US embassy cable - 05ANKARA3412

UNCLAS SECTION 01 OF 02 ANKARA 003412 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: BEXP, EINV, EFIN, TU 
SUBJECT:  Euro-Investors Shopping, Not Buying 
 
REFS: A) WHITFIELD CABLE, B) ISTANBUL 526, C) ISTANBUL 
 
692, D) ISTANBUL 422 
 
SENSITIVE BUT UNCLASSIFIED. 
 
1.  (SBU)  Summary.  European investors have flocked to 
Turkey since the December 17 EU decision to go ahead with 
accession negotiations, but U.S. companies are not 
joining them.  Despite all the shopping, concrete 
investment decisions are not slow in coming as would-be 
investors, European and U.S. alike, pass up the so-called 
"Europe buy" due to the opaque and unfair legal and 
regulatory environment, as well as widespread corruption. 
Yet, U.S. businesses are not keeping up with European 
companies in remaining current with opportunities here. 
Opportunities to familiarize U.S. companies include 
outreach to Europe-based U.S. subsidiaries as well as 
more effective collaboration between U.S. and Turkish 
business associations.  End Summary. 
 
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European Shoppers Arrive 
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2.  (SBU)  As State Department Special Representative for 
Business Affairs Frank Mermoud heard when he visited 
Istanbul in late April, there as been a stirring of 
European interest in investing in Turkey since December 
17, when Turkey obtained its October 3 date to begin EU 
accession negotiations.  For example, a high-level French 
business delegation led by former Renault CEO Louis 
Schweitzer visited Turkey June 13.  A 600-company strong 
German business delegation accompanied Chancellor 
Schroeder in early May.  Italian, Spanish and business 
groups from other EU countries have made similar tours, 
and Turkish ministers like Ali Babacan have gone to 
Europe to showcase investment in Turkey.  Newspapers are 
full of eurobusiness deals and rumors of deals. 
 
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U.S. Companies Absent 
--------------------- 
 
3.  (SBU)  Mermoud was told by a senior Sabanci Group 
executive who is head of Turkey's largest conglomerate's 
food products subsidiary, as well as by the head of Ata 
Invest, a Turkish investment bank, that U.S. companies 
are missing out on business opportunities that have 
accompanied the renewal of growth in Turkey.  The banker, 
whose bank has been an advisor in many privatization 
operations, lamented that U.S. firms had not shown an 
interest in pending energy and telecom privatizations. 
U.S. companies are also, he said, passing up what his 
bank saw as growth opportunities in the retail, 
construction, media and tourism sectors.  In the one case 
in which he was aware of U.S. interest (U.S. Steel in the 
Erdemir steel privatization), the U.S. company was not, 
he felt, as aggressive as its Russian, Korean and Indian 
competition.  Also suggesting the low profile of some 
U.S. firms, the Sabanci executive was not even aware of 
the presence in Turkey of several leading U.S. food 
products companies. 
 
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But Nobody's Buying 
------------------- 
 
4.  (SBU)  Yet for all the activity, and despite the 
banker's enthusiasm -- similar to that throughout 
Istanbul's business world -- the upsurge in European 
interest has not resulted in concrete investment 
decisions.  (The exception, proving the rule, is the 
financial sector, in which Italy's Unicredito and Kocbank 
joined forces to take control of Yapi Kredi, Turkey's 
largest private bank, BNP increased the size of its stake 
in the Turkish Economy Bank, and Fortis bought Disbank, 
Turkey's seventh largest.)  Indeed, European investment 
suffered a severe setback in March, when Turkey's 
Cukurova Group reneged on a deal to sell its interest in 
fast-growing cellular provider Turkcell to Scandinavian 
operator Telia Sonera for $3.1 billion (more than twice 
the total non-real estate FDI Turkey received in all of 
2004). 
 
