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

UNCLAS SECTION 01 OF 03 ISTANBUL 001728 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EUR/SE AND EB/IFD 
TREASURY FOR INTERNATIONAL AFFAIRS - RADKINS AND MMILLS 
NSC FOR BRYZA AND MCKIBBEN 
 
E.O. 12958: N/A 
TAGS: EFIN EINV ECON TU
SUBJECT: ISTANBUL BUSINESS LEADERS FOCUS ON EU 
 
REF: ANKARA 5791 
 
 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. 
 
¶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 
 
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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 
 
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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. 
SMITH