US embassy cable - 03ANKARA3017

C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 003017 
 
SIPDIS 
 
 
STATE FOR E, P AND EUR/SE 
TREASURY FOR OASIA - MILLS AND LEICHTER 
STATE FOR USTR - NOVELLI AND BIRDSEY 
USDOC FOR 4212/ITA/MAC/OEURA/DEFALCO 
NSC FOR QUANRUD AND BRYZA 
 
 
E.O. 12958: DECL: 05/05/2005 
TAGS: ECON, PGOV, EFIN, MARR, TU 
SUBJECT: MILITARY PENSION FUND THRIVING IN TROUBLED ECONOMY 
 
Classified by Econ Counselor Scot Marciel for reasons 1.5 
(b)(d). 
 
 
1. (C) Summary:  Since Turkey's financial crisis in early 
2001, OYAK, the Turkish military pension fund, has been one 
of the country's most profitable companies (it was the most 
profitable in 2001.)  Its critics accuse OYAK of having 
unfair tax advantages, and see OYAK's prominence as the 
military's influence on the economy.  This report examines 
OYAK's businesses (focused on auto manufacturing and 
banking), and finds its recent success owes more to its savvy 
management team under CEO Coskun Ulusoy than to any special 
GOT benefits.  OYAK made a killing in the financial markets 
in 2001 because Ulusoy predicted the devaluation and switched 
from lira to dollar investments.  He is currently making 
money the old-fashioned Turkish way (investing in T-bills). 
But OYAK is not just another private sector Turkish firm 
invested in T-bills - its initial source of liquidity is its 
10 percent levy on military officers' salaries.  OYAK's 
success is helping a privileged group -- Turkish military 
officers -- enjoy even more benefits.  End Summary. 
 
 
What is OYAK? 
------------- 
 
 
2. (U) Founded in 1961 to deal with the grievances of 
underpaid military officers following the 1960 military coup, 
OYAK (a Turkish acronym for the "Armed Forces Pension Fund") 
is a supplementary social security institution for more than 
200,000 active duty officers (160,000) and retired pensioners 
(40,000).   Its initial source of income is a compulsory 10 
percent levy on the net salary of all military officers 
(additional premiums, paid on an optional basis, provide life 
insurance and disability benefits).  Pensions are paid to all 
discharged members who have fulfilled at least 10 years of 
service with the military.  Retirees then have the option of 
reinvesting a portion or the entire amount of their benefits 
back into the fund.  In 2002, OYAK paid out to its members an 
average return of 41 percent (30 percent inflation) while in 
2001 the average return was 95 percent (69 percent 
inflation), according to OYAK annual reports. 
 
 
3. (U) In addition to portfolio investments in Turkish stocks 
and government securities, OYAK is an unusual pension fund 
that directly manages most of the 27 companies it invests in. 
 Its companies span the sectors of financial services, 
automotive, cement, food and chemicals, and various services. 
 Its subsidiaries' total asset value in 2002 was TL 5.9 
quadrillion ($4 billion).  Its annual profits in 2001 were TL 
594 trillion ($486 million), a year-on-year increase of 173 
percent; annual profits in 2002 were TL 495 trillion ($329 
million). 
 
 
4. (U) For most of OYAK's history, its top breadwinner has 
been its partnership with French automotive giant Renault. 
In 2001, this joint venture produced 170,000 vehicles and 
registered gross sales of $766 million, becoming Turkey's top 
auto producer.  However, revenues have decreased heavily 
since the country's economic downturn the past two years.  In 
the past three years, OYAK-Renault has gone from exporting 40 
percent of its vehicles three years ago to exporting 90 
percent of its vehicles in the first four months of 2003. 
Since 2001, most of OYAK's 27 companies have struggled (like 
most Turkish companies), and new investment has largely been 
halted. (Comment:  The high rates of return on government 
T-bills act as a disincentive for holding groups like OYAK to 
invest in companies. End Comment.) 
 
 
5. (C) As the company's new diamond in the rough, OYAK Bank 
is the sole OYAK subsidiary receiving substantial investment 
this year (mainly to build a more advanced information 
technology backbone between all branches).  In August 2001, 
OYAK purchased Sumerbank from the Banking Regulation and 
Supervision Board (BRSA); Sumerbank was itself the  product 
of a merger of six smaller failed banks that had been taken 
over by the BRSA. According to a Moody's report of November 
2002, OYAK was fortunate not to have had much retail lending 
prior to the 2001 financial crisis, and did not experience 
spread deficiency rates as large as those of other banks when 
the crisis hit.  OYAK Bank expanded its retail lending only 
after the official acquisition of SumerBank in January 2002. 
With just $20 million to get SumerBank running again, OYAK 
over the past 16 months has gone from a mere 11 branches to 
230, and has gone from a virtually unprofitable institution 
to a bank that today is worth $400-600 million and is still 
growing, according to Ergun Okur, OYAK executive vice 
president.  It is currently the 8th largest bank in Turkey - 
OYAK plans to make it the fifth largest in the next few 
years. 
 
