TURKEY'S 2004 TRADE WITH IRAQ SURPASSES 2003 LEVELS

UNCLAS SECTION 01 OF 03 ADANA 000037

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: ECON ETRD PREL ENRG IZ TU ADANA
SUBJECT: TURKEY'S 2004 TRADE WITH IRAQ SURPASSES 2003 LEVELS

1.(SBU) Summary: Determining export totals by region is an
inexact science, but data from local business groups indicates
trade between southeast Turkey and Iraq reached approximately
$586 million in 2004. (Note: Total Turkish exports to Iraq in
2004 were $1.8 billion. End note.) Moreover, since April 2003,
some $2.5 billion in refined petroleum, related transportation
services and sustainment commodities, like water, have been
delivered or are en route to Iraq through the region's Habur
Gate in support of Operation Iraqi Freedom (OIF). Contacts
claim that revenue from this increase in economic activity is
not having a significant impact on employment and investment in
southeast Turkey. Despite those claims, to the extent more
truckers are contracted to go to Iraq, common sense suggests
there should be additional income and employment in the region.
However there is a shortage of reliable statistics and anecdotal
evidence to confirm that assumption. End summary.

Southeast Turkey's Exports to Iraq
--------------

2.(U) Southeast Turkey accounts for roughly 30 percent of
Turkey's population, and 15 percent of its GDP. The
Gaziantep-based Southeast Anatolian Exporters Union (SAEU)
reports its members' 2004 exports to Iraq were $237.5 million,
close to two times the previous year's amount (Note: SAEU
includes exporters from Gaziantep, Kilis, Sanliurfa, Diyarbakir,
Sirnak, Siirt and Mardin provinces. According to the Gaziantep
Chamber of Commerce, Gaziantep alone accounted for $178 million
of the union's exports to Iraq in 2004, up from $99 million in

2003. End note.) Statistics from the Adana Chamber of Commerce
show Adana province's 2004 exports to Iraq coming in at $96
million, almost four times the 2003 total. Adding to these
figures information from the Mersin-based Mediterranean
Exporters Union (MEU),we get a snapshot of the southeast
region's exports as a whole for 2004:

2003 2004
(in millions of USD)

SAEU: 122.5 237.5
Adana CoC: 24.5 96.0
Sub-Total: 147.0 333.5
MEU: -------------- 252.6
Total: -------------- 586.1

(Note: Unfortunately, and somewhat strangely, neither MEU nor
other business contacts in Mersin, including the Chamber of
Commerce, have data on 2003 exports to Iraq. End note.)

What is being exported?
--------------

3.(U) Adana exporters sent $27.7 million worth of machinery and
mechanical equipment (e.g. agricultural-related machinery,
portable welding, some medical equipment, pre-manufactured steel
elements, pre-cast concrete infrastructure material),as well as
food products, and assorted manufactured goods to Iraq. As for
exporters of the SAEU, a representative citing Gaziantep
statistics stated ready-to-wear apparel, machine-made carpets,
grains, chemical products, dry fruits, and edible oils companies
are doing particularly well. Statistics for SAEU as a whole are
as follows (millions of dollars):

2003 2004

Cereals/Legumes 22.1 52.2
Chemicals 21.9 29.1
Rugs 14.7 28.1
Ready to wear 14.4 25.3
Cement 9.7 17.9
Steel 6.9 17.4
Electronics 8.0 16.0
Dryfruit/ed oils 5.2 14.5
Wood 6.2 11.9
Transport vehicles 2.4 8.1
Raw textiles 3.6 7.9
Leather products 5.5 7.1
Fish/Livestock 1.1 1.1
Fresh fruits/Veg 0.6 0.3
Minerals 0.4 0.6

As an aside, a partner in one of Mersin's largest exporters of
cereals and legumes told us that, while the food sector in
general is doing quite well now, his Mersin company's sales to
Iraq were actually higher in 2003 than in 2004. He attributed
this to purchases by Saddam's regime, as well as food assistance
programs, stocking up prior to the war.

Sustainment
--------------


4. (SBU) Since April 2003, some $2.5 billion in refined
petroleum, related transportation services and sustainment
commodities, like water, have been delivered or are en route to
Iraq through the Habur Gate in support of Operation Iraqi
Freedom (OIF). It is difficult to specify just what portion of
that amount has benefited Turkish companies directly; of the
benefits that have accrued to Turkey, it is even more difficult
to ascertain the portion that ends up in southeastern Turkey.
Petrol Ofisi, for example, said to AMCON ADANA in December 2004
that it has been making 3 to 5 percent profit on sales of some
$1.6 billion during this period, and local water sales for OIF
sustainment have grossed approximately $90 million.


