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Cablegate: Scenesetter for a/S Sullivan

VZCZCXRO2164
OO RUEHDA
DE RUEHAK #3998/01 1881500
ZNR UUUUU ZZH
O 071500Z JUL 06
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7134
INFO RUEHDA/AMCONSUL ADANA 0915
RUEHIT/AMCONSUL ISTANBUL 0908

UNCLAS SECTION 01 OF 03 ANKARA 003998

SIPDIS

SENSITIVE
SIPDIS

FOR EB ASSISTANT SECRETARY SULLIVAN

E.O. 12958: N/A
TAGS: ECON EFIN ENRG PREL KTFN TU
SUBJECT: SCENESETTER FOR A/S SULLIVAN

REF: A. ANKARA 3896

B. ANKARA 3717
C. ANKARA 3644

1. (SBU) Summary and Introduction: Your visit to Ankara is
an opportunity to send a message of confidence in
Government and Central Bank stewardship of the economy
while privately passing on U.S. investors' concerns.
Coming right after FonMin Gul's visit to Washington, your
Ankara stop helps us reinforce the economic component of
the just-announced Shared Vision and Structured Dialogue.
Your visit also provides an opportunity to exchange views
on important trade issues, press for a stronger regime
against terrorism finance and action on Iraq debt, and
discuss the Economic Partnership Commission.

2. (SBU) Your visit to Ankara is well-timed
to give a supportive public message showing U.S. confidence
in the Government and the Central Bank's stewardship of the
economy. In private, you could usefully pass on U.S.
investor concerns about Turkish officials' public
statements in June that failed to convey the sense that
investors' concerns were understood. Regarding
the EU accession process, a message of restraint in
publicly reacting to perceived EU slights and in quickly
advancing on other, non-pressing EU agenda items in a
strategy
to win allies would help both
with the EU process and with financial markets.

3. (SBU) The unremitting negativity in markets for most of
May
and June has at least temporarily subsided. Since the Central
Bank
hit the markets early last week with a package of
intervention,
foreign exchange auctions, rate hikes and lira deposit
auctions,
the lira has stopped sliding and has even appreciated a bit,
helped
along by the Fed statement and surprisingly benign June
inflation
numbers. End Summary.


---------------------------------
Turkey Still Committed to Program
---------------------------------

4. (SBU) The communication missteps and a sense that the
new Central Bank leadership was behind the curve in recent
months has masked what remains broadly speaking a good
economic reform story, as IMF Deputy M.D. Krueger pointed
out in her June 29 speech in Istanbul. The Government
has recently recommitted to the IMF program in general and
to fiscal discipline in particular. In a bid to reassure
markets, the Government is now talking about achieving a
6.7% of GDP primary surplus -- surpassing the existing 6.5%
target. At 6.5%, the primary surplus would already be one of
the most fiscally austere in the world. The Government
deserves credit for sticking to fiscal discipline as it
heads into an election year in a domestic political context
of rising nationalism and opposition bashing of the IMF and
the EU. An IMF Mission left Ankara in May, confident of the
government's current commitment to the stand-by program --
a view we share. The IMF board is expected to meet at the
end of July or beginning of August to approve the third and
fourth reviews under the program and release approximately
$1.6 billion in financing.

--------------
European Union
--------------

5. (SBU) Since Turkey became an accession country on
October 3, 2005, tensions with the EU have mounted. The
issue of Turkey opening its ports and airports to Cypriot
ships and planes looms as an imminent threat to Turkey's EU
accession process in the fall. Uncertainty over this issue
is an important worry in financial markets, as the EU
accession process "anchors" Turkey on a reformist,
modernizing, western-oriented track. With elections
(both presidential and parliamentary) next
year, decreased domestic support for EU accession and
rising nationalism, the Government can ill-afford to make
additional concessions on Cyprus without some political
cover in the form of EU movement to help reduce the economic
isolation of northern Cyprus.


ANKARA 00003998 002 OF 003


-----------------
Political Context
-----------------

6. (SBU) You are visiting during a time of renewed
political tensions in the run-up to presidential and
parliamentary elections scheduled for May and November
2007, respectively. Tensions have been building between
secular forces and the pro-Islam ruling Justice and
Development (AK)
Party, particularly in May after a dramatic assassination
of a senior judge by an individual allegedly professing
religious
motives (but with apparent nationalist credentials). The
earlier
controversy over the appointment of a new Central Bank
governor
was another manifestation of this tension. Having taken
office
at a time when inflation fears have re-emerged, this will
make
it even more difficult for Governor Yilmaz to reestablish the
Bank's
inflation-fighting credibility. Combined with the
uncertainties in
global markets that appear to have triggered the recent
market
correction, political uncertainties thus seem likely to
generate
more turbulence in the coming months.

