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