5.  (SBU)  Another example of the obstacles faced by 
foreign investors is highlighted by Coca Cola's mixed 
experience.  Coke's Gurtay Kipcak told Mermoud how Coke 
Turkey was a success story within the Coke empire, 
winning the coveted internal "Woodruff Prize" last year. 
Local sales grew 22% in 2004 and the local company is a 
training ground for senior Coke executives.  Through 
innovative advertising and philanthropic outreach, Coke 
has developed a "Turkish" image and has overcome threats 
from upstart local imitators like "Cola Turka."  Yet, 
despite success and growing employment, Coke (as well as 
Pepsi) have been subject to continual harassment by 
Turkish authorities.  On top of a punitive 47.5% "special 
consumption tax" on cola beverages, the companies 
recently had to fight back (with Embassy support) an 
effort by the government to give the maker of Cola Turka 
special breaks on Turkey's onerous sugar quota, which 
keeps sugar prices at three times global free market 
levels.  Every dollar earned in Turkey represents an 
unnecessary battle, Kipcak said. 
 
--------------------------------------------- - 
Legal System and Corruptions Major Impediments 
--------------------------------------------- - 
 
6.  (SBU)  Telia Sonera is now suing Cukurova in Turkish 
courts, but the failure of its deal and Coke's problems 
illustrate the issues that major foreign investors 
continue to face.  In addition to opaque business 
machinations and alliances within the Cukurova Group, the 
Telia Sonera deal was challenged in the press on 
nationalist grounds and there were suggestions that 
regulatory approvals would not be forthcoming.  If the 
past experience of foreign investors is a guide, Telia 
Sonera's will be disappointed in its efforts to obtain 
redress in the courts.  Turkish courts share the 
nationalist, statist outlook of the traditional Turkish 
"state" and have several times frustrated major 
investment deals, including the government's attempt to 
sell a $1.3 billion stake in refiner Tupras in 2004. 
 
7.  (SBU)  In a recent meeting with the U.S.-Turkey 
Congressional Study Group led by Congressman Ed Whitfield 
(ref A), State Minister Babacan -- who is responsible for 
investment as well as international economic policy -- 
acknowledged that attracting foreign investment depended 
on reforming Turkey's legal and judicial system.  Cavit 
Dagdas, the Deputy Under Secretary in Turkey's Treasury, 
made a similar point to Mermoud.  Dagdas also said that 
the GOT intended to tackle government corruption, another 
major deterrent to foreign investors (ref B), by cutting 
regulation, more e-government, and the implementation of 
e-signature regulations that reduce opportunities for 
corruption.  Dagdas also said the government was 
preparing a strategy to promote investment in Turkey in 
the United States. 
 
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Comment 
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8.  (SBU)  Rifat Hisarciklioglu, the head of Turkey's 
Union of Chambers of Commerce (TOBB) also told Mermoud 
that Turkey hoped to attract more U.S. investment. 
Hisarciklioglu, who was in Istanbul for the second 
meeting of the CEO-level Investor Advisory Council (ref 
c) claimed that foreign investors were satisfied with the 
progress Turkey has made.  Nonetheless, in post's and 
most disinterested observers' views, foreign investment, 
of which Turkey has received far less than other 
countries of similar size and potential, will continue to 
wait for a more stable, predictable business and legal 
environment, whatever the wishful thinking of Turkey's 
government and business leadership. 
 
9.  (SBU)  But many U.S. investors, some of whom were 
directly burned by bad experiences in Turkey, are not 
familiar with the changes since the financial crisis. 
Turkey needs to do more, especially in improving the 
legal environment, and European countries are a natural 
source of investment, but this should not be a reason for 
U.S. companies to not join the shopping tour.  One idea 
that came out of Mermoud's meetings was to consider 
working with U.S.-Turkish business associations to 
familiarize Europe-based subsidiaries of U.S. firms with 
opportunities here.  Along with Hisarciklioglu, the 
deputy chairman of the Turkey U.S. Business Council 
(TUSBC) Serif Egelli said he saw opportunities for 
partnerships between U.S. and Turkish companies in the 
Arab world and Central Asia.  Egeli described TUSBC's 
plans to hold investor-oriented events in the U.S. and 
Turkey over the coming year (see ref D), including as co- 
organizer of the recent ATC-TUSBC conference in 
Washington. 
EDELMAN