VZCZCXRO3887
RR RUEHDA
DE RUEHAK #6555/01 3351332
ZNR UUUUU ZZH
R 011332Z DEC 06
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 0142
INFO RUEHIT/AMCONSUL ISTANBUL 1725
RUEHDA/AMCONSUL ADANA 1387
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 ANKARA 006555 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
USDOC FOR ITA/MAC - RUSNAK 
TREASURY FOR OASIA - JONATHAN ROSE 
 
E.O. 12958: N/A 
TAGS: EFIN PGOV PHUM TU
SUBJECT:  Turkey's Military Pension Fund: Powerful, but 
Professional 
 
¶1.  (SBU)  Summary.  One of the many unique institutions with which 
outsiders often associate Turkey is its large and powerful military 
pension fund, which is often pointed to as a sign of undue military 
influence in politics and society.  But, along with coups, squatter 
housing, leftist terror, and inflation, such specificities are 
fading away as Turkey joins the global economy.  The pension fund, 
known as OYAK, no longer has special status or privileges and 
operates as a professionally-managed occupational retirement fund 
like others in Europe or the United States.  OYAK's practice of 
taking equity holdings in commercial enterprises (as opposed to 
financial holdings of stocks and bonds) makes it susceptible to 
political pressure and economic nationalism, as is arguably 
demonstrated by its recent investments in Turkey's steel industry. 
In any case, the pressures of the marketplace and EU-related reforms 
limit the potential for abuse and are turning OYAK into an advocate 
of sound economic policy, transparent corporate governance, and EU 
accession.  End Summary. 
 
¶2.  (SBU)  With assets of over $12 billion, OYAK, the Armed Forces 
Pension Fund, is one of Turkey's largest economic entities, ranking 
just after private industrial giants like the Koc, Sabanci, Dogus 
and Zorlu Groups.  OYAK was created by law in 1961 to manage the 
retirement savings of military officers and civilian employees of 
the Ministry of Defense.  In 2006, it has about 230,000 members, 
$600 million in annual profits, and 18,000 direct employees. 
Reflecting its membership, OYAK's all-male board consists of 
generals and admirals, a university rector, and a provincial 
governor (all retired), as well as its professional CEO.  Membership 
in OYAK is mandatory for uniformed personnel and optional for 
civilian defense employees, 80% of whom opt to join.  OYAK 
membership and benefits are supplementary to required universal 
participation in Turkey's social security system, SSK. 
 
¶3.  (SBU)  In October 2005, Oyak made a $2.7 billion equity 
investment in Turkey's formerly state-owned iron and steel company, 
Erdemir, which runs ageing steel factories along the Black Sea coast 
and the massive Isdemir works on the Mediterranean Gulf of 
Iskenderun.  OYAK's other equity holdings include the medium-sized 
Oyak Bank and joint ventures with foreign companies including the 
French companies Renault for automobile manufacturing and AXA in the 
insurance sector.  The Fund also has equity holdings in Turkish 
cement, energy, telecom and other companies.  The Fund has a policy 
against investing in the defense sector and tends to prefer 
investment in wholesale businesses that are not "brand names."  OYAK 
has no institutional relationship with the Armed Forces Foundation 
(TSKGV), a military-run body that owns enterprises that produce 
military equipment. 
 
--------------------------- 
The Military's Hidden Hand? 
--------------------------- 
 
¶4.  (SBU)  OYAK has been accused, particularly from European 
quarters, of being a tool used by the Turkish military -- or, more 
broadly, the putative "deep state" -- to influence democratic 
civilian politics.  A 2003 report by the "European Economic and 
Social Committee" called OYAK "the secret hand of the Turkish army." 
 A European Parliament commission report that same year contained 
similar conclusions.  Former French Ambassador to Turkey and 
journalist Eric Rouleau has said much the same, and called on the 
Turkish government to end special privileges enjoyed by OYAK.  On 
the other hand, no "political" document of the European Union (such 
as those of the Copenhagen summit) has cited objections to OYAK or 
its status. 
 
