US embassy cable - 05ISTANBUL1870

UNCLAS SECTION 01 OF 02 ISTANBUL 001870 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON, ETRD, TU 
SUBJECT: ISTANBUL BUSINESS BULLISH, BUT SEES INFLATD ASSET 
PRICES 
 
 
This message is sensitive but nclassified-- not for internet 
distribution.  Thi message was coordinated with Embassy 
Ankara. 
1. (SBU) Summary: In Istanbul meetings October 20,visiting 
Special Representative for Commercial ad Business Affairs 
Frank Mermoud found both Turksh and international business 
executives optimistc about the Turkish economy.  They 
concurred, hoever, that there is something of a bubble in 
Turish asset prices, as local holdings compete with oe 
another and with interested international invetors. 
Nonetheless, they predicted that the trend or higher 
valuations will continue.  Executives t the American 
Business Forum in Turkey (ABFT) otlined their work program 
for the year, noting tat they are collecting business input 
for Decembr's Trade and Investment (TIFA) meeting with 
Turkey.  End Summary. 
 
2. (SBU) In Istanbul, Mermoud et with Cahit Paksoy, CEO of 
cell phone operatorAVEA, board members from the American 
Business Frum in Turkey, and Haluk Dincer, Sabanci Group 
Vce President for Retail Operations.  In addition, Mermoud 
addressed business students at Koc Universty, answering 
questions on subjects ranging fromU.S. business practices to 
foreign policy issues 
 
3. (SBU) Mermoud's business interlocutors weregenerally 
bullish on the Turkish economy.  Paksoy, who outlined the 
history of AVEA, which was fored from the companies that 
secured (and overpaid for Turkey's third and fourth GSM 
licenses, hadaimed for profitability as of 2006, but 
achievedthat goal six months early in June 2005.  He noted 
that market penetration in the sector is currentl 57 
percent, and predicted that it should reach 5 to 90 percent 
in five years.  Paksoy, like Dincer, caveated only the high 
valuations that investors are currently placing on Turkish 
assets.  He suggested that the price paid for assets ranging 
from Turk Telecom (to the Oger Group) to Tupras (to Koc 
Holding) had been excessive, and might cause problems in the 
future.  He ascribed the overvaluation to the interest of 
foreigners, together with the desire of Turkish holdings to 
outdo their rivals. 
 
4. (SBU) In the telecom sector, Paksoy noted that problems 
continue as a result of weak government regulation.  With the 
continued failure of the government to honor its promises to 
provide for national roaming and number portability, he 
argued that there is no fair competition in the sector, and 
that companies like AVEA, which has increased its market 
share to 17 percent (right on the heels of second place 
Telsim, which was seized from the infamous Uzan clan and will 
soon be sold at auction, but well behind market leader 
Turkcell's 65 percent) are at a disadvantage.  An additional 
problem is Turkey's high communications taxes.  At 66 
percent, they are the highest in Europe.  Originally 
temporarily imposed after the 1999 earthquake, they have 
since become permanent.  Paksoy noted the dramatic impact 
they have had on cell phone usage in Turkey: whereas average 
monthly charges in 1999 were for 2.5 hours per user, by 2005 
that total had fallen to 67 minutes.  Paksoy and Mermoud 
agreed that exposing Turkish regulators to the U.S. 
regulatory system for telecommunications might be useful, and 
Paksoy immediately arranged an appointment for Mermoud the 
following day with the head of Turkey's Telecommunications 
Authority to explore the possibility.  Turkish telecom 
operators, and AVEA in particular, he said, would be happy to 
help defray the costs of any such visit.  As for AVEA, Paksoy 
said that in future the company should be more open to 
cooperation with American suppliers, as its Italian partner 
(which has previously blocked such a step) is in the process 
of selling its shares to Turk Telekom (which will thus double 
its stake to 80 percent). 
 
5. (SBU) ABFT executives briefed Mermoud on their current 
work program, noting their efforts to develop a partnership 
program with New York businesses, and asking for assistance 
in identifying a speaker who could headline a fundraising 
event for the initiative.  They noted that their membership 
is up to 63 companies, and said they are now making a 
significant push in the defense sector.  Pfizer's Alp 
Sevindik outlined the research-based pharmaceutical 
industry's mobilization to combat intellectual property 
rights issues in Turkey, noting the recent negative news that 
"ghost applications" currently exist at the Ministry of 
Health for many of the molecules that the industry has held 
back from the Turkish market until new data exclusivity 
regulations come into force.  Halim Neyzi, ABFT President, 
outlined his company's fear that the GOT may cancel an energy 
contract on which it has expended considerable resources. 
SUBJECT: ISTANBUL BUSINESS BULLISH, BUT SEES INFLATED ASSET 
"We will want to be compensated" if that occurs, he said. 
Neyzi added that the association is gathering input from its 
members for the upcoming Trade and Investment (TIFA) talks, 
and hopes to forward it to the U.S. and Turkish governments 
by mid-November.  He noted that ABFT has attempted to address 
one key concern, rule of law, with the Turkish government, 
but has found resistance in the Ministry of Justice to 
engaging in a dialog with foreign companies on the issue. 
More generally, Neyzi said, implementation of GOT commitments 
is the key sticking point, and the key area where they wish 
to see progress. 
 
6. (SBU) In a separate meeting with Sabanci's Haluk Dincer, 
Dincer outlined the Group's response to the bird flu 
emergency.  He noted that poultry sales had fallen 
immediately and dramatically in Turkey, notwithstanding the 
fact that chicken is the country's most affordable source of 
protein.  The group has cut production 50 percent and prices 
have fallen by a similar amount, increasing the price 
differential with red meat twofold (typically meat is three 
times as expensive as poultry in Turkey; that differential is 
now six).  Dincer expects the reaction to diminish within 
several months, if the outbreak is contained.  More 
generally, he was bullish on the economy, while concurring 
that asset prices have become inflated.  He noted that 
Sabanci intends to expand its operations in the energy 
sector, and expressed hope U.S. companies would join in that 
effort.  He said the group's flagship Akbank is open to 
foreign cooperation, but that it is unlikely to sell more 
than a 15-20 percent stake to a foreign investor. 
JONES