VZCZCXRO3495
RR RUEHDA
DE RUEHAK #0195/01 0311202
ZNR UUUUU ZZH
R 311202Z JAN 07
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 0771
INFO RUEHIT/AMCONSUL ISTANBUL 2016
RUEHDA/AMCONSUL ADANA 1598
RUEHKB/AMEMBASSY BAKU 1449
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 03 ANKARA 000195 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
TREASURY FOR KAREN MATHIASEN 
USDOC FOR CHERIE RUSNAK 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EFIN BEXP TU
SUBJECT: ECONOMIC PARTNERSHIP COMMISSION SCENESETTER 
 
 
SENSITIVE BUT UNCLASSIFIED 
 
¶1.  (SBU)  We are delighted to welcome Assistant Secretary Sullivan 
and his delegation to Turkey for the third meeting of the Economic 
Partnership Commission (EPC).  Resuming economic dialogue since the 
last meeting in Washington in December 2003 is an important part of 
the "Shared Vision and Structured Dialogue" agreed by Secretary Rice 
and Foreign Minister Gul last July.  We want to use this EPC to 
launch a more serious and sustained bilateral dialogue on economic 
issues, trade, and investment.  This will add balance to a bilateral 
relationship that has been heavily weighted to political and 
security cooperation, and it will help both sides cope with and move 
beyond turbulence in 2007 over Iraq-related issues and a likely 
Armenian genocide resolution in Congress. 
 
 
Political and Economic Stability 
-------------------------------- 
 
¶2.  (SBU)  After years of volatility, the relative political 
stability Turkey has enjoyed since the AK Party came to power in 
late 2002 has been an important part of Turkey's economic success. 
For the first time in decades, rampant inflation and government 
spending were brought under control and a single party enjoyed a 
parliamentary majority needed to pass essential reforms of the 
taxation, banking, and social security systems.  Per capita GDP has 
doubled to $5000 in four years.  The resilience of Turkey's reforms 
was tested in May-June 2006, when approximately $10 billion in 
foreign portfolio funds left the market as part of an emerging 
markets pullback and following the mishandling of a Central Bank 
leadership transition.  What would have been a major crisis five 
years earlier did not materialize: the lira stabilized, foreign 
investors are returning in droves, and trade continues to boom. 
 
Turbulent Year Ahead 
-------------------- 
 
¶3.  (SBU)  We face a potentially turbulent year as Turkey enters an 
election period during which it will choose a new president in the 
spring and a new parliament closer to the end of the year.  Emerging 
from these elections with a government and leadership with a strong 
mandate is essential if Turkey is to continue the reform process, 
particularly in addressing weaknesses in the judicial and 
educational systems.  The OECD and World Bank identify these "second 
generation reforms" as essential for Turkey to sustain the high 
levels of growth it will need to make up for lost decades and 
catch-up with income levels in the EU.  The ruling Justice and 
Development Party (AKP) will run on a good government platform, but 
there is a wide perception that the benefits of economic growth are 
not broadly shared and unemployment remains high. 
 
¶4.  (SBU)  Passage by Congress of an "Armenian Genocide" resolution 
would deeply complicate our relationship and have a negative impact 
on the political climate here.  When U/S Burns was here in 
mid-January, he stated clearly in his public and private meetings 
that the Administration would oppose such a resolution.  You can 
carry the same message.  To the extent that it is clear that the 
Administration strongly objected to a resolution, some of the 
bilateral damage can be offset.  The murder of Turkish-Armenian 
journalist Hrant Dink may have created an opportunity for bilateral 
opening with Armenia, but the domestic politics are very difficult 
and this has yet to play out. 
 
U.S. Companies Face Challenges 
------------------------------ 
 
¶5.  (SBU)  Your February 8-9 meetings with the private sector in 
Istanbul and with government officials in Ankara offer the 
opportunity to reinforce Turkey's commitment to economic openness 
and reform and to boost participation of U.S. companies in Turkey's 
economic success.  Although U.S. trade with Turkey has grown in the 
past five years to today's annual level of about $10 billion, the 
rate of growth has been far less than the overall growth in Turkey's 
total trade, so both countries have lost shares in each others' 
markets.  Reform has also allowed Turkey to attract new direct 
investment inflows.  A large portion of this has come from the 
United States, including $4.7 billion in equity investment in the 
financial sector by Citigroup and GE Capital.  However, the 
persistence of traditional ways of doing business, including 
corruption and perceptions of a biased judiciary, hold back 
greenfield investment.  Some problems have been fixed, but Cargill's 
continuing difficulties and pharmaceutical companies' IPR issues 
show U.S. investors still don't always get a fair shake. 
 