¶5.  (SBU)  OYAK executives assert that OYAK is a professionally and 
transparently managed pension fund, differing from other 
occupationally-based pension funds only in that it includes large -- 
in many cases controlling -- equity stakes in its investment 
portfolio, as opposed to only buying non-controlling shares in 
traded equities.  The executives explain this by pointing to the 
relative thinness and small capitalization of the Turkish stock 
market.  OYAK publishes annual reports and financial statements that 
are audited by international accounting firms in accordance with 
International Accounting Standards.  For example, OYAK's 2005 annual 
report contains an auditors' statement by Deloitte Touche.  OYAK has 
credit ratings from Moody's and Standard and Poors, and has issued 
bonds on international markets.  OYAK also publishes extensive 
verbatim transcripts of its annual membership meetings, although 
these may be edited to delete commercially sensitive information. 
 
----------------------------------------- 
Economic Nationalism vs. Sound Management 
----------------------------------------- 
 
 
ANKARA 00006555  002 OF 002 
 
 
¶6.  (SBU)  When current CEO Coskun Ulusoy took over in 2000, he 
brought with him from the Koc Group a team of outside business 
professionals like Executive VP Ergun Okur and Aydin Muderisoglu. 
The Fund has thrived under the new team, with assets mushrooming 
from $5.8 billion in 2003 to 2005's $12.3 billion.  Ulusoy asserts 
that OYAK's "first duty is to safeguard the value of its members' 
savings."  Nonetheless, observers sometimes perceive non-economic 
motives in OYAK's investment decisions.  The decision to acquire 
Erdemir, which stretched the Fund's financial and managerial 
capabilities, is a recent example.  Erdemir's privatization took 
place at a time of rising economic nationalism and fears that large 
foreign companies, like Mittal and Arcelor in steel, would take over 
key economic sectors.  OYAK's high bid was welcomed by politicians 
as a "national" solution, while financial analysts viewed the price 
as excessively high.  Similarly, there has been controversy in the 
press about OYAK's desire to sell its mid-size Oyak Bank to a 
foreign bank despite OYAK management's argument that a relatively 
small, nationally-based bank can not be competitive against major 
international banking giants, like Citigroup, BNP and Dexia, that 
are buying into Turkey's banking sector. 
 
----------------------- 
No "Special Privileges" 
----------------------- 
 
¶7.  (SBU)  OYAK officials also deny that the Fund enjoys special 
privileges.  They rebut charges, such as Eric Rouleau's, that 
military banking accounts held at Oyak Bank are a hidden subsidy by 
explaining that individual military units' decisions on where to 
hold their salary accounts are commercially-based.  In Turkey, 
ministries, the military, and private corporations pay salaries 
through the banking system.  Banks compete for this business by 
offering non-cash incentives to the managers of individual units. 
In some cases, these incentives can be substantial, such as new cars 
or buildings.  Oyak Bank has apparently won the business of many 
military units by providing such goodies to commanders, ostensibly 
for the enjoyment of their units.  In any case, this issue will 
become moot once Oyak Bank is sold. 
 
¶8.  (SBU)  Further reforms in OYAK's structure and relationships 
will be necessary as part of Turkey's EU accession process.  In 
particular, Turkey currently lacks a "second pillar" retirement 
insurance system that supplements government social security plans. 
Creation of such a system, as required by EU legislation, would 
require creation of an independent regulatory body and additional 
transparency regulations.  OYAK executives say they would like to 
open up membership to non-military personnel and even the public, 
but such deregulation seems remote at the present given the priority 
EU countries give to government run social security systems. 
 
------- 
Comment 
------- 
 
¶9.  (SBU)  Unlike military-owned and operated commercial enterprises 
in some other countries, like China, OYAK is not a source of income 
that gives the Turkish military independence from the civilian 
financial control through the national budget.  At the same time, 
there is no doubt that some politicians, particularly of the 
nationalist strain, see OYAK as a handy source of finance for 
would-be "national champion" companies.  It is also true that OYAK, 
given its size and military origins, carries influence with 
politicians that could be used to protect its institutional and 
business interests.  Indeed, the Fund's current management uses its 
influence to support the orthodox economic policies implemented by 
the AK Party government, including the IMF program.  There is no 
evidence that OYAK uses its financial resources covertly to 
influence politicians.  In fact, the author of the 2003 European 
Economic and Social Committee report, Tom Etty, has, according to 
OYAK executives, retracted his earlier views about OYAK's "secret 
hand."  As Turkey proceeds on the path to EU membership, OYAK should 
continue the process of becoming a professional pension fund on the 
European and U.S. model. 
 
This report is available on Intellipedia for editing and commenting: 
http://www.intelink.sgov.gov/wiki/OYAK. 
WILSON