Identifier
Created
Classification
Origin
03ANKARA3017
2003-05-08 15:32:00
CONFIDENTIAL
Embassy Ankara
Cable title:  

MILITARY PENSION FUND THRIVING IN TROUBLED ECONOMY

Tags:  ECON PGOV EFIN MARR TU 
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C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 003017 

SIPDIS


STATE FOR E, P AND EUR/SE
TREASURY FOR OASIA - MILLS AND LEICHTER
STATE FOR USTR - NOVELLI AND BIRDSEY
USDOC FOR 4212/ITA/MAC/OEURA/DEFALCO
NSC FOR QUANRUD AND BRYZA


E.O. 12958: DECL: 05/05/2005
TAGS: ECON PGOV EFIN MARR TU
SUBJECT: MILITARY PENSION FUND THRIVING IN TROUBLED ECONOMY

Classified by Econ Counselor Scot Marciel for reasons 1.5
(b)(d).


C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 003017

SIPDIS


STATE FOR E, P AND EUR/SE
TREASURY FOR OASIA - MILLS AND LEICHTER
STATE FOR USTR - NOVELLI AND BIRDSEY
USDOC FOR 4212/ITA/MAC/OEURA/DEFALCO
NSC FOR QUANRUD AND BRYZA


E.O. 12958: DECL: 05/05/2005
TAGS: ECON PGOV EFIN MARR TU
SUBJECT: MILITARY PENSION FUND THRIVING IN TROUBLED ECONOMY

Classified by Econ Counselor Scot Marciel for reasons 1.5
(b)(d).



1. (C) Summary: Since Turkey's financial crisis in early
2001, OYAK, the Turkish military pension fund, has been one
of the country's most profitable companies (it was the most
profitable in 2001.) Its critics accuse OYAK of having
unfair tax advantages, and see OYAK's prominence as the
military's influence on the economy. This report examines
OYAK's businesses (focused on auto manufacturing and
banking),and finds its recent success owes more to its savvy
management team under CEO Coskun Ulusoy than to any special
GOT benefits. OYAK made a killing in the financial markets
in 2001 because Ulusoy predicted the devaluation and switched
from lira to dollar investments. He is currently making
money the old-fashioned Turkish way (investing in T-bills).
But OYAK is not just another private sector Turkish firm
invested in T-bills - its initial source of liquidity is its
10 percent levy on military officers' salaries. OYAK's
success is helping a privileged group -- Turkish military
officers -- enjoy even more benefits. End Summary.


What is OYAK?
--------------



2. (U) Founded in 1961 to deal with the grievances of
underpaid military officers following the 1960 military coup,
OYAK (a Turkish acronym for the "Armed Forces Pension Fund")
is a supplementary social security institution for more than
200,000 active duty officers (160,000) and retired pensioners
(40,000). Its initial source of income is a compulsory 10
percent levy on the net salary of all military officers
(additional premiums, paid on an optional basis, provide life
insurance and disability benefits). Pensions are paid to all
discharged members who have fulfilled at least 10 years of
service with the military. Retirees then have the option of
reinvesting a portion or the entire amount of their benefits
back into the fund. In 2002, OYAK paid out to its members an

average return of 41 percent (30 percent inflation) while in
2001 the average return was 95 percent (69 percent
inflation),according to OYAK annual reports.



3. (U) In addition to portfolio investments in Turkish stocks
and government securities, OYAK is an unusual pension fund
that directly manages most of the 27 companies it invests in.
Its companies span the sectors of financial services,
automotive, cement, food and chemicals, and various services.
Its subsidiaries' total asset value in 2002 was TL 5.9
quadrillion ($4 billion). Its annual profits in 2001 were TL
594 trillion ($486 million),a year-on-year increase of 173
percent; annual profits in 2002 were TL 495 trillion ($329
million).



4. (U) For most of OYAK's history, its top breadwinner has
been its partnership with French automotive giant Renault.
In 2001, this joint venture produced 170,000 vehicles and
registered gross sales of $766 million, becoming Turkey's top
auto producer. However, revenues have decreased heavily
since the country's economic downturn the past two years. In
the past three years, OYAK-Renault has gone from exporting 40
percent of its vehicles three years ago to exporting 90
percent of its vehicles in the first four months of 2003.
Since 2001, most of OYAK's 27 companies have struggled (like
most Turkish companies),and new investment has largely been
halted. (Comment: The high rates of return on government
T-bills act as a disincentive for holding groups like OYAK to
invest in companies. End Comment.)



5. (C) As the company's new diamond in the rough, OYAK Bank
is the sole OYAK subsidiary receiving substantial investment
this year (mainly to build a more advanced information
technology backbone between all branches). In August 2001,
OYAK purchased Sumerbank from the Banking Regulation and
Supervision Board (BRSA); Sumerbank was itself the product
of a merger of six smaller failed banks that had been taken
over by the BRSA. According to a Moody's report of November
2002, OYAK was fortunate not to have had much retail lending
prior to the 2001 financial crisis, and did not experience
spread deficiency rates as large as those of other banks when
the crisis hit. OYAK Bank expanded its retail lending only
after the official acquisition of SumerBank in January 2002.
With just $20 million to get SumerBank running again, OYAK
over the past 16 months has gone from a mere 11 branches to
230, and has gone from a virtually unprofitable institution
to a bank that today is worth $400-600 million and is still
growing, according to Ergun Okur, OYAK executive vice
president. It is currently the 8th largest bank in Turkey -
OYAK plans to make it the fifth largest in the next few
years.


