US embassy cable - 04ANKARA6867

UNCLAS SECTION 01 OF 02 ANKARA 006867 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ENRG, ETRD, PREL, RS, TU 
SUBJECT: NEW ERA IN TURKISH RUSSIAN ECONOMIC RELATIONS? -- 
NOT 
 
REF: ANKARA 6797 
 
Sensitive But Unclassified. 
 
1.  (SBU) Summary:  The December 5-6 visit of Russian 
President Putin to Turkey was portrayed by Turkish 
politicians and the press as a turning point in 
Russian-Turkish relations.  Putin and Turkish President Sezer 
asserted that the rapid growth of bilateral trade is leading 
to an emerging "Multidimensional Partnership" with the 
economic relationship at the forefront.  However, the visit 
failed to meet expectations as few of the ambitious economic 
initiatives agreed to at the Turkey-Russia Joint Economic 
Commission (JEC) meeting the week before were endorsed during 
the Putin visit.  A broad energy MOU was short on clear 
commitments and left all Bosphorus shipping and bypass issues 
still in play.  In the end, little was accomplished to 
improve an economic relationship with lots of promise, but 
many problems.  (Septel reports the political context of the 
Putin visit.)  End Summary. 
 
Trade Boom 
---------- 
 
2.  (SBU) Vladimir Putin visited Ankara December 5-6, marking 
the first visit of a Russian President to Turkey.  The visit 
followed a meeting a week earlier of the Russia-Turkey Joint 
Economic Commission in Moscow, the first in four years, and 
demonstrated the desire of both sides to take advantage of 
growing bilateral trade to broaden bilateral economic 
cooperation.  Russia is Turkey's second largest trading 
partner after Germany.  This year, two-way trade volume is 
expected to exceed $10 billion, a dramatic increase from $200 
million in 1989 and $6.7 billion in 2003.  However, most of 
that is accounted for by Russian natural gas, oil and refined 
product sales, resulting in a large bilateral trade deficit 
for Turkey.  (In the first 10 months of 2004, Turkey has 
imported $6.9 billion while exporting only $1.5 billion, for 
a deficit of $5.4 billion).  Turkish officials pressed 
Russian officials to balance the trade, specifically by 
implementing a Soviet-era offset agreement for natural gas 
purchases.  Turkish MFA officials noted the Russian assertion 
that the bilateral trade deficit is largely offset by the 
estimated 1.7 million Russian tourists spending about $1 
billion at Turkish resorts, Turkish construction contracts of 
about $2 billion and an estimated $2-3 billion of annual 
undocumented "suitcase trade" from Turkey to Russia. 
 
An Ambitious Agenda . . . 
------------------------ 
 
3.  (SBU) Prior to the visit, Turkish officials expressed 
their high aspirations for trade with Russia.  Foreign Trade 
Minister Tuzmen, who led the Turkish delegation at the JEC, 
said Turkey expects bilateral trade to reach $25 billion by 
2007, which would make Russia Turkey's number one trade 
partner.  Turkish officials said the goal for the JEC was to 
build a modern structure for the bilateral economic relations 
so that trade and investment can flourish.  Some of the steps 
agreed to were practical, such as an investment protection 
agreement, while others, like the attempt to enforce an 
offset agreement for natural gas sales, are unlikely to go 
anywhere. 
 
4.  (SBU) The Joint Economic Commission agreed to pursue a 
long list of initiatives: 
-- rewrite the 1937 bilateral trade agreement. 
-- examine the possibility of establishing a free trade 
agreement with Russia, especially if Turkey does not achieve 
full EU membership. 
-- agreed to Russian regulation of undocumented suitcase 
trade.  Turkey fears that Russian restrictions will 
drastically reduce this important income source for Turkey's 
low-income northeast and asked for a transition period to 
delay implementation. 
-- eliminate non-tariff barriers, such as the Russian 
imposition of a high reference price on Turkish industrial 
goods. 
-- draft new agreements on double taxation and investment 
protection. 
-- establish a consultative mechanism to address a long list 
of investment disputes.  Turkish officials are increasingly 
frustrated by the problems their companies face doing 
business in Russia. 
-- implement the offset agreement for natural gas purchases. 
The 1984 agreement to sell Soviet gas to Turkey included a 
provision guaranteeing Soviet purchases of Turkish goods 
equal to 70% of the natural gas sold.  The offset agreement 
functioned somewhat until the early 1990s.  In Moscow, the 
Russians acknowledged that the offset clause remained valid 
but agreed only to talk about ways to implement it. 
-- create an tax-fee zone for Turkish companies in Moscow. 
-- resolve Russia's debt to Turkey's EXIM Bank. 
-- reduce Russian trade barriers to Turkish food exports 
(especially chicken). 
-- draft a civ air agreement. 
 
