BUMPY START TO EU AID FOR TURKISH CYPRIOTS

C O N F I D E N T I A L SECTION 01 OF 04 NICOSIA 000476

SIPDIS

SIPDIS

E.O. 12958: DECL: 03/28/2016
TAGS: PGOV PREL EAID EUN TU CY
SUBJECT: BUMPY START TO EU AID FOR TURKISH CYPRIOTS

REF: A. NICOSIA 273

B. LIBBY-SILLIMAN-ETC EMAIL (12/07/2005)

C. LIBBY-INGMANSON-ETC EMAIL (12/13/2005)

D. NICOSIA SIPRNET DAILY REPORT (3/21/06)

E. ZIMMERMAN-INGMANSON-ETC EMAIL (3/28/2006)

Classified By: Ambassador Ronald Schlicher, for reasons 1.4 (b) and (d)
.


1. (C) SUMMARY. With the long-awaited EU aid package for the
Turkish Cypriots finally approved, the European Commission
and Turkish Cypriots have begun negotiating over project
priorities and sensitive details of implementation. The
question of whether the EU's aid office will be located in
the north or south is the first politically charged issue the
Commission must address -- although other contentious
logistical questions are sure to arise as the EU's aid moves
forward. The Turkish Cypriots hope that an April 4 meeting
between DG Enlargement's Michael Leigh and "President" Talat
will set a positive tone for future efforts to untangle such
issues. The Turkish Cypriots are nonetheless worried that EU
aid will be funneled through the ROC or subject to Greek
Cypriot political conditions, which they fear would render
the assistance economically useless and politically
impossible for the "TRNC" to accept. "President" Talat has,
for the moment, silenced quibbling between "TRNC government"
coalition partners over whether to accept EU aid, reasserting
his policy of consultation with the Commission and not
blocking project implementation for now. The Commission,
anxious to reverse Turkish Cypriot perceptions that the EU
does not keep its promises, has focused on high-visibilty,
quick-start projects -- often without careful forethought,
adequate intelligence about the political context in which
they operate, or meaningful coordination with USAID's
up-and-running CyPEG. At the same time the
politically-paranoid Turkish Cypriots may pose obstacles of
their own, as in some cases the "TRNC" in its goal to avoid
letting the ROC score points is capable of taking measures
that amount to economic "self-isolation." Haphazard
planning, Greek Cypriot shenanigans, and Turkish Cypriot
political twitchiness pose a real danger to the effectiveness
of EU aid to the Turkish Cypriots. END SUMMARY.

EU PROJECT PLANNING BEGINS
--------------


2. (C) The EU approved its long-awaited 139 million euro
assistance package for the Turkish Cypriots in February (ref
a). (COMMENT: The package had been valued at 259 million
euros when it was proposed immediately following the Turkish
Cypriot "yes" vote in the 2004 Annan Plan Referendum. But a
drawn-out tug-of-war between the ROC, the UK, and the Turkish
Cypriots over whether it should be "delinked" from an EU
direct-trade proposal -- among other things -- resulted in
120 million of the aid being lost as the budget cycle
advanced. END COMMENT.) With aid now authorized, the Cyprus
team at DG Enlargement, which handles north Cyprus matters in
the Commission, visited the island twice in March to begin
negotiating both the technical and political aspects of
program implementation.


3. (C) According to the EC team, as well as Turkish Cypriot
sources, the EU's aid program will focus on five general
priorities: economic and social development, rural
development (to include projects relating to the environment
and infrastructure),bicommunal reconciliation (including
preservation of cultural heritage),technical assistance, and
scholarship. The Commission's team expressed a clear
preference for quick-start programs that would be ready for
approval by the Phare Committee (which oversees EU aid and
consists of representatives from the member states, including
the ROC) by June. According to Turkish Cypriot sources, the
Commission's team was "frantic" to "show the flag" in the
north and was planning to spend as much as 25 million euros
on quick-impact projects that would counter the perception
that Europe had not "kept its promises" to the Turkish
Cypriots.

NEGOTIATING POLITICAL LAND MINES
--------------


4. (C) Before aid can start flowing, however, a large number
of practical questions -- including several with potentially
serious political implications -- need to be worked out. The
first is the question of where the Commission's aid office
will be located. The ROC has insisted that the office be in
the "areas controlled by the legitimate government" (i.e., in
the south),while the Turkish Cypriots recoil at the idea of
their aid being "channeled through the Greek Cypriots." They
would like the EC to follow the example of USAID, which has
insisted that its contractors open robust "service centers"
north of the Green Line (on undisputed Turkish Cypriot

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property). The Commission appears to be quietly seeking a
compromise and has floated the idea of hanging a shingle in
the south, perhaps by simply opening a PO box, but operating
a proper office (having a "presence") in the north.


