ECONOMIC MINISTERS BATTLE FOR INFLUENCE AS ERDOGAN

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 002315

SIPDIS


STATE FOR E, P, EUR/SE AND EB
TREASURY FOR OASIA - MILLS AND LEICHTER
NSC FOR QUANRUD AND BRYZA


E.O. 12958: DECL: 04/08/2008
TAGS: ECON EFIN PGOV TU
SUBJECT: ECONOMIC MINISTERS BATTLE FOR INFLUENCE AS ERDOGAN
APPOINTS LOYALISTS TO SENIOR POSITIONS IN BUREAUCRACY


(U) Classified by DCM Robert Deutsch. Reason: 1.5(b,d)



1. (C) Summary: Infighting among economic ministers is
hindering the Government's efforts to coordinate policy
around an economic "super-minister." Deputy PM Sener, who
was supposed to lead the economic team, appears to be losing
influence to Finance Minister Unakitan, while State Minister
Babacan's clout remains limited. Meanwhile, PM Erdogan is
replacing a number of key technocrats with people loyal to
him, in many cases from Istanbul municipality and/ or Islamic
financial institutions. The lack of a clear policy
coordination mechanism, combined with the latest personnel
reshufflings, is adding to investor concerns about this
government's willingness and ability to implement its
economic program effectively. End Summary.



2. (C) The AK Party took the reins of government late last
year intending to coordinate economic policy through an
economic "super minister" who would oversee Treasury,
Finance, and other key agencies. Initial power struggles
resulted in half a loaf: Abdullatif Sener was named Deputy
Prime Minister responsible for overall economic coordination,
with direct responsibility for the Privatization
Administration, Banking Regulatory and Supervision Agency
(BRSA),and State Planning Organization, but without direct
control over the Treasury or Finance Ministry.



3. (C) The months since then have witnessed constant
infighting among the ministers that has hindered policy
coordination and coherence. According to senior Treasury
officials, Sener has been battling, unsuccessfully, to assert
greater control over economic policy. He refused for two
months to sign a cabinet circular naming State Minister for
the Treasury Ali Babacan to chair the interagency committee
on improving the foreign investment environment. He finally
was instructed to sign the circular, but the delay meant that
the committee did not even meet until February. Sener
continues to wage the battle for management of foreign
investment policy through the State Planning Organization,
which is trying to wrest control of the issue from Treasury.



4. (C) Other senior officials have told us that both Babacan
and Finance Minister Kemal Unakitan have largely ignored
Sener, reporting directly to the Prime Minister. In recent
weeks, according to government officials and some Istanbul
analysts, Unakitan appears to have gained greater influence
at Sener's expense, as evidenced by the government's recent
decision to shift control of the Privatization Administration
from Sener to the Finance Ministry; Sener also lost his role
as government spokesman. There have been unsubstantiated
press reports that Sener is frustrated and may be considering
resigning. Analysts speculate that Unakitan's rise is due to
(a) his closer personal relationship to PM Erdogan (since
they worked together in Istanbul),and (b) his talent as a
pragmatic problem solver. The consensus is that Babacan's
clout remains limited.



5. (C) Erdogan's assumption of the Prime Ministry also has
led to the long-expected replacement of a number of senior
economic bureaucrats. In the past two weeks, the government
has replaced the entire board of the two state banks, along
with two senior Privatization Administration officials. It
has also fired the head of the State Gas Pipeline Company
(BOTAS) and the State Electricity Trading Company TETTAS,
both of whom had reputations for competence. This week,
markets are awash with rumors that Treasury U/S Faik Oztrak
will be replaced in the very near future, perhaps by Istanbul
Deputy Secretary General for Finance Mesut Pektas. (Note:
Oztrak told us late April 8 that he had told Minister Babacan
that he could not continue as a "lame duck"; the government
needed either to replace him or back him fully.)



6. (C) European diplomats argued to us April 7 that Erdogan
appears to be appointing new people to these key bureaucratic
positions based more on their loyalty to him than on their
competence or credibility with the markets. For example, the
new Chairman of the State Bank Board, replacing respected
banker Safa Ocak, is Zeki Sayin, who managed the Istanbul
municipality-owned supermarket and then served on the board
of Islamic bank Family Finans. Can Caglar, the new general
manager of state-owned Zirat bank, also was an executive at
Family Finans. Istanbul investment bankers and analysts with
whom we met on April 3 were harshly critical of these
appointments, saying the new board members lacked experience
and credibility. They and others in the financial markets
with whom we have spoken say they know little about Mesut
Pektas, Faik Oztrak's rumored replacement, who worked for the
Islamic finance house Al-Baraka Turk (as did Kemal Unakitan)
before working with Erdogan in the Istanbul municipality.
Faruk Demir, a leading national security analyst and
Executive Director of the Advanced Strategy Center, argues
that Pektas has a reputation for probity, credibility with
the capital markets, and is one of the few men close to
Erdogan who can give him the unvarnished truth.



7. (C) Comment: To regain market confidence, this
government needs not only to implement its economic reform
program, but to avoid mistakes and unhelpful signals.
Unfortunately, the lack of policy coordination and discipline
within the government means populists such as Energy Minister
Hilmi Guler and Industry Minister Ali Coskun can continue to
make unhelpful public statements that rattle the markets. It
also means that the business community -- as well as the IFIs
and foreign diplomats -- does not know where to turn for
support of sound economic policy. (Note: When we made this
complaint to Faik Oztrak April 8, he said "now you know my
problem.") The government's replacement of competent
technocrats with people who are either unknown or do not
inspire confidence compounds the problem.
PEARSON