Taking Advantage of the 2001 Financial Crisis
--------------



6. (SBU) While not nearly as big as Turkey's famed Koc and
Sabanci holding companies, OYAK was more profitable than
either of them in 2001, and was among the top five most
profitable Turkish firms in 2002. This is due primarily to
OYAK's savvy investment policy under CEO Coskun Ulusoy (and
also partly to the liquidity advantage of the 10 percent levy
on officers' salaries). Hired in 2000, Ulusoy immediately
overhauled the management of OYAK's companies, canceling $120
million in planned investments, opting instead to invest in
stocks and securities. (Note: Ulusoy has a PhD in economics
from the University of Pittsburgh, and is a former banking
executive at Citibank, KocBank, and later Ziraat Bank. He
has the reputation of a bottom-line, American-style business
manager. He resigned as CEO of Ziraat Bank rather than give
concessional loans to political cronies. He was a protg of
Turgut Ozal, and has close contacts with retired generals
disillusioned with the present government. End Note.)



7. (C) According to Executive VP Okur, Ulusoy anticipated in
early February 2001 that devaluation was near and, thus,
wanted to maintain as much liquidity as possible. In OYAK's
2001 annual report, Ulusoy says that it was within Turkey's
"extraordinary economic conditions" that OYAK weathered the
storm and posted a net profit of nearly $500 million. What
the report does not say is that Ulusoy got out of many of the
firm's lira investments before the devaluation. In February
2001, OYAK immediately sold large portions of its Turkish
lira for dollars, going from 5 percent dollar assets prior to
the crisis to 45 percent following it. Okur dismisses
allegations made by some newspapers at the time that OYAK was
tipped off to the devaluation.



8. (C) OYAK has been thriving ever since, investing in
government securities with interest rates that have
consistently been at least twice as high as real interest
rates over the past two years. With the exception of OYAK
Bank, Ulusoy has continued to halt new investments in its
companies, choosing instead to allow the company's portfolio
managers to invest as much liquid capital as possible into
government securities. Okur shuns accusations of OYAK having
special advantages or insider information, though he admits
that this bonanza cannot last forever. "We're earning lots
of money on interest rates and we realize that someday the
government will say 'sorry, we can't pay this anymore.' We
all know the end of the movie. But when it ends, I don't
know," he stated.


Does Military Influence Give OYAK Added Perks?
-------------- -



9. (U) OYAK is governed by Law No. 205, enacted in March
1961, which dictates that a Board of Representatives,
comprised of 75 retired military officers, oversee a General
Assembly, comprised of 20 Army officers and 20 civil
servants, which, in turn, oversees the Board of Directors,
comprised of three active generals, two retired generals, two
civilians, and CEO Ulusoy. The law requires three auditors
to oversee the Board's monthly meetings - one elected by
OYAK's General Assembly, one assigned by the Prime Ministry,
and one assigned by the Banks Union of Turkey. Says Okur,
this independent audit board is designed to prevent military
brass from unduly influencing OYAK's bottom-line goal of
making profits.

10. (U) OYAK's critics allege that it is a tool the military
uses to consolidate its power, accusing it of having tax
advantages vis-a-vis competitors and, more sinisterly, of
using its influence to militarize the economy. For example,
former Le Monde journalist and former French Ambassador to
Turkey and Egypt Eric Rouleau has written in Foreign Affairs
magazine that OYAK is exempt from all taxes and duties.
While it is true that military officers enjoy greater
privileges than civil servants at the same level (higher pay,
subsidized military stores, ability to obtain lower-interest
housing loans),this criticism of OYAK is simply not true.
All of OYAK's economic enterprises pay corporate taxes, and
any tax advantages it does have are similar to those of other
pension funds. Our contacts at the GOT Ministry of Finance
and the EU mission in Ankara say they have never found OYAK
to enjoy special advantages because of its military links.



11. (U) Critics such as Rouleau also allege that OYAK is
closely linked to its "sister firm," the TSKGV (Foundation
for the Strengthening of the Turkish Armed Forces),which
raises money through donations and invests in companies
exclusively devoted to arms production. Because TSKGV
receives much of its income through charitable contributions,
the TSKGV enjoys a number of tax benefits. These benefits,
however, do not extend to OYAK. Okur claims that, though it
is not stated in Law No. 205, OYAK's company policy has
always been to avoid all arms contracts, citing
anti-competition factors as the reason. He said that there
have been instances in the past when the TSKGV has taken
majority ownership of companies in which OYAK had a small
share. Wanting to avoid the perception that it is involved
in war profiteering, OYAK would immediately sell off its
shares. This was the case, said Okur, when the TSKGV bought
Aselsan Electronic Industries.
PEARSON