 
Taking Advantage of the 2001 Financial Crisis 
--------------------------------------------- 
 
 
6. (SBU) While not nearly as big as Turkey's famed Koc and 
Sabanci holding companies, OYAK was more profitable than 
either of them in 2001, and was among the top five most 
profitable Turkish firms in 2002.  This is due primarily to 
OYAK's savvy investment policy under CEO Coskun Ulusoy (and 
also partly to the liquidity advantage of the 10 percent levy 
on officers' salaries).  Hired in 2000, Ulusoy immediately 
overhauled the management of OYAK's companies, canceling $120 
million in planned investments, opting instead to invest in 
stocks and securities.  (Note: Ulusoy has a PhD in economics 
from the University of Pittsburgh, and is a former banking 
executive at Citibank, KocBank, and later Ziraat Bank.  He 
has the reputation of a bottom-line, American-style business 
manager.  He resigned as CEO of Ziraat Bank rather than give 
concessional loans to political cronies.  He was a protg of 
Turgut Ozal, and has close contacts with retired generals 
disillusioned with the present government. End Note.) 
 
 
7.  (C) According to Executive VP Okur, Ulusoy anticipated in 
early February 2001 that devaluation was near and, thus, 
wanted to maintain as much liquidity as possible.  In OYAK's 
2001 annual report, Ulusoy says that it was within Turkey's 
"extraordinary economic conditions" that OYAK weathered the 
storm and posted a net profit of nearly $500 million.  What 
the report does not say is that Ulusoy got out of many of the 
firm's lira investments before the devaluation.  In February 
2001, OYAK immediately sold large portions of its Turkish 
lira for dollars, going from 5 percent dollar assets prior to 
the crisis to 45 percent following it.  Okur dismisses 
allegations made by some newspapers at the time that OYAK was 
tipped off to the devaluation. 
 
 
8.  (C) OYAK has been thriving ever since, investing in 
government securities with interest rates that have 
consistently been at least twice as high as real interest 
rates over the past two years.  With the exception of OYAK 
Bank, Ulusoy has continued to halt new investments in its 
companies, choosing instead to allow the company's portfolio 
managers to invest as much liquid capital as possible into 
government securities.  Okur shuns accusations of OYAK having 
special advantages or insider information, though he admits 
that this bonanza cannot last forever.  "We're earning lots 
of money on interest rates and we realize that someday the 
government will say 'sorry, we can't pay this anymore.' We 
all know the end of the movie.  But when it ends, I don't 
know," he stated. 
 
 
Does Military Influence Give OYAK Added Perks? 
--------------------------------------------- - 
 
 
9. (U) OYAK is governed by Law No. 205, enacted in March 
1961, which dictates that a Board of Representatives, 
comprised of 75 retired military officers, oversee a General 
Assembly, comprised of 20 Army officers and 20 civil 
servants, which, in turn, oversees the Board of Directors, 
comprised of three active generals, two retired generals, two 
civilians, and CEO Ulusoy.  The law requires three auditors 
to oversee the Board's monthly meetings - one elected by 
OYAK's General Assembly, one assigned by the Prime Ministry, 
and one assigned by the Banks Union of Turkey.  Says Okur, 
this independent audit board is designed to prevent military 
brass from unduly influencing OYAK's bottom-line goal of 
making profits. 
10.  (U) OYAK's critics allege that it is a tool the military 
uses to consolidate its power, accusing it of having tax 
advantages vis-a-vis competitors and, more sinisterly, of 
using its influence to militarize the economy.  For example, 
former Le Monde journalist and former French Ambassador to 
Turkey and Egypt Eric Rouleau has written in Foreign Affairs 
magazine that OYAK is exempt from all taxes and duties. 
While it is true that military officers enjoy greater 
privileges than civil servants at the same level (higher pay, 
subsidized military stores, ability to obtain lower-interest 
housing loans), this criticism of OYAK is simply not true. 
All of OYAK's economic enterprises pay corporate taxes, and 
any tax advantages it does have are similar to those of other 
pension funds.  Our contacts at the GOT Ministry of Finance 
and the EU mission in Ankara say they have never found OYAK 
to enjoy special advantages because of its military links. 
 
 
11.  (U) Critics such as Rouleau also allege that OYAK is 
closely linked to its "sister firm," the TSKGV (Foundation 
for the Strengthening of the Turkish Armed Forces), which 
raises money through donations and invests in companies 
exclusively devoted to arms production.  Because TSKGV 
receives much of its income through charitable contributions, 
the TSKGV enjoys a number of tax benefits.  These benefits, 
however, do not extend to OYAK.  Okur claims that, though it 
is not stated in Law No. 205, OYAK's company policy has 
always been to avoid all arms contracts, citing 
anti-competition factors as the reason.  He said that there 
have been instances in the past when the TSKGV has taken 
majority ownership of companies in which OYAK had a small 
share.  Wanting to avoid the perception that it is involved 
in war profiteering, OYAK would immediately sell off its 
shares.  This was the case, said Okur, when the TSKGV bought 
Aselsan Electronic Industries. 
PEARSON