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Cablegate: Istanbul Business Leaders Focus On Eu

This record is a partial extract of the original cable. The full text of the original cable is not available.





E.O. 12958: N/A


Sensitive but Unclassified-- entire text. Not for internet
distribution. This cable was coordinated with Embassy Ankara.

1. (SBU) Summary: In separate meetings the week of November
8, Istanbul business leaders told visiting State Department
Special Representative for Commercial and Business Affairs
Frank Mermoud and U.S. Ambassador to the European Union
Rockwell Schnabel that they are optimistic both about
Turkey's overall economic prospects and about the outcome of
the December 17 EU summit. Business leaders were relatively
pragmatic about the October 6 EU Commission report,
recognizing the balance it sought strike between Turkey and
sceptical European publics. They stressed, however, that
there should be no dilution of the ultimate goal of full
Turkish membership in the EU. Only that prospect, they
argued, will make Turkey's reform process irrevocable and
overcome the entrenched interests that will otherwise resist
surrendering the concessions and privileges they now enjoy.
A cautionary note was struck by TUSIAD foreign relations
chief Cem Duna, who warned that the negotiations will
highlight the divergent interests of different parts of the
Turkish economy, and that it will not be easy for the country
to formulate a common negotiating position. End Summary.

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2. (U) The November 8 visit of Special Representative Mermoud
and November 10-13 visit of USEU Ambassador Schnabel
permitted us to touch base with a broad cross-section of the
Istanbul business community and regauge sentiment both about
Turkey's current economic conjuncture and about prospects for
Turkey to receive a date to begin negotiations at the EU's
December 17th summit. Mermoud's meetings ranged from
bilateral business groups such as the American Business Forum
in Turkey and the Turkish-American Business Association, to
the Foreign Investors' Association (YASED) and such leading
American investors as Coca-Cola, Cargill and Motorola. In
addition to TUSIAD (the Turkish Businessmen's and
Industrialist's Association), Ambassador Schnabel also met
with representatives of the Turkey-EU Business Council, ING
Bank Managing Director John McCarthy and Finansbank Chairman
Husnu Ozyegin.

3. (U) Bullish Outlook: Both Mermoud and Schnabel's
interlocutors were generally upbeat on Turkey's prospects in
the near to mid-term. ING's McCarthy noted that Turkey is
currently experiencing the best economic period he has seen
in his twenty-plus years in Turkey. He stressed that the
bank, while "realistic" about problems that continue to
exist, such as corruption and an inadequate legal system, is
generally "bullish" on Turkey. Cem Duna, TUSIAD's foreign
relations chief (and a former Turkish Ambassador to the EU),
echoed this positive appraisal, pointing not just to the work
that has been done in recent years to restore "macro
balances" in the economy, but also structural changes such as
the creation of independent regulatory boards that are now
working "more or less" effectively. He noted that work has
also begun on legal reform, though he conceded that with only
10,000 judges and prosecutors for a population of 70 million
people, Turkey still has a long way to go. EU Business
Council leaders pointed up their expectation that the ongoing
economic recovery will enable the country to overcome some of
the limitations that have held it back in the past. Turkey's
underdeveloped capital markets, for instance, have suffered
from the absence of institutional investors, but with the
recent creation of private pension plans and the prospect of
development of a mortgage system in the next two years, there
is hope that these markets can be deepened and strengthened.
Only Cargill's Corporate Affairs Director Mustafa Sayinatac
was more pessimistic about Turkey's mid-term prospects,
pointing to such issues as Turkey's budget and current
account deficits, the absence of foreign direct investment,
and his belief the economy is overheating. McCarthy,
however, opined that this year's growth and current account
deficit reflect the satisfaction of pent-up demand and will
ease next year: ING sees growth moderating to 4.8 percent in
2005, he said.