----------------------
Bilateral Relationship
----------------------

7. (SBU) A strong relationship with the U.S. is a necessary
ingredient of stability in Turkey and the region. It
helps, among other things, offset the current uncertainties
about the EU. Secretary Rice has made considerable
progress in restoring an atmosphere of shared effort and
partnership that includes Turkey's valuable contributions
in Afghanistan and Iraq (although Turkey has not signed on
to debt reduction to Iraq) as well as to the international
diplomatic effort to convince Iran to drop its nuclear
ambitions. We are working together against the PKK in Iraq
and its support networks in Europe. Coming right after
FonMin Gul's visit, your visit helps us reinforce the
economic component ofthe "Shared Vision and Structured
Dialogue." The always energetic and creative Turkish press
will be keen to read some kind of deeper meaning into your
visit. To the extent that your public comments put your
meetings into this context of shared interests and
consultations among allies, as well as your confidence in
the sound economic policies that have fostered success thus
far, it will help to put to rest any misguided conspiracy
theories.

-------------------------------
Economic Partnership Commission
-------------------------------

8. (SBU) In your meetings at MFA, it is important
that you be prepared to discuss the EPC, even if only in a
preliminary way. With no EPC having been held since
December, 2003, one is long overdue and is specifically
referenced in the Structured Dialogue paper announced at
the Gul visit. We should make the best use of the EPC,
both as a forum to discuss bilateral economic issues and
try to achieve some focus on both sides, but also as a
symbol of our commitment to putting economic flesh on the
strategically-oriented "bones" of the bilateral
relationship. You will find the MFA very receptive, albeit
not economically-savvy.

--------------------
Trade and Investment
--------------------

9. (SBU) Bilateral trade totals about $10.2 billion, with
$5.3 billion in U.S. exports and $4.9 billion in U.S.
imports from Turkey. Trade with the U.S. accounts for 6.7%
of Turkey's exports and 4.6% of Turkey's imports. Roughly
half of Turkey's trade is with the EU. Trade Minister
Tuzmen has dubbed 2006 the "Year of the Americas" and the
Turkish Government is trying to expand exports to the U.S.
by focusing on a few target states. The U.S. has
longstanding concerns about Turkey's trade and Intellectual
Property policies, including WTO-inconsistent barriers to
U.S. agricultural products and significant problems with

ANKARA 00003998 003 OF 003


intellectual property protection in the pharmaceutical
sector.

10. (SBU) The investment climate has improved in recent
years, in part due to the Government's strongly
pro-business, pro-foreign investment, pro-privatization
stance. These policies brought in $9.6 billion in FDI in
2005, a number that is expected to be surpassed in 2006.
The Government deserves credit for encouraging
privatization and foreign investment despite popular
skepticism and political opposition. Though some U.S.
companies continue to experience problems with the courts
and regulators, the list of intractable U.S. company
problems has shortened in recent years. The strong growth
in the economy -- it averaged 7.5% a year from 2002 through
2005 -- has shifted the focus from problems to
opportunities

------------------------------------------
Terrorism Finance: Keeping the Profile up and the Pressure on
-----------------------------------------


11. (SBU) Except for a small group of officials directly
responsible for the issue, the political level seems
indifferent
to the issue, despite the GOT's overall commitment
to fighting global terrorism. Turkey's regime is weak but
the
Government seems to think it will be taken care of with
the long-delayed passage of a law reorganizing Turkey's
financial intelligence unit (MASAK). Though the law
includes important reforms (explicitly criminalizing the
financing of terrorism and providing immunity from
prosecution for bank filers of suspicious activity reports)
and was submitted to parliament in November 2005, the
parliament
has recessed until October without passing it. Turkey is
likely to fare very badly in its Financial Action Task
Force peer review which will begin in September. You
should urge rapid passage of the law but also a broader
focus on meaningful implementation.

---------
Iraq Debt
---------

12. (SBU) Turkey has not agreed to provide debt treatment
to Iraq comparable to Paris Club terms of 80% forgiveness.
In fact, there is no specific official position yet but
Turkey has no history of debt forgiveness and there is a
strong bias (delusion?) in favor of merely rescheduling the
debt. Turkey is unaccustomed to thinking of itself as a
creditor country and Turks have a tendency to view Iraq as
a potentially rich country and themselves as a country with
financial difficulties. Moreover, Iraqi authorities
have yet to push the debt issue in a meaningful way with
Turkey. One positive development is that Minister of
Economy Babacan, the minister with the most experience in
international financial fora, has recently taken the lead
on the issue. It would be useful for you to urge Turkish
officials to help stabilize Iraq by providing treatment
comparable to Paris Club terms, which Iraq is required to
seek from all creditors.

Visit Ankara's Classified Web Site at
http://www.state.sgov.gov/p/eur/ankara/

WILSON

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