing lenders to withhold or defer disbursements if conversion becomes uneconomical or restricted.

These provisions require:

• A clear definition of “FX Disruption Event”,
• Guidance on recalculating repayment schedules or activating grace periods, and
• Pre-agreed renegotiation frameworks with measurable thresholds (e.g., FX deviation bands, CPI triggers).

Outlook – Can Projects Still Be Bankable?

Despite the undeniable complexity introduced by Türkiye’s current FX regime, capital controls, and regulatory tightness, the answer to whether infrastructure and energy projects remain bankable in Türkiye is still yes—but with important qualifications.

The future of project bankability will depend on three core conditions:

1. Structural Resilience Over Pure Leverage

In the past, project sponsors often pursued aggressive capital structures, relying on elevated debt-to-equity ratios and back-ended repayment profiles. However, the new era demands front-loaded equity, higher DSCR cushions, and structures that prioritize liquidity and cash flow continuity over maximum gearing.

From a legal perspective, this translates into:

• Stronger reserve funding obligations,
• Enforceable hedging frameworks, and
• Dynamic waterfall models that can adapt to FX shortfalls and rate shocks without breaching covenants.

2. Legal Clarity Around FX Risk Allocation

Capital controls introduce not only operational delays but legal uncertainty. Successful projects must now embed well-drafted contractual mechanisms that anticipate exchange rate shifts, hedging disruptions, repatriation restrictions, and cross-border enforceability.

It is no longer sufficient to include boilerplate FX clauses; instead, lawyers must craft project-specific FX management regimes that meet both Turkish regulatory requirements and international lender standards.

3. Coordination Between Legal, Financial, and Regulatory Counsel

The new normal requires multi-disciplinary planning. Legal counsel must work side-by-side with financial advisors, technical consultants, and sponsors’ treasury teams to pre-clear revenue structures with regulators, align hedging timelines with disbursement milestones, and monitor for new CBRT and BDDK circulars that can alter key assumptions overnight.

This shift demands early legal involvement—not just to execute documents, but to design the framework under which value is protected and delivered over time.

Conclusion – Legal Counsel as Risk Translator

In Türkiye’s evolving project finance ecosystem, legal counsel must do more than interpret the law—they must translate risk into enforceable, regulatorily compliant, and commercially realistic structures. The growing complexity of Türkiye’s FX controls, hedging obligations, and cross-border cash flow restrictions demands legal foresight, not just legal documentation.

Where foreign exchange volatility once sat at the periphery of risk analysis, it is now at the center. Today, project bankability in Türkiye hinges on how effectively legal teams can reconcile:

• Regulatory capital controls with lender protections,
• Multi-currency cash flows with domestic revenue constraints, and
• Long-term financing instruments with shifting monetary and fiscal policy frameworks.

This has been observed as transformation not as a constraint, but as a design challenge. Whether advising on FX-indexed financing, hedging enforceability, receivables security, or direct agreements with regulated counterparties, legal counsel has become a core architect of deal viability.

The question is no longer: “Is the project viable?”
The question is: “Is it legally designed to survive?”

In Türkiye’s fast-changing project finance environment, that legal design is what turns volatility into value.