SE TURKEY: INFRASTRUCTURE, SECURITY HINDER INCREASED TRADE

UNCLAS SECTION 01 OF 02 ADANA 000038

SIPDIS

SENSITIVE

NOT FOR INTERNET DISTRO

E.O. 12958: N/A
TAGS: ETRD ECON EINV ENRG EPET ELTN IZ TU ADANA
SUBJECT: SE TURKEY: INFRASTRUCTURE, SECURITY HINDER INCREASED TRADE
WITH IRAQ

REF: A. A) ANKARA 648

B. B) ANKARA 5996

C. C) BAGHDAD 503


1.(SBU) Summary: Exports from southeast Turkey to Iraq
increased in 2004 over the previous year (septel),but many
factors conspire against further increases in this trade: a
single border gate between the two countries, sub-standard roads
leading to the gate, Iraq's security situation and
underdeveloped banking system, and the difficulty in obtaining
insurance for trade and investment lending related to Iraq.
Increased trade is unlikely to make a major contribution to the
economy of southeastern Turkey until some of these challenges
are addressed. End summary.

Challenges I: Infrastructure and Security
--------------


2. (SBU) Exports from southeast Turkey to Iraq increased in
2004 over the previous year (septel),but several obstacles
stand in the way of a further increase in trade. There is but
one single border crossing between the two countries, at the
Habur/Ibrahim Khalil Gate. Exporters in the region are
unanimous in their call for a second border gate to be
developed, calling the current one - with considerable
understatement -- "very uncomfortable." Transporters routinely
wait for many hours to head southbound, and sometimes even seven
to ten days to return northbound. A modernization project at
the gate reportedly is due to commence this spring (ref A).
While it could conceivably have a temporary and short-term
negative effect on throughput, the project should lead to
facilitation of trade in the long-term. Nevertheless, even the
modernization project will not be enough, say exporters; they
want a second gate.


3. (SBU) Aside from the border gate itself, the abhorrent state
of infrastructure leading to the Habur Gate is a deterrent to
healthy trade. Heading east from Adana, when the highway ends
in Gaziantep, truckers have approximately 400 more kilometers to
travel - on a dangerous, damaged and overused two-lane road -
before reaching the border crossing. (Note: Concern about the
harmful impact of truck traffic on this already sub-standard
road is starting to show in Turkish Minister of Transportation
unwillingness to grant exceptions to a "three quarters-full"
loading policy - which aims to reduce spillage and wear and tear
- for sustainment fuel tankers. End note.)


4. (SBU) Trucker security (ref B) in Iraq is another well-known
challenge for the time being. (Note: A trilateral dialogue is
ongoing to address this issue, where a downtrend in violence
toward Turkish truckers is detectable anecdotally in the last
three months. End note.) Security problems have led to sharp
increases in transportation costs. One Mersin exporter shared
that he paid $40 per ton of cargo transported in the past, but
is now paying $90. He attributed the rate increase solely to
perceptions of security risks. (Note: According to trucker
union representatives, this increase in cargo haulage costs has
not translated into appreciably higher trucker salaries,
presumably because the increase in cost goes primarily to
companies, not to individual truckers. End note.)

Challenges II: Banking and Insurance
--------------


5. (SBU) The inadequacy of the banking system within Iraq (ref
C) also dampens enthusiasm for bigger business with the country
for the moment. One contact conceded that banks do exist, but
says the system has not been firmly established yet. There are
not enough branches, for example, and wire transfers are
impossible. "I would be happy to wait for up to ten days for a
wire," said one businessman, "rather than bringing cash across
the border." Wire transfers will also decrease the amount of
bribes that customs officials are charging, they assert. One
contact went so far as to say that with settlement of U.S.
contracts in Iraq in cash, the U.S. is exposing its contractors
to hostage-taking and predatory criminal activity, carried out
by some to finance the insurgency.


6. (SBU) A related challenge faced by some Turkish exporters,
particularly when selling to the Iraqi Interim Government (IIG),
was the retrieval of bank guarantee letters after a transaction
had been completed. For example, when contracting orders with a
Mersin-based cereals and legume company, the IIG required a bank
letter demonstrating that the company could fulfill the order.
After orders were filled, however, it took this company two and
even three months, sometimes, to get their notes back from the
IIG. In the meantime, until the note was returned to the bank,
the bank was requiring that the company deposit in cash the
amount that had been guaranteed.


7. (SBU) Yet another problem for those thinking of doing serious
business in Iraq is the difficulty in getting insurance on
investments there. According to comments made by a high-level
AIG Sigorta representative at a recent conference, some
insurance for exports to Iraq is available, but it is quite
expensive. Another AIG contact claimed that AIG itself was
writing policies for exports to Iraq, but stopped doing so four
months ago after having to pay out significant damages. Now
they will insure goods only as far as Habur Gate. Reflecting
the difficulties in ascertaining exact information about
insurance options, an AKBank contact in the region told us that
his company had just finalized its insurance policy for exports
to Iraq, though they were not going to finance investments
there. An Istanbul-based representative of the same firm said,
however, that they had been writing policies on exports to Iraq,
but that two months ago they suspended doing so when the risks
became too great.

Financing trade
--------------


8. (SBU) In discussions with Adana-based regional bankers such
as AKBank and Oyak-Bank, there are steady reports that 2004 did
not see as much Iraq-related lending or banking activity, such
as requests for letters of credit, as 2003. They report that
2003's higher levels of business were driven by truck financing
as transport companies and small independent truckers financed
new long-haul transportation for Iraq. Such lending did not
recur at the same level in 2004. They also report that Eastern
Mediterranean Turkey's financial health is still "in
transition," with many clients breaking even, little new
investment, and the region's big private capital holders (AK
says its Adana-based private investment group is Turkey's
largest at over 150 clients with average 750,000 to $2 million
balances) on the sidelines.


9. (SBU) In addition to this lending sector, both 2003 and 2004
saw steady lending for construction material purchase for
contractors, working capital for construction and service
operators (such as SERKA in Adana which charters vehicles and
aircraft - mainly former Soviet airframes, such as Antonov and
Ilyushin - for deliveries to northern Iraq) and spare parts
ordering for Turkish service contract providers to U.S. bases
north of Baghdad.


10. (SBU) Comment: Increased trade is unlikely to make a major
contribution to the economy of southeastern Turkey until the
security situation in Iraq improves and the transportation
bottlenecks are eliminated. End Comment.

11.(U) BAGHDAD MINIMIZE CONSIDERED.


REID