US embassy cable - 03ANKARA7311

C O N F I D E N T I A L SECTION 01 OF 04 ANKARA 007311 
 
SIPDIS 
 
 
STATE FOR E, EUR/SE AND EB 
TREASURY FOR OASIA - MILLS AND LEICHTER 
STATE PASS USTR FOR NOVELLI/ERRION 
USDOC FOR 4212/ITA/MAC/OEURA/DDEFALCO 
USDA FOR FAS FOR EC AND CCC/FSA 
 
 
E.O. 12958: DECL: 11/21/2008 
TAGS: ECON, PREL, EFIN, EINV, TU 
SUBJECT: SCENESETTER FOR THE ECONOMIC PARTNERSHIP 
COMMISSION MEETING 
 
 
REF: ANKARA 7121 
 
 
(U) Classified by DCM Robert Deutsch.  Reason: 1.5 (b). 
 
 
1.  (C) Summary:  A successful EPC will help our efforts to 
strengthen a bilateral relationship that has been through 
difficult times this year.  Two developments -- the 
still-fragile recovery of the Turkish economy, and the 
development of economic opportunities in Iraq -- should 
create opportunities for stronger economic ties, if managed 
properly.  There has been less progress on the trade and 
investment front, despite Turkish steps to improve the 
investment environment.  Energy has been a mixed bag, with 
continued cooperation on regional efforts but little progress 
in reform of Turkey's domestic market. PM Erdogan hopes the 
EPC will rejuvenate the QIZ initiative; otherwise, GOT 
expectations appear relatively low. 
 
 
------------ 
The  Context 
------------ 
2. (C) The second Economic Partnership Commission meeting 
comes at the end of a difficult year in U.S.-Turkish 
relations and in the immediate aftermath of terrorist attacks 
that have shaken Turkey.  Prime Minister Erdogan told the 
Ambassador November 15 that he sees the meeting, along with 
the just-completed High Level Defense Group discussions, as 
evidence that the bilateral relationship is recovering from 
recent travails.  In that broad sense, a successful EPC can 
add to the positive momentum in the overall relationship. 
 
 
3. (C) Our ability to stage a successful EPC meeting should 
be aided by the fact that, so far at least, Turkish 
expectations are lower than they were in the lead-up to the 
February 2002 meeting.  Prime Minister Erdogan hopes the 
meeting will rejuvenate the Qualified Industrial Zone 
initiative, and the Turks in general want extensive 
discussions on Iraq.  Beyond these issues, however, the GOT 
has not articulated specific goals for the meeting. 
 
 
4. (SBU) Reftel suggests goals and issues for discussion for 
each segment of the EPC.  This cable provides an overview of 
the state of the relationship in these areas. 
 
 
------------------------- 
The Economic Relationship 
------------------------- 
5.  (SBU) Economic Reform:  After a rocky start, the AK 
Government has presided over positive economic developments 
since April.  Turkey is now poised to meet its year-end macro 
targets: 5 percent real GDP growth, a 6.5 percent primary 
surplus, and 20 percent inflation--the lowest rate since the 
1970,s.  Foreign exchange, equity and debt markets have 
enjoyed a sustained rally. 
 
 
6. (SBU) The GOT,s success in meeting macroeconomic targets 
in recent months stems only partly from its economic 
policies.  Though the GOT has broadly cooperated with the IMF 
and shown a commitment to fiscal discipline, it also 
benefited from the Iraq war having much less impact on 
Turkey,s economy than expected, from lower inflation 
achieved by the independent Central Bank and from the lira 
appreciation induced by reverse currency substitution in the 
markets. 
 
 
7. (SBU) Senior officials have yet to demonstrate support for 
the structural reforms that are essential to Turkey achieving 
sustained growth.   On privatization, the GOT will end 2003 
with unsatisfactory results, having cancelled two major 
tenders.  The GOT has moved slowly on liberalization of the 
agriculture, telecoms and energy sectors, and has not 
supported the independent regulatory boards.  Though it 
claims it is re-energizing its dialogue with the World Bank 
on structural reforms, the government has yet to take 
meaningful actions outside of the narrow range of reforms 
required by the IMF program. 
 
