US embassy cable - 05ADANA38

UNCLAS SECTION 01 OF 02 ADANA 000038 
 
SIPDIS 
 
SENSITIVE 
 
NOT FOR INTERNET DISTRO 
 
E.O. 12958: N/A 
TAGS: ETRD, ECON, EINV, ENRG, EPET, ELTN, IZ, TU, ADANA 
SUBJECT: SE TURKEY:  INFRASTRUCTURE, SECURITY HINDER INCREASED TRADE 
WITH IRAQ 
 
REF: A. A) ANKARA 648 
     B. B) ANKARA 5996 
     C. C) BAGHDAD 503 
 
 
1.(SBU)  Summary:  Exports from southeast Turkey to Iraq 
increased in 2004 over the previous year (septel), but many 
factors conspire against further increases in this trade:  a 
single border gate between the two countries, sub-standard roads 
leading to the gate, Iraq's security situation and 
underdeveloped banking system, and the difficulty in obtaining 
insurance for trade and investment lending related to Iraq. 
Increased trade is unlikely to make a major contribution to the 
economy of southeastern Turkey until some of these challenges 
are addressed.  End summary. 
 
Challenges I:  Infrastructure and Security 
------------------------------------------ 
 
2.  (SBU) Exports from southeast Turkey to Iraq increased in 
2004 over the previous year (septel), but several obstacles 
stand in the way of a further increase in trade.  There is but 
one single border crossing between the two countries, at the 
Habur/Ibrahim Khalil Gate.  Exporters in the region are 
unanimous in their call for a second border gate to be 
developed, calling the current one - with considerable 
understatement -- "very uncomfortable."  Transporters routinely 
wait for many hours to head southbound, and sometimes even seven 
to ten days to return northbound.  A modernization project at 
the gate reportedly is due to commence this spring (ref A). 
While it could conceivably have a temporary and short-term 
negative effect on throughput, the project should lead to 
facilitation of trade in the long-term.  Nevertheless, even the 
modernization project will not be enough, say exporters; they 
want a second gate. 
 
3.  (SBU) Aside from the border gate itself, the abhorrent state 
of infrastructure leading to the Habur Gate is a deterrent to 
healthy trade.  Heading east from Adana, when the highway ends 
in Gaziantep, truckers have approximately 400 more kilometers to 
travel - on a dangerous, damaged and overused two-lane road - 
before reaching the border crossing.  (Note:  Concern about the 
harmful impact of truck traffic on this already sub-standard 
road is starting to show in Turkish Minister of Transportation 
unwillingness to grant exceptions to a "three quarters-full" 
loading policy - which aims to reduce spillage and wear and tear 
- for sustainment fuel tankers.  End note.) 
 
4.  (SBU) Trucker security (ref B) in Iraq is another well-known 
challenge for the time being.  (Note:  A trilateral dialogue is 
ongoing to address this issue, where a downtrend in violence 
toward Turkish truckers is detectable anecdotally in the last 
three months.  End note.)  Security problems have led to sharp 
increases in transportation costs.  One Mersin exporter shared 
that he paid $40 per ton of cargo transported in the past, but 
is now paying $90.  He attributed the rate increase solely to 
perceptions of security risks.  (Note:  According to trucker 
union representatives, this increase in cargo haulage costs has 
not translated into appreciably higher trucker salaries, 
presumably because the increase in cost goes primarily to 
companies, not to individual truckers.  End note.) 
 
Challenges II:  Banking and Insurance 
------------------------------------- 
 
5.  (SBU) The inadequacy of the banking system within Iraq (ref 
C) also dampens enthusiasm for bigger business with the country 
for the moment.  One contact conceded that banks do exist, but 
says the system has not been firmly established yet.  There are 
not enough branches, for example, and wire transfers are 
impossible.  "I would be happy to wait for up to ten days for a 
wire," said one businessman, "rather than bringing cash across 
the border."  Wire transfers will also decrease the amount of 
bribes that customs officials are charging, they assert.  One 
contact went so far as to say that with settlement of U.S. 
contracts in Iraq in cash, the U.S. is exposing its contractors 
to hostage-taking and predatory criminal activity, carried out 
by some to finance the insurgency. 
 
6. (SBU) A related challenge faced by some Turkish exporters, 
particularly when selling to the Iraqi Interim Government (IIG), 
was the retrieval of bank guarantee letters after a transaction 
had been completed.  For example, when contracting orders with a 
Mersin-based cereals and legume company, the IIG required a bank 
letter demonstrating that the company could fulfill the order. 
After orders were filled, however, it took this company two and 
even three months, sometimes, to get their notes back from the 
IIG.  In the meantime, until the note was returned to the bank, 
the bank was requiring that the company deposit in cash the 
amount that had been guaranteed. 
 
7. (SBU) Yet another problem for those thinking of doing serious 
business in Iraq is the difficulty in getting insurance on 
investments there.  According to comments made by a high-level 
AIG Sigorta representative at a recent conference, some 
insurance for exports to Iraq is available, but it is quite 
expensive.  Another AIG contact claimed that AIG itself was 
writing policies for exports to Iraq, but stopped doing so four 
months ago after having to pay out significant damages.  Now 
they will insure goods only as far as Habur Gate.  Reflecting 
the difficulties in ascertaining exact information about 
insurance options, an AKBank contact in the region told us that 
his company had just finalized its insurance policy for exports 
to Iraq, though they were not going to finance investments 
there.  An Istanbul-based representative of the same firm said, 
however, that they had been writing policies on exports to Iraq, 
but that two months ago they suspended doing so when the risks 
became too great. 
 
Financing trade 
--------------- 
 
8. (SBU) In discussions with Adana-based regional bankers such 
as AKBank and Oyak-Bank, there are steady reports that 2004 did 
not see as much Iraq-related lending or banking activity, such 
as requests for letters of credit, as 2003.  They report that 
2003's higher levels of business were driven by truck financing 
as transport companies and small independent truckers financed 
new long-haul transportation for Iraq.  Such lending did not 
recur at the same level in 2004.  They also report that Eastern 
Mediterranean Turkey's financial health is still "in 
transition," with many clients breaking even, little new 
investment, and the region's big private capital holders (AK 
says its Adana-based private investment group is Turkey's 
largest at over 150 clients with average 750,000 to $2 million 
balances) on the sidelines. 
 
9. (SBU) In addition to this lending sector, both 2003 and 2004 
saw steady lending for construction material purchase for 
contractors, working capital for construction and service 
operators (such as SERKA in Adana which charters vehicles and 
aircraft - mainly former Soviet airframes, such as Antonov and 
Ilyushin - for deliveries to northern Iraq) and spare parts 
ordering for Turkish service contract providers to U.S. bases 
north of Baghdad. 
 
10. (SBU) Comment:  Increased trade is unlikely to make a major 
contribution to the economy of southeastern Turkey until the 
security situation in Iraq improves and the transportation 
bottlenecks are eliminated.  End Comment. 
 
11.(U) BAGHDAD MINIMIZE CONSIDERED. 
 
 
REID