TURKEY LOOKS FOR ECONOMIC SWEETENERS FOR EU

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 004274 SIPDIS TREASURY FOR MILLS, ADKINS NSC FOR BRYZA COMMERCE FOR ADVOCACY CENTER E.O. 12958: DECL: 07/29/2009 TAGS: EAIR BEXP FR TU SUBJECT: TURKEY LOOKS FOR ECONOMIC SWEETENERS FOR EU ACCESSION REF: A. PARIS 5495 ¶B. BERLIN 2510 Classified By: Robert S. Deutsch, Charge d'Affaires, a.i. Reasons 1.4 (b,g) ¶1. (C) Summary. In an apparent effort to secure France's support for Turkey's EU bid, Prime Minister Erdogan offered contracts or potential contracts to French companies during his July trip to Paris. This includes Turkish Airlines' purchase of 36 mid-size Airbus jets, suggestions that Turkey is interested in engaging French companies to build nuclear power plants, and hints of preferences for French companies competing for Turkish military orders. Playing politics with state-involved business deals remains a part of Turkey's (and probably France's) political culture. But the economic cost to Turkey of making sub-optimal business deals is compounded by the likelihood that such deals will be long-forgotten when European leaders make their crucial decision about Turkey's EU accession next December. End Summary. -------------- France Trip Highlights Economic Ties -------------- ¶2. (SBU) Apart from discussions of French support for beginning EU accession negotiations with Turkey (reftels), Turkish officials tell us PM Erdogan's July 19-21 visit to Paris focused on developing bilateral economic ties. Turkish MFA officials said that in addition to a letter of intent between Airbus and state-owned Turkish Airlines (THY) for the purchase of 36 new aircraft, the two sides concluded a bilateral investment treaty. The Turkish press reported that there were also discussions of potential French participation in developing Turkish nuclear energy projects and the possibility of preferences for French companies in Turkish defense procurements. ¶3. (SBU) In addition to meeting President Chirac, PM Raffarin, and other political figures, Erdogan addressed the French employers' association, MEDEF, and had a separate, private breakfast with a smaller group of French industrialists (who complained to him about Turkey's opaque investment climate). Erdogan also gave press interviews highlighting economic ties to le Figaro and other journals. With $7 billion in bilateral trade last year, France is Turkey's fifth largest trade partner. French companies have been authorized $5.7 billion in investments since 1980, making France Turkey's largest source of foreign direct investment. MFA said that 500,000 Turks live in France, and noted that France is an important source of Turkish tourism revenue. -------------- Airbus Deal Signed -------------- ¶4. (SBU) The most concrete economic outcome of the visit was the letter of intent to purchase 36 Airbus plans that was announced in Paris and finalized July 22 by Airbus and THY at the Farnborough Air Show. The order, which includes 12 A321-200, 19 A320-200, and 5 A330-200 aircraft, is worth approximately $3 billion at list prices. Also in Farnborough, THY and Boeing announced a THY order for 15 737-800 aircraft. The financial terms of the Airbus/THY arrangement are not public, although it local press speculation is that a substantial discount, quoted at up to $1 billion, was involved. A source close to the prime minister told us the agreement contains a cancellation penalty of $10 million, or approximately $300,000 per airplane. -------------- No Nukes, Yet -------------- ¶5. (SBU) The nuclear discussions were more theoretical. Although Turkish energy officials have for some time been considering nuclear power plants as an option for meeting Turkey's growing electricity needs, Erdogan's comments seemed far ahead of the GOT bureaucracy and caused considerable surprise in Ankara. Turkey's difficult financial situation is widely seen as making very expensive new projects like nuclear plants unfeasible. Local press reports estimate the cost of the project suggested by Erdogan at $13 billion, with Turkey only in a position to provide $4 billion of this. As in the case of the Airbus deal, the Turkish press linked Erdogan,s statements to Turkey,s efforts to win French endorsement for Turkey,s EU bid. ¶6. (C) Energy Deputy U/S Cimen confirmed to us there had not been a "firm" decision to develop nuclear power in Turkey. If such a decision were to be made, he believed Turkey would not try to finance the construction from its budget, but would look for private companies to build the plants on a "build-operate-transfer" (BOT) basis. A second option, he said, would be to reach a bilateral agreement with an interested country "like the U.S., Canada or France." Under such an arrangement, all the contracts would be negotiated with the partner country. Cimen confirmed that Erdogan had discussed this idea with Chirac, but emphasized that no final decision has been reached. -------------- Comment -------------- ¶7. (C) The split in the THY order, with a considerably larger share going to Airbus, follows months of intense political pressure on Erdogan from European leaders, reportedly including Chirac, Schroeder and Blair. The Europeans undoubtedly linked -- at least implicitly and probably explicitly -- Airbus getting the largest chunk of THY's order to support for Turkey's EU bid. Boeing reps have told us the company is convinced that they left a better business offer on the table, particularly in the A320 category. They are disappointed at what seemed to them to be a clearly political choice. ¶8. (C) Erdogan undoubtedly viewed such economic "deliverables" as sweeteners that would encourage French support for Turkey's EU bid. Indeed, Chirac is reported to have said, "Let me call Schroeder," when Erdogan informed him of the airplane decision. However, as reftel A suggests, the Turks are deluding themselves if they think such announcements will be remembered come an EU Summit decision in December on Turkey's accession process. This was also confirmed by French Trade Minister Loos' ironic comment -- made, however, after the Farnborough announcement -- that buying Airbus "was not part of the Copenhagen criteria." DEUTSCH