Reforms Create New Opportunities 
 
ANKARA 00000195  002 OF 003 
 
 
-------------------------------- 
 
¶6.  (SBU)  Business and government leaders will appreciate hearing 
that reforms are paying off and need to continue.  Indeed, you can 
say that private sector-led growth is creating new opportunities for 
interaction between our private sectors.  The Citigroup and GE 
investments demonstrate this potential, but there are many new areas 
to explore in nearly all sectors.  Business leaders are also looking 
for greater cooperation with U.S. companies in Turkey's 
neighborhood, where Turkey's economic dynamism has the potential to 
be an engine of growth and stability in the Middle East, Central 
Asia and the Caucasus, as well as in an emerging Black Sea region. 
The U.S. Chamber of Commerce's Eurasia Business Platform is one such 
regional vehicle.  Turkey's national business federation, TOBB, has 
also been working to encourage Turkish investment in the Middle 
East, notably in Gaza's Erez Industrial Zone. 
 
U.S. Support for EU Membership 
------------------------------ 
 
¶7.  (SBU)  Turkish leaders will also want to hear you reiterate U.S. 
support for Turkey's EU accession.  In particular, it will be good 
for them to hear that the United States believes EU membership will 
make both Turkey and the EU stronger and be good for our 
relationships with both.  Increased trade with the EU under its 1996 
Customs Union has been an important part of Turkey's growth 
equation.  However, full EU membership will require much more 
difficult economic adjustments, as it will require Turkey to 
dismantle much of its remaining protectionist infrastructure in 
agriculture and curb IPR abuse, as well as adopt expensive new 
standards in environmental protection.  These transitions can, 
however, create opportunities for U.S. companies and for bilateral 
cooperation.  Improving agricultural productivity through adoption 
of U.S. technology and greater use of cost-saving U.S. environmental 
technologies are two such openings. 
 
Energy: Domestic as Well as Regional 
------------------------------------ 
 
¶8.  (SBU)  While an important part of your focus is on regional 
energy, Turkey's domestic energy sector is an example of how 
economic reform is opening new opportunities for U.S. companies. 
For example, most projections are that Turkish electricity demand 
will outstrip supply in the next two to three years.  Turkish 
officials realize that they need new capacity, but are having 
difficulty creating a regulatory environment conducive to the 
long-term investments required, including in civilian nuclear power 
generation.  In addition, Turkey will struggle to meet EU 
environmental standards and improve energy efficiency.  Getting 
input from potential foreign investors on the regulatory climate and 
enhanced commercial cooperation can help meet both these objectives, 
as could DOE-proposed workshops on energy efficiency and clean coal 
technology. 
 
Innovation 
---------- 
 
¶9.  (SBU)  Private sector-led economic growth is opening new 
opportunities to increase bilateral science and technology 
cooperation.  Turkey's traditional "top-down" approach to innovation 
has not been conducive to the development and use of new 
technologies that create value and meet the needs of individuals. 
Turkey ranked among the lowest countries on most indicators of 
innovation according to a 2004 European Commission "Innovation 
Scorecard."  But along with new sources of government funding, new 
private universities and innovative companies are emerging.  We plan 
to take advantage of this by hosting a conference later this year 
with the American Business Forum in Turkey (ABFT) that will 
highlight the elements of success as an "innovative economy," 
including world-class intellectual property protection.  Your 
announcing plans to sign a new bilateral S&T agreement would also be 
a positive signal. 
 
Building on Hopes 
----------------- 
 
¶10.  (SBU)  A metaphor used by the World Bank is that of Turkey as a 
patient who has left the emergency room and moved to intensive care, 
but has a long time to go before leaving the hospital.  There is a 
real risk of a loss of reform momentum and relapse into the 
political and economic instability and stagnation that have been 
more the norm than the exception.  Vulnerabilities include the large 
dependence on foreign financing of imports reflected in the 8.5% of 
GDP current account deficit, still widespread poverty and 
unemployment, a backwards rural sector and broken agriculture 
 
ANKARA 00000195  003 OF 003 
 
 
policy, and more fundamentally, unsettled issues of Turkish 
identity, including religious identity, and the relationship between 
individuals and government.  For the first time in years, however, 
there is hope for the future.  We especially see this when we travel 
to some of the regional centers outside Ankara and Istanbul that are 
beginning to prosper after years of neglect. 
 
¶11.  (SBU)  A better relationship with the United States is part of 
this hope, and much of that will come with greater commercial 
interaction.  The cooperation between the U.S. Chamber of Commerce 
and its Turkish counterpart, TOBB, that resulted from earlier EPC 
meetings was very successful this past summer, holding seminars on 
doing business with the U.S. in five Turkish cities.  The "Business 
Forum" you will lead in Istanbul is an excellent opportunity for 
business and government leaders to work together to devise plans to 
realize these hopes.  We hope this Forum will become a regular part 
of the EPC process.  Finding other structured ways to build on these 
hopes and improve awareness in the United States and in Turkey of 
mutual opportunities, including follow-on programs between the 
Chamber and TOBB, would be important outcomes from this meeting that 
would help lay the groundwork for the next meeting and for a deeper, 
self-sustaining economic dialogue. 
WILSON