TURKEY ELECTION YEAR ENERGY PRICE CONTROVERSY

UNCLAS ANKARA 006403 SIPDIS USDOE FOR CHARLES WASHINGTON USDOC FOR 4212/ITA/MAC/CPD/CRUSNAK EXIM FOR PAMELA ROSS AND MARGARET KOSTIC OPIC FOR R CORR AND C CHIS SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ENRG PGOV EFIN TU SUBJECT: TURKEY ELECTION YEAR ENERGY PRICE CONTROVERSY REF: ANKARA 6380 Sensitive But Unclassified. Please handle accordingly. ¶1. (SBU) SUMMARY: The prices Turkish consumers pay for electricity and natural gas has become a hot political issue in the run-up to 2007 presidential and parliamentary elections. With state-owned oil and gas pipeline company BOTAS reportedly on the brink of bankruptcy and cold weather approaching, the government is under strong pressure from the IMF to raise natural gas and electricity prices before the end of the year. Despite the difficult politics, it seems very unlikely that the AK Party government will buck the IMF or allow BOTAS, the sole importer of natural gas, to default. Thus, already stretched consumers should be prepared for bigger gas and electricity bills. It will be interesting to watch how the government spins this pocketbook issue. End Summary. -------------- BOTAS "BANKRUPTCY" -------------- ¶2. (SBU) BOTAS' financial difficulties, while not a secret to insiders, hit the headlines on October 31. The press described a letter BOTAS reportedly sent to the Ministry of Energy warning that the company would be unable to pay for contracted gas from Russia, Iran, Algeria and Nigeria this winter, given uncollectible receivables from state entities. The letter highlighted debts owed by the State Electricity Generation Company (EUAS) and Ankara Municipality's gas distribution company EGO. The press also reported that BOTAS had reached its borrowing limit with banks and was unable to finance purchases with bank credit. ¶3. (SBU) BOTAS Assistant DG Riza Ciftci confirmed to us that the company is in a tough spot due to the GOT's policy of maintaining low natural gas prices to consumers to encourage extension of natural gas around the country. He singled out EGO and EUAS as the biggest deadbeats, with debts of $1 billion and $2 billion respectively, and noted that BOTAS is constrained from cutting off service by law. Nevertheless, Ciftcifelt BOTAS would weather these problems throuh a combination of government support and re-financing BOTAS's debt payments to banks to service about $350 million in bank borrowing that covered building of new pipeline infrastructure. -------------- IMF CONCERNED -------------- ¶4. (SBU) Sorting out intra-company debts among state-owned enterprises is also becoming a major issue for the IMF. The Fund is pressuring the government to raise consumer energy prices so that the government budget does not bear the cost of cleaning up the books of BOTAS and other companies. The IMF office here explained that while there is an existing formulaic mechanism for linking government-set consumer prices to costs, the government has not allowed this to operate during the recent spike in wholesale costs. He contrasted the continuing government control of this market with the gasoline and diesel market, which has been completely liberalized so that prices are set by supply and demand. The lack of clarity about the state-owned companies' financial situation will also have to be cleared up before the government completes the planned privatization of the electricity generation and distribution sector. -------------- GOVERNMENT WILL TAKE THE POLITICAL RISK -------------- ¶5. (SBU) The price hike debate highlights the interplay between economic reform and politics that has become highly controversial in this political season. Natural gas prices were raised 5.4% at the beginning of November. Although the IMF tells us this was not enough, Prime Minister Erdogan and Energy Minster Guler are frequently quoted in the press saying there will be no further energy price increases. However, during the November 11 ruling AK Party congress, Erdogan made comments in which he seemed to begin preparing the public for price hikes. This adherence to economic orthodoxy despite the political pressures perhaps reflects the AKP's belief that one of its greatest assets in the upcoming elections will be its success in managing the economy. Wilson