5.  (SBU) Investments and Energy:  Putin brought with him to 
Ankara a long list of investment proposals totaling $20 
billion.  The list includes Russia's interest in Turkey's 
privatization of the natural gas distribution network, 
electricity generation facilities and the Seydisehir Aluminum 
plant (see reftel).  Russian officials also mentioned grand 
plans for 1) extending the Blue Stream gas pipeline to the 
Mediterranean port of Ceyhan and construction of an LNG 
facility to export Russian gas to Israel; 2) selling Russian 
electricity to Turkey via Georgia; and 3) a railway/ferry 
network connecting Turkey and Russia directly.  In a joint 
statement on energy, the Turks and Russians announced plans 
to cooperate on nuclear power (septel); endorsed Gazprom's 
desire to invest in a range of natural gas projects in 
Turkey; and welcomed Russian investment in the electricity 
sector.  Although the high court recently canceled the tender 
for the TUPRAS refinery company, won by a consortium led by 
Russian firm Tatneft, a Turkish MFA official confirmed press 
reports that PM Erdogan promised that the tender would be 
reopened with favorable consideration to Tatneft. 
 
6.  (SBU) Bosphorus:  Both sides expressed commitment to 
achieving a Bosphorus bypass solution and discussed the 
merits of the various options.  The Turkish side emphasized 
environmental sustainability (in support of Samsun-Ceyhan, 
and in opposition to trans Thrace and Burgos-Alexandropolos) 
and the Russian side emphasized economic feasibility.  While 
the press reported extensively that the Russians were 
abandoning their previous support of a trans-Thrace bypass 
route to support the Turkey favored Samsun-Ceyhan route, 
Embassy contacts stated that no firm agreement on 
Samsun-Ceyhan had been reached.  Acknowledging that Bosphorus 
tanker shipping had limits and was dangerously congested, the 
Russians offered assistance on shipping safety from their 
Baltic experience.  The Turks expressed confidence in their 
own expertise and new Vessel Traffic System (VTS).  Russian 
Oil Minister Khristenko said making a bypass pipeline 
economically feasible would require "preferential treatment" 
from the sponsoring country.  According to the MFA, their 
proposal for "Voluntary Principles" for public/private 
partnership on working together on achieving a Bosphorus 
bypass solution was presented to the Russians. 
 
. . . But Little to Show 
------------------------ 
 
7.  (SBU) Putin and Sezer endorsed the ambitions of both 
countries to boost bilateral economic ties.  "Economic 
cooperation usually falls behind political interaction 
between Russia and its partners, Putin said, but in the case 
of Turkey this is vice versa."  The two signed a joint 
declaration on economic ties and a series of specific 
agreements on energy cooperation, IPR for defense items, and 
prevention of accidents in the Black Sea.  It is notable, 
however, that few of the ambitious projects agreed to in the 
JEC were endorsed during Putin's visit, and the other big 
economic issues, like agreement on a Bosphorus Bypass 
pipeline, did not succeed.  In the end, we suspect, most of 
the ambitious projects will end up as nothing more than words 
on paper.  Confirming that view, just days after the visit, 
the mood of the Turkish press darkened, with one paper 
reporting that "the historical opportunity for making a 
breakthrough in ties with Russia that emerged with the visit 
of Russian President Vladimir Putin to Turkey had been 
missed." 
EDELMAN