 
8. (SBU) Some analysts fear that the GOT's laxity in 
implementing structural reforms, combined with a growing 
current account deficit and a sense that markets may have 
overshot in a positive direction, could leave financial 
markets vulnerable to a sharp downturn at some point in 2004. 
Trade 
----- 
9.  (SBU) With some isolated exceptions (such as passage of 
modern copyright legislation in 2001), there has been little 
progress on outstanding issues in our bilateral trade 
relationship in recent years.  The USG has repeatedly pressed 
for the elimination of WTO-inconsistent restrictions on 
agriculture imports, stronger intellectual property 
protection, and an end to policies that discriminate against 
imported drugs.  The Turks respond that the USG maintains 
significantly higher tariff and non-tariff barriers 
(including textile/apparel quotas and anti-dumping, 
countervailing duty actions) on Turkey,s products overall 
than they do on ours. 
 
 
10. (SBU) Our trade with Turkey is approximately balanced, 
with each country exporting about USD 3 billion in goods to 
the other annually.  Turkey,s exports are highly 
concentrated in sensitive sectors such as textiles, apparel 
and steel, which face higher-than-average levels of 
protection. 
 
 
11. (SBU) Turkey sharply cut its industrial tariffs on third 
countries to just over four percent under the EU customs 
union.  Although Turkey did this unilaterally to obtain the 
benefits of duty-free access to European markets, the Turks 
argue that they made trade concessions to the United States 
and others without compensation in the form of better access 
for Turkish products.  This is a bogus argument, but one they 
continually make. 
 
 
12. (SBU) Turkey,s relatively low current industrial tariffs 
are one ingredient in Turkey,s ambivalent approach to the 
WTO talks.  The GOT is hesitant to endorse multilateral 
liberalization in industrial goods that would erode the 
benefit to Turkey of duty-free access to the EU market.  It 
is also wary of tariff reductions in agriculture, maintaining 
that high tariffs are Turkey,s only tool to protect its 
agricultural producers from highly-subsidized EU and U.S. 
imports.  In the WTO talks, Turkey insisted with the G-21 on 
elimination of these subsidies and proposed asymmetrical 
tariff reductions on industrial goods. 
 
 
13. (SBU) The Prime Minister has indicated he wants to move 
forward on Qualifying Industrial Zones for Turkey at the EPC, 
but we do not yet know what the Turks will say on this 
subject at the meeting.  Foreign Trade officials are 
skeptical that companies from eligible sectors could both 
satisfy QIZ requirements (primarily Israeli content) and 
derive a trade benefit (since many if not most of the sectors 
with the highest tariffs would be excluded). 
 
 
Investment 
---------- 
14. (SBU) Turkey has underperformed many other emerging 
markets in attracting foreign direct investment, with inflows 
well under one percent of GDP for most of the last decade. 
The Erdogan Government is more receptive to FDI and private 
sector concerns than were its predecessors, and has taken 
steps to improve the climate for FDI, including a law ending 
screening of foreign investors and another streamlining 
company establishment.  Inflation accounting--long sought by 
investors--is due to come into effect January 1, 2004.  The 
GOT It is also considering establishment of a public-private 
agency to promote investment in Turkey.  The GOT has taken a 
few helpful steps for individual U.S. companies, such as 
authorizing higher quotas for corn syrup producers under the 
Sugar Law. 
 
 
15. (SBU) Notwithstanding these actions, U.S.--and other 
foreign-- companies continue to face a difficult business 
environment.  This affects large multinationals, like 
Motorola, Cargill, Pfizer and the other pharmaceuticals 
companies, and small business persons like Victor and Kristy 
Bedoian, who have struggled for several years to operate a 
hotel they renovated in Van.  Other policies ) like the 
failure to honor contract sanctity on build-operate-transfer 
(BOT) projects in energy or the lack of data exclusivity 
protection ) send a negative signal about the GOT,s 
willingness to adhere to agreements previously undertaken. 
16. (SBU) We have pressed the GOT at high levels to solve 
these issues prior to the EPC.  Thus far, our GOT 
interlocutors have provided few clues as to what they may be 
prepared to do in this area in the near future. 
 
