US embassy cable - 04ANKARA5791

UNCLAS SECTION 01 OF 03 ANKARA 005791 
 
SIPDIS 
 
SENSITIVE 
 
NSC FOR BRYZA 
USTR FOR LISA ERRION 
TREASURY FOR OASIA - ADKINS, PLANTIER 
EXIM FOR PAUL TUMMINIA 
PASS OPIC 
USDOC MAC/OEURA/CPD/DDEFALCO 
USDOC MAC/ODAS/ESTEWART 
USDOC MAC/OEURA/CPD/PDACHER 
ALSO FOR EB/CBA - FRANK MERMOUD 
 
E.O. 12958: N/A 
TAGS: ECON, TU 
SUBJECT:  Turkish Business: EU Accession Talks Not Enough 
 
REF:  ANKARA 5781 
 
SENSITIVE BUT UNCLASSIFIED. 
 
1.  (SBU)  Summary.  Strong advocates of EU membership, 
leaders of Turkey's business community see accession 
negotiations as another step in a long, arduous process 
of economic and political change that will eventually 
make Turkey a more "normal" country.  In contrast to 
their political counterparts, business leaders welcome 
the conditional, iterative nature of the likely accession 
process, hoping it will help keep Turkey on the reform 
track.  They do not think the start of accession talks 
will by itself result in large amounts of new foreign 
direct investment.  End Summary. 
 
2.  (SBU)  Turkey's business community welcomed the 
October 6 European Commission report recommending the 
start of EU accession negotiations as another step toward 
normalcy for a country plagued for decades by political 
and economic volatility.  Understanding that the 
accession process will be long and often bumpy, business 
leaders say they value the very process as a way of 
locking-in and ensuring the continuation of economic and 
political reforms begun since the 2001 financial crisis 
and the 2002 ascendancy of the AK Party.  As strong 
supporters of EU membership, business groups will now 
help the government lobby EU members for a favorable 
decision in December.  A number of groups are now jetting 
off to European capitals, including to join Prime 
Minister Erdogan in business events in Berlin and Paris 
this month. 
 
---------------------- 
A More Distant Horizon 
---------------------- 
 
3.  (SBU)  The CEO of the largest "holding" group of 
companies told us the start of accession talks would 
immediately lengthen his companies' planning horizon, 
allowing the group the "visibility" to make longer-term 
investment and employment decisions in Turkey.  He said 
the group, which has invested heavily in Russia and 
Eastern Europe as well as in export projects in Turkey, 
would likely relax its current internal rule that 
requires 50% of all revenues be generated from outside 
Turkey.  Top bankers similarly expected an EU negotiation 
process to help lengthen credit maturities, facilitating 
innovations like the introduction of a home mortgage 
market and a corporate bond market. 
 
------------------------------------ 
Keeping the State on a "Short Leash" 
------------------------------------ 
 
4.  (SBU)  But in contrast to politicians and many in the 
media (see reftel), several business people told us they 
welcome the reservations and cautions in the October 6 
report, as well as the iterative, "conditional" nature of 
the likely accession process.  Consistent with the view 
that it is the process more than the endpoint that 
counts, the CEO of another leading group said he hoped EU 
talks would keep both politicians and the military "on a 
short leash."  In a sense, the longer the process takes 
and the more conditions that must be met, the better, he 
thought.  Similarly, businesspeople are not concerned 
about the actual date EU ministers will set in December 
for the start of negotiations. 
 
------------------------------ 
New FDI Will be Slow in Coming 
------------------------------ 
 
5.  (SBU)  Markets seemed to agree with business 
interlocutors that the import of the start of an EC 
process was for the long end of investors' portfolios. 
Although Turkey-watchers around the globe were glued to 
their Reuters screens, short-term money and currency 
markets, which had priced-in a positive EC recommendation 
for some months, did not react to the October 6 news. 
The Istanbul stock market index of thirty corporate blue- 
chips, however, enjoyed a strong day with a 3.3% 
increase.  The index is now up 21% since January 1. 
 
6.  (SBU)  Business leaders are skeptical that a December 
green light for EU negotiations will trigger a flood of 
new foreign direct investment as Turkey becomes a 
"convergence country."  An official of TUSIAD, the big 
business organization, told us he expected an increase of 
corporate "exploratory missions" from EU countries.  But 
he thought such visits would not lead to much new 
investment since existing investment impediments, notably 
lack of confidence in the rule of law and the fairness of 
regulation, will not go away once accession talks begin. 
The Foreign Direct Investment Association of Turkey 
(YASED) also stated in public remarks that unless the 
investment climate improved in Turkey, a date would not 
have a significant impact on the FDI flow into Turkey. 
 
7.  (SBU)  In Ankara, a senior Treasury bureaucrat 
responsible for investment echoed this view.  He noted 
the uptick in FDI inflows this year, but thought that the 
success of ongoing negotiations with the IMF on a new 
three-year macroeconomic policy framework was far more 
important to new investors than was the prospect of EU 
membership ten or more years in the future.  An IMF- 
provided "policy anchor" would help convince investors of 
the sustainability of today's good monetary and fiscal 
policies, giving investors the confidence he still felt 
they lacked.  Along with judicial reform, he thought that 
over time such confidence would bring in the large FDI 
flows that other EU accession countries enjoyed. 
 
8.  (SBU)  An EU Mission official agreed, noting as well 
that "structural and cohesion" financial aid from the EU 
would take time to materialize and would not be very 
large in relation to the size of Turkey's economy. 
Furthermore, transposing into legislation and 
implementing 90,000 pages of EU "acquis" will be an 
arduous task that will likely have more downs than ups. 
 
--------------------------------- 
The AKP: A Learning Organization? 
--------------------------------- 
 
9.  (SBU)  The business community's views on EU accession 
reflect an opinion that after two years in power, the AK 
Party has yet to earn business' trust, especially that of 
Istanbul's corporate elite.  Business leaders believe the 
AK government has only made economically sensible policy 
decisions after going to the brink and being pushed back 
by markets or external forces like the IMF.  The recent 
adultery controversy and the dispute this spring over the 
status of religious "Imam Hatip" schools are frequently 
cited evidence that the AK Party has failed to learn from 
the success of policies that have stabilized the currency 
and generated domestic investment and growth.  A more 
recent flap is over a government-draft of a new banking 
law that essentially ignored the industry's input in 
favor of a top-down, coercive approach to regulation (see 
septel).  Left to its own devices, businesspeople fear, 
"Ankara" would quickly revert to the populist habits that 
have been the downfall of so many governments. 
 
------------------------------------- 
Comment: Keeping the Focus on Reforms 
------------------------------------- 
 
10.  (SBU)  The business world's realism is well- 
grounded:  EU accession talks are not a magic pill, but 
an anchor that -- along with a continued IMF role -- will 
help ensure the continuity of reforms over time.  To 
business people, definitively breaking out of Turkey's 
boom-bust cycles requires continued progress in creating 
political predictability, as well as follow-through on 
privatization and the tax, social security, banking, and 
regulatory and legal reforms.  U.S. (and EU) support for 
a strong IMF program will help preserve the current 
economic momentum, as will continued work to solve long- 
festering business disputes and create a framework for 
expanding U.S.-Turkey trade and investment.  We will 
continue to urge the Turks to set a date for TIFA Council 
discussions and look forward to upcoming visits by senior 
U.S. economic officials.  Post will also keep a public 
affairs focus on a better investment and business climate 
as the key to Turkey's long-term prosperity. 
EDELMAN