4. (SBU) An EU Stamp of Approval: Business leaders stressed
their belief that Turks feel a strong emotional pull to
Europe, based in large part on the belief that EU membership
will bring about an improvement in the standard of living
here. For business, Duna said, the key advantage the EU will
bring is "predictability." Business council leaders
elaborated that they expect that some of the key problems
which currently hamper their activities, such as red tape and
an inadequate legal system, will be addressed as part of the
negotiating process. While (like Duna) they were generally
understanding of the balance the commission had sought to
strike in its October 6 report, they stressed the importance
of avoiding "additional qualifiers" on December 17, since
this would reduce the impact of a positive decision. The
key, they suggested, is that the "carrot of full membership"
remain clearly in front of Turkey, since only that prospect
will convince economic actors here to be willing to give up
the concessions and privileges that they have enjoyed in the
past. Not all saw the report's emphasis of the "open-ended"
nature of the negotiations as all negative, however. Tezcan
Yaramanci, Chairman of BankEuropa, reflecting a viewpoint we
are hearing more and more from the business community, noted
that this may work to Turkey's benefit, since once it has
made the changes necessary to join Europe (and benefited
economically from them), it may find that it no longer wants
to join the club.

5. (SBU) Challenges Ahead: All agreed that the challenges
facing Turkey will only intensify after December 17. Duna,
who is often mentioned as a candidate for the post of
Secretary General of Turkey's EU negotiating team, noted that

he is concerned about the difficulties that the negotiating
process will pose for Turkey as it attempts to formulate
national positions on various economic issues. "The fault
lines will be more obvious," he predicted, and companies will
be divided based on the nature of their operations.
Cargill's Sayinatac pointed to the difficulties that will
result from the need to reconcile Turkey's enormous
agricultural sector with that of the EU, while Coca-Cola's
Bozer dismissed the argument that large Turkish companies are
not ready for the EU ("the Customs Union has prepared them"),
but conceded that he is concerned about how Turkish SMEs will
react. Most, including members of Turkey's EU busienss
councils, concurred that there is currently little
understanding in Turkey, even among specialists, about what
EU membership actuallly entails and about the changes that
Turkey will be asked to undertake. They predicted more than
a few difficult moments as Turkey is asked to make changes to
harmonize with the acquis.

6. (SBU) Foreign Investment: All agreed that while the EU
stamp of approval, a sort of ISO 9000 certificate, will mark
a "paradigm shift" for both the EU and Turkey, by itself it
will not be enough to spark an inflow of foreign direct
investment. Business council leaders pointed to ongoing
problems such as red tape, heavy taxation, and Turkey's legal
system as factors that will take time to address, so that
even with a date Turkey will remain "far down the list" of
potential investment locations. Coca-Cola President Ahmet
Bozer, whose own company's IPO was pulled on the day he met
with Mermoud, predicted that investment would flow only after
the "tipping point" in negotiations is reached and Turkish EU
membership appears inevitable. Mustafa Alper, YASED's new
Secretary General, noted that his organization is seeing

increased interest in Turkey, particularly from Asian
countries, as it draws nearer to the EU. But he conceded
that this has not yet translated into new flows of FDI and
that while much new legislation has been adopted,
implementation issues remain. The "bureaucracy is tough," he
noted, and it will take time to tackle it, legal reform, and
taxation. He added that while the government has been
extremely responsive on many issues, outstanding areas of
dispute do remain. Most notably, private sector/government
disagreement over how a new Investment Promotion Agency
should be structured and managed has resulted in its being
put on hold for the forseeable future. Overally, however, he
assessed that the investment climate remains "cloudy, but is
getting better."

7. (SBU) Comment: Ambassador Schnable and Special
Representative Mermoud's meetings provided a useful snapshot
of where Turkish business is in its thinking about the
Turkish economy generally and EU relations specifically.
Optimism was widespread that Turkey will receive a date on
December 17, that will enable it to take its relationship
with the EU, and its economy as well, to a new level. Few
were eager to speculate about an alternative "doomsday"
scenario, though most agreed that failure to secure a date
would result in a sharp economic correction and threaten the
country's hard won political and economic stability. Duna
predicted that such a development would lead opposition
forces (whether in the establishment or fundamentalist
circles) to challenge the reforms that Turkey has achieved in
recent years. But he expressed hope that those changes have
already become so entrenched that the Turkish people would
not accept going back to the old way of doing things even
even in such a worst case scenario. End Comment.

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