TURKEY VIEWS ON HABUR GATE, FUEL TRADE TO SOMO,

C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 004707

SIPDIS

E.O. 12958: DECL: 08/05/2010
TAGS: ECIN EPET ETRD PREL IZ TU
SUBJECT: TURKEY VIEWS ON HABUR GATE, FUEL TRADE TO SOMO,
AND BEYOND

REF: A. ANKARA 4406

B. ANKARA 4000

C. ANKARA 1392

D. 05 ANKARA 6952

Classified By: Economic Counselor Thomas Goldberger for reasons 1.4 (b)
and (d)


1. (C) Summary. Although the smuggling investigation that
had impeded Turkish fuel shipments to Iraq is over and
construction of the new customs facility at Habur is nearly
complete, Turkish trade officials observe that Iraqi demand
for fuel from Iraq appears to be declining. At the same
time, SOMO made a recent request for FTU approval of imports
of 30,000 tons of gasoline and diesel from a single Turkish
company. FTU is loath to approve this request, which would
contravene the bilateral framework agreed last February to
protect the Turkish companies to which SOMO owed about $1
billion in unpaid bills. While FTU is willing to have
another look at the specifics of the February agreement, it
is not willing to give up the protections for Turkish
companies contained in the MOU. Meanwhile, FTU says that a
second border gate could be constructed at Ovakoy in about
one year at a cost of about $50 million. Building a second
gate closer to Habur with Ovakoy to come later -- as is being
discussed by Turkish and Iraqi diplomats -- would take
longer, be more expensive to build, and far less advantageous
to Iraqi and Turkish trade. End Summary.

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Iraqi Imports From Turkey Falling
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2. (C) Foreign Trade Undersecretariat (FTU) Director
General Sevket Ilgac told Econ/C and Econoff August 11 that
Iraqi demand for fuel imports from Turkey seemed to have
declined in recent weeks. (As we see in the daily reports
from the border.) He attributed this to increased production
from Iraqi refineries, which he also saw reflected in
increased fuel oil exports to Turkey that are bartered for
Turkish electricity exports, as well as to increased
purchases from Iran, Syria, and perhaps Jordan. He noted
that two Turkish fuel trading companies (NFI) were exporting
to Iraq via Iran.


3. (C) The anti-smuggling investigation at Habur had also
of course contributed to lower exports, particularly for LPG,
which he said was subject to the most abuse by smugglers. He
said that 70 LPG tankers were still being detained by the
public prosecutor investigating the case. However, the
operational part of the smuggling investigation -- and the
delays it ensued -- was, he said, finished.


4. (C) Ilgac said that construction of the new customs
facility at Habur was now expected to be completed by
end-September, as opposed to the original plan to be done by
the end of August. This would bring throughput capacity to
5000 vehicles per day (2500 each way). He understood that
capacity could be increased even more to 7000 or so if
Turkish customs was able to purchase sophisticated x-ray
machines that would speed inspection of fuel tankers. He
noted however that current throughput was only 2000 per day
(two-way).

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SOMO Requests for New Purchases Outside MOU
--------------


5. (C) Nevertheless, Ilgac said he received an urgent
request August 9 from SOMO DG Mussab al-Dujayli for FTU
approval of the purchase of 30,000 tons of gasoline and
diesel from TPIC, the Turkish state-owned fuel trading
company. Ilgac noted that this request was outside the
February and June MOU's between FTU and SOMO that provided
for repayment of past due arrears and a system involving
letters of credit for new SOMO purchases from the 30-odd
Turkish companies to which SOMO was indebted. According to
Ilgac, SOMO is more or less current on the arrears payments
(7 out of 10 of the so-called "category A" monthly payments
have been received),but SOMO has not provided L/C's for the
remaining $350 million in new ("category B") purchases. He
understood that SOMO had requested this funding from the
Iraqi Finance Ministry, which had refused to provide it.


6. (C) Given that the category B arrangements were designed
to protect Turkish companies that had extended credit to
SOMO, Ilgac said he was loath to approve a new arrangement
until category B was settled. Doing so would also expose him
and other bureaucrats to personal legal risk. Therefore, he
had referred the request to Trade Minister Tuzmen. For the
same reasons, however, he did not think that Tuzmen would
approve a new purchase until the category B purchases were
arranged between SOMO, FTU and the Turkish companies.


7. (C) Ilgac stressed, however, that he was ready to
re-discuss with SOMO technical terms of category B, such as
the payment period that were agreed in the February MOU.
Most importantly, he stressed that once category B was
"settled," FTU would step back from its oversight of the fuel
trade -- which had only been necessary because of the
enormous debts SOMO had incurred to Turkish companies -- and
allow SOMO to contract freely with Turkish companies
according to its desires. He understood that SOMO wanted to
deal with fewer than the 30 companies to which it is
currently indebted, but the GOT needed those debts to be
settled before new contracts were opened.

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New Border Gates
--------------


8. (C) Asked about new border gates between Turkey and
Iraq, Ilgac made a strong economic argument for locating a
new gate at Ovakoy. He said putting another new gate at or
near Habur -- as proposed by Turkish and Iraqi diplomats
seeking to overcome the objections of the KDP to a new gate
at Ovakoy -- made no economic or political sense (the &why
not just expand Habur?8 pitch). On the other hand, the new
gate that Turkey has been proposing for years to be built at
Ovakoy would avoid the very mountainous region southeast of
Habur at Zakho and most importantly link Turkey's high-speed
road network to Iraq's highway network with only the
construction of short connector routes. He said
approximately 15 km of roads and two bridges would need to be
constructed on the Turkish side of the border for a cost
estimated at $20 million in 2001 and approximately 30 km of
roads costing $35 million would need to be built in Iraq to
connect to the Iraqi highway network.


9. (C) This small investment of just $55 million would,
Ilgac claimed, link Turkey's and Iraq's highspeed road
network (once a strip between Gaziantep and the Iraqi border
is completed). It would provide the entire region north of
Baghdad with easy access to the large Turkish Mediterranean
port in Mersin as well as direct highway access to Europe.
Furthermore, this would facilitate trade between Turkey and
the Gulf, which had been interrupted since the 1980s.
(Trucking through Syria, Jordan and Saudi Arabia is too
expensive/corrupt, time-consuming and complicated, he said).
Once political stability had been achieved in Iraq, this
connectivity would give an enormous economic benefit to Iraq
and help tie the region to Europe and the rest of the world
through Turkey. He said there was a strong interest in the
UAE business world in such a route and that there was a
longer term vision of improving the link between the Turkish
and Iraqi railroad networks, which could then link into
expanded Saudi and Gulf railways. He hoped that the "people
of northern Iraq" would come to recognize and buy-in to this
vision of cooperation.


10. (C) Ilgac said that building a facility and road
improvements in the mountainous area near Habur, as is being
discussed by Turkish diplomats, would take longer and be more
expensive than the Ovakoy solution. Ilgac acknowledged that
the ultimate call was political and that the issue was being
handled by MFA Iraq Coordinator Celikkol, to whom he has
explained his views in detail. He understood that the price
of a gate at Ovakoy might be a third uneconomical gate at or
near Habur. Still, this inefficient approach to the problem
was frustrating to his businesslike, results-oriented
instincts.

Visit Ankara's Classified Web Site at
http://www.state.sgov.gov/p/eur/ankara/

WILSON