© Reuters. FILE PHOTO: People are waiting in line to petition a huge canal project in Istanbul
By Ebru Tuncay and Can Sezer
ISTANBUL (Reuters) – Some of Turkey's largest banks are reluctant to fund President Tayyip Erdogan's proposed Istanbul Canal amid environmental concerns and investment risks from the massive construction project, four senior bankers told Reuters.
Two of the sources said a global sustainability pact signed by six of Turkey's leading banks is an obstacle to funding the Istanbul Canal, which Erdogan called a "crazy project" a decade ago when he launched it.
The government expects the foundation stone to be laid in June, which will link the Black Sea in the north with the Sea of Marmara in the south and run 45 km through marshland, farms and towns on the western edge of the city.
Erdogan says the canal will protect the Bosphorus, which runs through the heart of Istanbul, by diverting traffic.
The mayor of Istanbul, engineers and, according to a survey, most citizens oppose the project on environmental grounds, saying it would destroy a marine ecosystem and resources that provide almost a third of the city's fresh water. https://reut.rs/3nnWmQN
Russia, meanwhile, has signaled discomfort about the project for security reasons, as the canal would open a second passage to the Black Sea, which is home to a Russian fleet.
"I don't think we can get involved in the funding of Kanal Istanbul," said a senior banker, who asked for anonymity. "It can cause some environmental problems."
Six Turkish banks, including Garanti Bank, Is Bank and Yapi Kredi, have signed the United States-sponsored Responsible Banking Principles, which urge signatories to avoid harming people and the planet.
"In any case, we do not want to give credit to this type of project for environmental reasons," a second senior banker told Reuters, adding that the signatory banks must adhere to the United States-sponsored sustainability pact.
In 2019, a government report estimated the channel's price at 75 million liras – or $ 13 billion at the time.
The reluctance of some Turkish lenders to fund the project makes it more likely that government and foreign funding will have to play a bigger role for Erdogan's dream to come true.
A Treasury Department spokesman did not immediately respond to a request for comment.
When asked whether Turkish banks would participate in the financing, Erdogan's spokesman and advisor Ibrahim Kalin told Reuters that the project will "certainly" attract investors and creditors if tenders are soon to take place.
Garanti Bank declined to comment. Is Bank and Yapi Kredi did not immediately respond to requests for comment.
Denizbank and state-owned Vakifbank also declined to comment on the channel's funding, while Akbank and state-owned lenders Halkbank and Ziraat Bank did not immediately respond to requests for comment.
The canal's cost would dwarf other mega-projects like the huge new Istanbul Airport that defined Erdogan's legacy of credit-driven growth.
Massive short-term foreign debt of around $ 150 billion for banks and corporations has haunted the lira and exposed the risk of Turkey's depleted foreign exchange reserves.
A currency crisis in 2018 delayed the canal project, but it's back on the agenda as the economy recovers from the pandemic and the government approved development plans last month.
In an interview on Sunday, Erdogan's advisor Kalin said there was already interest in the tender, which was open to everyone, including Turkish, European, American and Chinese companies.
"It is a profitable project … and we are confident that it will move forward," he told Reuters.
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But for most Turkish banks, especially lenders with European lenders and those involved in loan syndication, the risks would likely be too high, the sources said.
They said that taking on such a large project could limit their ability to conduct further loan syndication, while also running the risk that the project could be torpedoed at a later date.
"No Turkish bank, whether state or private, could take this risk," said a former senior banker.
The Turkish Ministry of the Environment has carried out environmental impact assessments, which paved the way for the further project.
But European supporters of Turkish banks would likely not see a Turkish environmental stamp as credible, said the former banker.
"This is one of those white elephants. Land price speculation aside, it's difficult to see any value in it," he said.
The canal would destroy a marine ecosystem and basins that supply nearly a third of Istanbul's fresh water, according to the Union of Chambers of Turkish Engineers and Architects.
Moscow fears the canal may not fall under the Montreux Convention, which restricts foreign warships' access to the Black Sea across the Bosphorus.
A Turkish official said in 2019 that the new canal would not fall under the convention, which dates back to 1936.
This month, amid a build-up of the Russian Navy near Ukraine, the Kremlin said President Vladimir Putin called Erdogan to say that the Convention must be respected.
A fourth banker also said that, given opposition parties to the project, construction could be halted if Erdogan's ruling AK party is overthrown. The presidential elections are scheduled for 2023.
"The project is huge. It carries reputational and credit risks," said the person. "It still seems like the government's favorite project."
($ 1 = 8.2920 Lira)