5. (C) It is far from clear that this compromise would meet
the requirements of both sides. But the "TRNC's" lead EU
expert, Erhan Ercin, nonetheless gives the EC team credit for
trying to find a middle ground. Ercin had similar praise for
the Commission's apparent willingness to allocate aid funds
via HSBC Bank in the north, rather than through the Cyprus
Central Bank in the south -- the apparent preference of the
GOC. Ercin acknowledged that there would be "countless
other" technical issues to work out in the future, but
suggested that, if the Commission maintained its "newly
constructive attitude" and continued to "show backbone
against Greek Cypriot demands," such problems could be
resolved.


6. (C) This cautious praise for the EC is a remarkable change
of tone for the Turkish Cypriots, who until very recently
were furious at the Commission for agreeing, in December, to
issue an "unacceptable" declaration as the price for ROC
approval of EU aid (ref b). Although the EC later backed
down amid howls of protest from Talat (and, more quietly,
from the UK),there was nonetheless significant damage to
their relationship with the Turkish Cypriots (ref c). Since
then, Ercin noted to us with some satisfaction, Leopold
Maurer (whom the Turkish Cypriots blame for December's near
train-wreck) has since been assigned to Kosovo. His acting
replacement, Georg Ziegler, was much more "constructive."
Ercin also told us that DG Enlargement's #2, Michael Leigh,
would visit Cyprus on April 4 and meet with Talat (in the
latter's office). Ercin hoped Leigh's visit would produce a
"final and acceptable" agreement on the issue of office
location -- and mark a definitive turn-around in the
political atmosphere between Turkish Cypriots and the
Commission.

STILL NO RED CARPET UP NORTH
--------------


7. (C) Ercin's rosy-ish assessment of Turkish Cypriots-EC
relations, however, has not translated into smooth political
sailing for the EU's aid package up north. Many Turkish
Cypriots feel that EU aid to develop their economy is useless
without the corresponding "direct trade" package that the EU
proposed, but then failed to approve, after the 2004 Annan
Plan Referendum. As one commentator put it, EU aid is a
"moldy half loaf" instead of a full and nutritious meal. For
this reason, Turkish Cypriots were dead-set against
decoupling the trade and aid measures. Passing aid alone,
they feared, would create the impression that the EU had kept
its promises to help Turkish Cypriots, thus making it easier
to shelve direct trade for good.


8. (C) Now that aid is in the pipeline, Turkish Cypriot
public opinion has focused its worry on questions of
implementation. Most observers assume that the "Greek
Cypriot administration" will use its sway as an EU member
state to ensure that aid is either stymied or frittered away
on projects not directly beneficial to the Turkish Cypriot
economy. Informed experts share this worry. They note, for
example, that Greek Cypriot stipulations about respecting
property rights could severely limit development assistance
by blocking projects supporting economic activity that takes
place on Greek Cypriot land (which amounts to at least 80
percent of all the land in the north). This belief --
compounded with the general sense that the aid is somehow
going to be "funneled through the south" -- has caused
significant public opposition to "accepting" European aid.


9. (C) Serdar Denktash, the nationalist "FM" who is the
uneasy coalition partner of Talat's ruling CTP, has led the
charge against EU aid. Threatening at one point to bring
down the "government" over the issue, Serdar was only walked
back from the edge after Talat took him to the woodshed in a
closed-door meeting last week (refs a and d). Calmer voices,
including respected members of the business community, have
echoed Serdar's call that the "TRNC" should reject EU aid.
Perhaps most significantly, Turkey is rumored to be pressing
Talat to block implementation of EU aid -- something the
local Turkish Ambassador tacitly admitted to Ambassador
Schlicher on March 14, even as he said that the Turkish
Cypriot authorities had made their own, contrary decision on
the matter.


10. (C) Despite this pressure, however, Talat has directed
"TRNC" officials not to block aid, but to cooperate with the
Commission's aid team. "PM" Soyer has reassured the public,
on behalf of Talat, that EU programs will help build
institutional ties between the Turkish Cypriots and Europe

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that could prove more valuable than the aid itself over the
long term. Privately, advisors close to Talat have told us
that "the president" did not want to be painted as a
nay-sayer by refusing EU aid outright. But they nonetheless
stress that Talat will constantly reassess his position on
aid if too many "unacceptable" restrictions and/or political
conditions are "imposed" by the GOC.