5. (SBU) These profits probably make a substantial difference
to the profits of Petrol Ofisi - a nationwide company quoted on
the Istanbul Stock Exchange - but have little local impact on
the Southeast. On the other hand, to the extent Petrol Ofisi is
contracting more drivers to go to Iraq there should be
additional income and employment for the truckers concerned.
However there is a shortage of reliable statistics and anecdotal
evidence, especially regarding employment figures, to confirm
that assumption. In the infrastructure materiel business, for
example, one local employer of almost 400 workers said he hired
approximately 15 percent more workers in 2004 over 2003. But
the largest construction firm in town (employing close to 2000),
which is very active in Iraq, reports no increase in employment:
"our sector is still in crisis," says the company's CEO. The
region relies heavily on day labor that is often not recorded on
the books, thus a true picture of the impact of increased trade
with Iraq is difficult to measure.


6. (SBU) The sector break-down of MEU members' 2004 exports may
provide some additional insight into the local impact of U.S.
buying for sustainment. (Note: MEU is the union which covers
exporters mostly from Mersin and Adana. End note). The
following figures are MEU exports for 2004, in millions of
dollars (no 2003 figures available):

LPG $85.1
Diesel $34.9
Gas $25.3
Pre-fab steel $17.3
Red lentils $10.9
Edible oils $ 8.1
Soaps $ 8.0
Cleaning prod $ 7.9
Beans $ 7.7
Soft drinks $ 6.6
Beer $ 6.4
Alumin/cables $ 5.3
(All others categories of exports fall below $5.0 million)

Informal sector
--------------

7.(SBU) Informal - including black market - trade between
Turkey and Iraq is almost impossible to measure. Developments
in the last two years may have moved some, especially truckers,
from the informal sector (e.g. smuggling of fuel during Saddam's
regime) to the formal sector, as they enter into transportation
contracts for sustainment fuel providers. For these truckers,
there may be a decrease in the standard of living, as a result
of costs associated with participating in the formal economy,
such as taxes and social security payments. Many truckers, as
seen in December's strikes, even claim to be breaking even or
actually losing money. Until three months ago, only the Turkish
side was combating fuel smuggling out of Iraq by truckers.
(Note: Fuel in Iraq costs 5-10 cents per liter, while in Turkey
it sells for approximately $1.50 per liter. End note.) In
response to GoT complaints, Iraqi officials have now implemented
regulations that have greatly decreased the amount of fuel
truckers are able to smuggle, though the practice has not ended
altogether. Additionally, local smuggling by day traders occurs
in commodities such as sugar and tea, which are far less
expensive in Iraq than in Turkey.

Trade may be up, but minimal macro impact so far
-------------- ---

8.(SBU) Contacts assert that everyone is getting a small piece
of the modest benefits of this trade. Exporting companies see
some revenues, workers feel a bit of job security with the
re-emergence of this market, and -- to the extent that companies
are actually paying taxes and/or social security -- government
gains some benefit from the trade.

9.(SBU) However interlocutors from Diyarbakir to Mersin to
Mardin claim that the increased exports to Iraq over the last
year are not resulting in any significant increase in investment
or job creation in southeast Turkey, be it from domestic or
foreign sources. (Note: They further assert that few Turks,
aside from some smaller ethnic Kurdish Turks doing informal
sector investment, which is difficult to track, are making
significant investments in Iraq. End note.) One or two
transportation companies based in southeast Turkey have told us
they have constructed warehouses near Habur Gate, and one
reinvested in its trucking fleet, but this does not appear to be
an across-the-board phenomenon. Several factors are mentioned
to explain why trade with Iraq has resulted in little investment
in Turkey.

10.(SBU) First, the lack of security in Iraq currently leaves
the business community in a "wait-and-see" posture, especially
as some businesses are also still paying down debts incurred in
the wake of the 2000-01 financial crisis. Second, excess
capacity in the region, and in plants elsewhere Turkey, seems to
be filling the rising demands of this relatively small market
without new investments. (Note: While it seems hard to believe
that there was so much unused capacity in the southeast that
exports could double with such a minimal impact on employment
and investment, it is hard to find contrary evidence. The
region had been very depressed in 2002-03 in the wake of the
financial crisis. End note.)


11. (SBU) Finally, business contacts claim that despite the
increased level of exports, their profit margins are still quite
thin. Some claim to be staying in business with almost no
profit, just hoping for more opportunities when the security
situation improves. Representatives of international businesses
have recently been visiting industrial zones in Adana, Mersin
and Gaziantep, according to local contacts, in order to "see
what we do and do not have," but no major investments have yet
been forthcoming from such visits. One area that could use
investment in Mersin, for example, is cold storage capacity,
which is currently strained by a significant amount of American
chicken parts moving to Iraq.


12. (SBU) As for investment in Iraq, several larger Turkish
players with southeast presence say they are awaiting
privatization there. We hear that Sabanci group is interested
in the water and cement sectors in Iraq, for example.
Gaziantep-based SANKO is taking a wait-and-see approach, mulling
possible opportunities in Syria (septel) for the moment and
shipping textile products, edible oil and water to Iraq from
existing plant in southeast Turkey.

13.(U) Baghdad minimize considered.



REID