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Cablegate: New Era in Turkish Russian Economic Relations? --

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

UNCLAS SECTION 01 OF 02 ANKARA 006867

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: ENRG ETRD PREL RS TU
SUBJECT: NEW ERA IN TURKISH RUSSIAN ECONOMIC RELATIONS? --
NOT

REF: ANKARA 6797

Sensitive But Unclassified.

1. (SBU) Summary: The December 5-6 visit of Russian
President Putin to Turkey was portrayed by Turkish
politicians and the press as a turning point in
Russian-Turkish relations. Putin and Turkish President Sezer
asserted that the rapid growth of bilateral trade is leading
to an emerging "Multidimensional Partnership" with the
economic relationship at the forefront. However, the visit
failed to meet expectations as few of the ambitious economic
initiatives agreed to at the Turkey-Russia Joint Economic
Commission (JEC) meeting the week before were endorsed during
the Putin visit. A broad energy MOU was short on clear
commitments and left all Bosphorus shipping and bypass issues
still in play. In the end, little was accomplished to
improve an economic relationship with lots of promise, but
many problems. (Septel reports the political context of the
Putin visit.) End Summary.

Trade Boom
----------

2. (SBU) Vladimir Putin visited Ankara December 5-6, marking
the first visit of a Russian President to Turkey. The visit
followed a meeting a week earlier of the Russia-Turkey Joint
Economic Commission in Moscow, the first in four years, and
demonstrated the desire of both sides to take advantage of
growing bilateral trade to broaden bilateral economic
cooperation. Russia is Turkey's second largest trading
partner after Germany. This year, two-way trade volume is
expected to exceed $10 billion, a dramatic increase from $200
million in 1989 and $6.7 billion in 2003. However, most of
that is accounted for by Russian natural gas, oil and refined
product sales, resulting in a large bilateral trade deficit
for Turkey. (In the first 10 months of 2004, Turkey has
imported $6.9 billion while exporting only $1.5 billion, for
a deficit of $5.4 billion). Turkish officials pressed
Russian officials to balance the trade, specifically by
implementing a Soviet-era offset agreement for natural gas
purchases. Turkish MFA officials noted the Russian assertion
that the bilateral trade deficit is largely offset by the
estimated 1.7 million Russian tourists spending about $1
billion at Turkish resorts, Turkish construction contracts of
about $2 billion and an estimated $2-3 billion of annual
undocumented "suitcase trade" from Turkey to Russia.

An Ambitious Agenda . . .
------------------------

3. (SBU) Prior to the visit, Turkish officials expressed
their high aspirations for trade with Russia. Foreign Trade
Minister Tuzmen, who led the Turkish delegation at the JEC,
said Turkey expects bilateral trade to reach $25 billion by
2007, which would make Russia Turkey's number one trade
partner. Turkish officials said the goal for the JEC was to
build a modern structure for the bilateral economic relations
so that trade and investment can flourish. Some of the steps
agreed to were practical, such as an investment protection
agreement, while others, like the attempt to enforce an
offset agreement for natural gas sales, are unlikely to go
anywhere.

4. (SBU) The Joint Economic Commission agreed to pursue a
long list of initiatives:
-- rewrite the 1937 bilateral trade agreement.
-- examine the possibility of establishing a free trade
agreement with Russia, especially if Turkey does not achieve
full EU membership.
-- agreed to Russian regulation of undocumented suitcase
trade. Turkey fears that Russian restrictions will
drastically reduce this important income source for Turkey's
low-income northeast and asked for a transition period to
delay implementation.
-- eliminate non-tariff barriers, such as the Russian
imposition of a high reference price on Turkish industrial
goods.
-- draft new agreements on double taxation and investment
protection.
-- establish a consultative mechanism to address a long list
of investment disputes. Turkish officials are increasingly
frustrated by the problems their companies face doing
business in Russia.
-- implement the offset agreement for natural gas purchases.
The 1984 agreement to sell Soviet gas to Turkey included a
provision guaranteeing Soviet purchases of Turkish goods
equal to 70% of the natural gas sold. The offset agreement
functioned somewhat until the early 1990s. In Moscow, the
Russians acknowledged that the offset clause remained valid
but agreed only to talk about ways to implement it.
-- create an tax-fee zone for Turkish companies in Moscow.
-- resolve Russia's debt to Turkey's EXIM Bank.
-- reduce Russian trade barriers to Turkish food exports
(especially chicken).
-- draft a civ air agreement.

5. (SBU) Investments and Energy: Putin brought with him to
Ankara a long list of investment proposals totaling $20
billion. The list includes Russia's interest in Turkey's
privatization of the natural gas distribution network,
electricity generation facilities and the Seydisehir Aluminum
plant (see reftel). Russian officials also mentioned grand
plans for 1) extending the Blue Stream gas pipeline to the
Mediterranean port of Ceyhan and construction of an LNG
facility to export Russian gas to Israel; 2) selling Russian
electricity to Turkey via Georgia; and 3) a railway/ferry
network connecting Turkey and Russia directly. In a joint
statement on energy, the Turks and Russians announced plans
to cooperate on nuclear power (septel); endorsed Gazprom's
desire to invest in a range of natural gas projects in
Turkey; and welcomed Russian investment in the electricity
sector. Although the high court recently canceled the tender
for the TUPRAS refinery company, won by a consortium led by
Russian firm Tatneft, a Turkish MFA official confirmed press
reports that PM Erdogan promised that the tender would be
reopened with favorable consideration to Tatneft.

6. (SBU) Bosphorus: Both sides expressed commitment to
achieving a Bosphorus bypass solution and discussed the
merits of the various options. The Turkish side emphasized
environmental sustainability (in support of Samsun-Ceyhan,
and in opposition to trans Thrace and Burgos-Alexandropolos)
and the Russian side emphasized economic feasibility. While
the press reported extensively that the Russians were
abandoning their previous support of a trans-Thrace bypass
route to support the Turkey favored Samsun-Ceyhan route,
Embassy contacts stated that no firm agreement on
Samsun-Ceyhan had been reached. Acknowledging that Bosphorus
tanker shipping had limits and was dangerously congested, the
Russians offered assistance on shipping safety from their
Baltic experience. The Turks expressed confidence in their
own expertise and new Vessel Traffic System (VTS). Russian
Oil Minister Khristenko said making a bypass pipeline
economically feasible would require "preferential treatment"
from the sponsoring country. According to the MFA, their
proposal for "Voluntary Principles" for public/private
partnership on working together on achieving a Bosphorus
bypass solution was presented to the Russians.

. . . But Little to Show
------------------------

7. (SBU) Putin and Sezer endorsed the ambitions of both
countries to boost bilateral economic ties. "Economic
cooperation usually falls behind political interaction
between Russia and its partners, Putin said, but in the case
of Turkey this is vice versa." The two signed a joint
declaration on economic ties and a series of specific
agreements on energy cooperation, IPR for defense items, and
prevention of accidents in the Black Sea. It is notable,
however, that few of the ambitious projects agreed to in the
JEC were endorsed during Putin's visit, and the other big
economic issues, like agreement on a Bosphorus Bypass
pipeline, did not succeed. In the end, we suspect, most of
the ambitious projects will end up as nothing more than words
on paper. Confirming that view, just days after the visit,
the mood of the Turkish press darkened, with one paper
reporting that "the historical opportunity for making a
breakthrough in ties with Russia that emerged with the visit
of Russian President Vladimir Putin to Turkey had been
missed."
EDELMAN

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