WILL IT WORK?
--------------


11. (C) The question of whether Turkish Cypriot authorities
will accept EU aid is a bit misleading, since the Commission
is not planning to write checks directly to the "TRNC."
Nonetheless, the Turkish Cypriot political leaders can make
or break the program by granting -- or withholding -- their
cooperation with implementers. At the logistical level,
there is a range of options at the "TRNC's" disposal (such as
demanding VAT payments, slow-rolling phone installation, or
denying entry to implementers) should they decide the
political cost of accepting EU aid is too high.


12. (C) Unfortunately, the Turkish Cypriots are more than
willing to shoot themselves in the economic foot to make a
perceived or symbolic political point. For example, this
week "TRNC" officials appear to have used indirect pressure
on the Chamber of Commerce and a "state"-owned fruit packing
company to derail a deal to export citrus through the south
(ref e). This maneuver was the result of a misguided
political fear that allowing exports through Limassol --
however profitable this might be for their businessmen --
would undermine the political argument for direct trade with
the EU. We have strongly counseled the "TRNC" that, even as
we seek to find ways to end Turkish Cypriot isolation, they
in no instance should take action that damages existing
opportunities and can be styled as "self-isolation." It is
reasonable to expect the Greek Cypriots to try to exploit
this self-destructive instinct by kicking up a fuss (over
office location, for example),goading the Turkish Cypriots
into saying "no" to European aid, and watching with glee as
Europe curses Talat's intransigence.


13. (C) At the same time, serious questions remain about the
ability of the EC Cyprus team to manage its aid program
effectively. As one Turkish Cypriot reminded us, the EC has
a startlingly bad understanding of Turkish Cypriot political
dynamics. Referring to the Commission's point-man on the
Turkish Cypriots (who lodges in the south, spends significant
time in Brussels, and speaks no Turkish) he noted that the
EU's only consistent presence in the north consisted of
nothing more than a "single Italian in a car." It is hardly
surprising that the Commission has repeatedly rammed blindly
into Turkish Cypriot political redlines as it tried to secure
approval of aid last year.


14. (C) The Commission also seems instinctively resistant to
cooperation with USAID -- refusing, for example, to share
with us a World Bank study they commissioned on the north's
economy and withholding for over a year the results of their
feasibility studies in important areas such as water, waste
water, energy, rural development, and solid waste. This
attitude appears to stem, at least in part, from a rather
territorial belief that, since Cyprus is a European country,
the U.S. should butt out. As a result, the Commission team
here consistently rebuffs our offers to discuss potential
areas of coordination and deconfliction between our
assistance programs. This attitude sometimes borders on the
surreal, with Commission officials bickering over our use of
the word "Partnership" in the CyPEG acronym (on the grounds
that the EU's "Partnership for the Future" program had
already appropriated the term). Once, Commission
representatives even forbade their contractors to join a
Turkish Cypriot-led meeting on environmental priorities
because AID staff were also present.


15. (C) In their rush to spend money and make a quick public
splash, the EU seems to have compromised the quality of their
program management and implementation. Despite the
managerial and political ineptitude of their local team, the
EU has indicated they will likely use the existing
Partnership for the Future as the delivery mechanism for most
-- if not all -- of their initial assistance package. Past
performance suggests this preference for convenience and
speed could have serious consequences. In one case, a
PFF-funded restoration project in Famagusta was put on such a
tight deadline that Turkish Cypriot municipal authorities had
to choose between losing EU funding for a restoration project
or settling on quickly-available contractors whose lack of
expertise threatened to damage the medieval structure that
they were trying to protect. This does not bode well for
successful (or Turkish Cypriot-friendly) quick-start programs
in the future.

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COMMENT
--------------


16. (C) The EU's aid program is probably too little, too late
to reverse the Turkish Cypriot perception that "Europe" has
abandoned them. At the same time, hasty planning and poor
coordination will probably dilute the impact of the EU's
assistance efforts. Meanwhile, Turkish Cypriot twitchiness,
coupled with the inevitable Greek Cypriot shenanigans, could
mean that EU aid will ultimately amount to little more than
an arena for more childish political games. We will seek to
forestall this possibility here through pressing for more and
better coordination and deconfliction of projects and
priorities. At appropriate points, we will ask our
colleagues in Brussels and appropriate EU capitals to echo
this message when needed. END COMMENT.
SCHLICHER