Euro-Investors Shopping, Not Buying

UNCLAS SECTION 01 OF 02 ANKARA 003412

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: BEXP EINV EFIN TU
SUBJECT: Euro-Investors Shopping, Not Buying

REFS: A) WHITFIELD CABLE, B) ISTANBUL 526, C) ISTANBUL

692, D) ISTANBUL 422

SENSITIVE BUT UNCLASSIFIED.


1. (SBU) Summary. European investors have flocked to
Turkey since the December 17 EU decision to go ahead with
accession negotiations, but U.S. companies are not
joining them. Despite all the shopping, concrete
investment decisions are not slow in coming as would-be
investors, European and U.S. alike, pass up the so-called
"Europe buy" due to the opaque and unfair legal and
regulatory environment, as well as widespread corruption.
Yet, U.S. businesses are not keeping up with European
companies in remaining current with opportunities here.
Opportunities to familiarize U.S. companies include
outreach to Europe-based U.S. subsidiaries as well as
more effective collaboration between U.S. and Turkish
business associations. End Summary.

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European Shoppers Arrive
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2. (SBU) As State Department Special Representative for
Business Affairs Frank Mermoud heard when he visited
Istanbul in late April, there as been a stirring of
European interest in investing in Turkey since December
17, when Turkey obtained its October 3 date to begin EU
accession negotiations. For example, a high-level French
business delegation led by former Renault CEO Louis
Schweitzer visited Turkey June 13. A 600-company strong
German business delegation accompanied Chancellor
Schroeder in early May. Italian, Spanish and business
groups from other EU countries have made similar tours,
and Turkish ministers like Ali Babacan have gone to
Europe to showcase investment in Turkey. Newspapers are
full of eurobusiness deals and rumors of deals.

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U.S. Companies Absent
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3. (SBU) Mermoud was told by a senior Sabanci Group
executive who is head of Turkey's largest conglomerate's
food products subsidiary, as well as by the head of Ata
Invest, a Turkish investment bank, that U.S. companies
are missing out on business opportunities that have
accompanied the renewal of growth in Turkey. The banker,
whose bank has been an advisor in many privatization
operations, lamented that U.S. firms had not shown an
interest in pending energy and telecom privatizations.
U.S. companies are also, he said, passing up what his
bank saw as growth opportunities in the retail,
construction, media and tourism sectors. In the one case
in which he was aware of U.S. interest (U.S. Steel in the
Erdemir steel privatization),the U.S. company was not,
he felt, as aggressive as its Russian, Korean and Indian
competition. Also suggesting the low profile of some
U.S. firms, the Sabanci executive was not even aware of
the presence in Turkey of several leading U.S. food
products companies.

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But Nobody's Buying
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4. (SBU) Yet for all the activity, and despite the
banker's enthusiasm -- similar to that throughout
Istanbul's business world -- the upsurge in European
interest has not resulted in concrete investment
decisions. (The exception, proving the rule, is the
financial sector, in which Italy's Unicredito and Kocbank
joined forces to take control of Yapi Kredi, Turkey's
largest private bank, BNP increased the size of its stake
in the Turkish Economy Bank, and Fortis bought Disbank,
Turkey's seventh largest.) Indeed, European investment
suffered a severe setback in March, when Turkey's
Cukurova Group reneged on a deal to sell its interest in
fast-growing cellular provider Turkcell to Scandinavian
operator Telia Sonera for $3.1 billion (more than twice
the total non-real estate FDI Turkey received in all of
2004).


5. (SBU) Another example of the obstacles faced by
foreign investors is highlighted by Coca Cola's mixed
experience. Coke's Gurtay Kipcak told Mermoud how Coke
Turkey was a success story within the Coke empire,
winning the coveted internal "Woodruff Prize" last year.
Local sales grew 22% in 2004 and the local company is a
training ground for senior Coke executives. Through
innovative advertising and philanthropic outreach, Coke
has developed a "Turkish" image and has overcome threats
from upstart local imitators like "Cola Turka." Yet,
despite success and growing employment, Coke (as well as
Pepsi) have been subject to continual harassment by
Turkish authorities. On top of a punitive 47.5% "special
consumption tax" on cola beverages, the companies
recently had to fight back (with Embassy support) an
effort by the government to give the maker of Cola Turka
special breaks on Turkey's onerous sugar quota, which
keeps sugar prices at three times global free market
levels. Every dollar earned in Turkey represents an
unnecessary battle, Kipcak said.

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Legal System and Corruptions Major Impediments
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6. (SBU) Telia Sonera is now suing Cukurova in Turkish
courts, but the failure of its deal and Coke's problems
illustrate the issues that major foreign investors
continue to face. In addition to opaque business
machinations and alliances within the Cukurova Group, the
Telia Sonera deal was challenged in the press on
nationalist grounds and there were suggestions that
regulatory approvals would not be forthcoming. If the
past experience of foreign investors is a guide, Telia
Sonera's will be disappointed in its efforts to obtain
redress in the courts. Turkish courts share the
nationalist, statist outlook of the traditional Turkish
"state" and have several times frustrated major
investment deals, including the government's attempt to
sell a $1.3 billion stake in refiner Tupras in 2004.


7. (SBU) In a recent meeting with the U.S.-Turkey
Congressional Study Group led by Congressman Ed Whitfield
(ref A),State Minister Babacan -- who is responsible for
investment as well as international economic policy --
acknowledged that attracting foreign investment depended
on reforming Turkey's legal and judicial system. Cavit
Dagdas, the Deputy Under Secretary in Turkey's Treasury,
made a similar point to Mermoud. Dagdas also said that
the GOT intended to tackle government corruption, another
major deterrent to foreign investors (ref B),by cutting
regulation, more e-government, and the implementation of
e-signature regulations that reduce opportunities for
corruption. Dagdas also said the government was
preparing a strategy to promote investment in Turkey in
the United States.

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Comment
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8. (SBU) Rifat Hisarciklioglu, the head of Turkey's
Union of Chambers of Commerce (TOBB) also told Mermoud
that Turkey hoped to attract more U.S. investment.
Hisarciklioglu, who was in Istanbul for the second
meeting of the CEO-level Investor Advisory Council (ref
c) claimed that foreign investors were satisfied with the
progress Turkey has made. Nonetheless, in post's and
most disinterested observers' views, foreign investment,
of which Turkey has received far less than other
countries of similar size and potential, will continue to
wait for a more stable, predictable business and legal
environment, whatever the wishful thinking of Turkey's
government and business leadership.


9. (SBU) But many U.S. investors, some of whom were
directly burned by bad experiences in Turkey, are not
familiar with the changes since the financial crisis.
Turkey needs to do more, especially in improving the
legal environment, and European countries are a natural
source of investment, but this should not be a reason for
U.S. companies to not join the shopping tour. One idea
that came out of Mermoud's meetings was to consider
working with U.S.-Turkish business associations to
familiarize Europe-based subsidiaries of U.S. firms with
opportunities here. Along with Hisarciklioglu, the
deputy chairman of the Turkey U.S. Business Council
(TUSBC) Serif Egelli said he saw opportunities for
partnerships between U.S. and Turkish companies in the
Arab world and Central Asia. Egeli described TUSBC's
plans to hold investor-oriented events in the U.S. and
Turkey over the coming year (see ref D),including as co-
organizer of the recent ATC-TUSBC conference in
Washington.
EDELMAN