 
Energy 
------ 
17. (SBU) Regional energy cooperation has been a success 
story.  We have worked closely and effectively with Turkey to 
begin building the Baku-Tbilisi-Ceyhan oil pipeline and to 
attain sanctioning of the Shah Deniz natural gas pipeline. 
Both projects are proceeding, albeit with some delays on BTC. 
 The Turks are concerned that Washington has lost interest in 
these projects, considering them done.  They also are worried 
about the possible impact of political developments in the 
Caucasus on the pipelines and about the possible reversal of 
Odessa-Brody.  Although Turkey is committed to Shah Deniz, 
prospects for a significant natural gas surplus over the next 
several years could affect Turkey,s decision making unless 
potential markets are identified in Europe for the surplus. 
 
 
18. (SBU) On the domestic front, the Energy Regulatory Market 
Authority (EMRA) has made substantial progress in 
implementing both the Natural Gas Law and the Electricity Law 
and aligning Turkey with the EU,s acquis; however, much more 
needs to be done to establish a liberalized market.  The 
credibility of the deregulation program is at stake unless 
BOTAS and the state generation and trading companies comply 
with EMRA,s regulations, especially to establish a tariff 
system and to end BOTAS,s gas market monopoly. 
 
 
19. (SBU) The other major domestic issue concerns the GOT,s 
treatment of U.S. energy investors.  First, the government 
decided not to implement a number of Build-Operate-Transfer 
(BOT) and Transfer of Operation Rights (TOR) projects, 
including several involving U.S. firms, despite having signed 
contracts with those firms.  More recently, the government 
has been pressing existing BOT companies*including two 
involving major U.S companies*to lower tariffs unilaterally. 
 In addition to the U.S. private investment in these 
projects, OPIC and Eximbank have provided financing.  The 
Energy Minister has publicly threatened to take over the 
companies, and has said that they should not rely too much on 
their contracts.  Moreover, the government has launched 
several investigations into the projects, which the companies 
believe constitutes a form of harassment. 
 
 
Regional Cooperation 
-------------------- 
20. (SBU) Turkey continues to assert itself as a force for 
stability in the region.  Turkey,s efforts derive from its 
own view of how best to contribute, and in many areas, such 
as Afghanistan and the East-West Energy Corridor, it has 
enthusiastically followed the U.S. 
 
 
21. (SBU) Afghanistan:  Turkey has already disbursed its $5 
million Tokyo pledge and hopes to increase its pledge even 
more.  Turkish companies are also playing a significant role 
in reconstruction efforts. 
 
 
22. (SBU) Iraq:  In Madrid, Turkey pledged $50 million for 
Iraq Reconstruction.  Turkey has also made numerous offers to 
help with humanitarian needs.  Turkey provides a vital 
overseas corridor for supplies for U.S. troops in Iraq, as 
well as humanitarian supplies and fuel.  In addition, Turkey 
has begun exporting electricity to Iraq and plans to 
significantly increase exports to help fill Iraq,s urgent 
power deficit. 
 
 
23. (SBU) Several Iraq-related items remain on the agenda: 
timing of the re-opening of the Kirkuk-Yumurtalik oil 
pipeline; mechanisms to enhance Turkish-Iraqi trade, 
including Turkey's desire to open a second border gate, ways 
to reduce delays in getting supplies through Habur Gate, and 
Turkey's interest in revitalizing Turkey-Iraq rail links; 
projects -- proposed by U.S. companies AIG and Washington 
International Group ---to increase the capacity of 
Turkey-Iraq electricity transmission lines; our request that 
the Turkish Export-Import Bank negotiate an agreement with 
the Iraqi Trade Bank (along the lines of U.S. Ex-Im's 
agreement); Ziraat Bank's interest in establishing branches 
in Iraq; and of course the great interest of Turkish 
companies in obtaining Iraqi reconstruction contracts. 
 
 
24. (SBU) Caucusus:  Turkey is an essential partner in the 
BTC project and the East-West Energy Corridor that will 
bolster the economies of Georgia and Azerbaijan and provide a 
new oil supply to world markets. 
 
 
25. (SBU) Water to Israel:  Turkey hopes that reducing water 
tensions in the Mideast will contribute to peace.  It is 
negotiating with Israel a plan to send by tanker 50 million 
cubics meters of fresh water per year and has made the same 
offer to other Mideast countries. 
EDELMAN