MEETING WITH A TURKISH COMPANY THAT PLANS TO

C O N F I D E N T I A L SECTION 01 OF 03 ISTANBUL 000981 SIPDIS E.O. 12958: DECL: 11/09/2017 TAGS: ENRG ECON PREL IR IZ TU SUBJECT: MEETING WITH A TURKISH COMPANY THAT PLANS TO IMPORT IRANIAN ELECTRICITY Classified By: Sandra Oudkirk, Deputy Principal Officer; U.S. Consulate General Istanbul REASON: 1.4 (d) Action request -- see paragraph 10 ¶1. (SBU) Istanbul Pol/Econ officers met November 5 with executives from the Kartet company and its holding company, Karadeniz, to discuss a deal by Kartet to import electricity from Iran. (Our discussion on Kartet,s electricity exports to Iraq is reported septel.) Kartet director Nuray Atacik said the company's deal with Iran's state-owned electricity exporting company, Tavanir Holding, was mischaracterized in the press and has no connection with the recently signed Turkey-Iran electricity trading MOU. Kartet has signed a 10-year electricity purchase agreement with Tavanir under which Kartet expects to import around 55 megawatts (mW) of electricity annually from Iran -- the limit of what the local electric grid will allow, absent significant expansion. Atacik insisted Kartet is only buying electricity, not investing in Iran's energy sector or electricity infrastructure. Replying to Iran watcher's explanation of the USG decision to designate the IRGC and Iranian banks, Orhan Karadeniz said his company is exercising vigilance about its Iranian partners. He urged Washington's understanding in recognizing that Turkey is facing an energy crisis and must import electricity from Iran, and encouraged the USG to support a larger Turkish role (read: by his company) in helping sell Iranian electricity to Iraq. End summary. Importing Iranian Electricity -------------- ¶2. (SBU) Following up on recent Turkish press articles claiming that Turkey's Karadeniz Holding Company and its electricity import/export subsidiary, Kartet, recently signed a deal to import up to "six million megawatts (mW)" of electricity from Iran, Iran watcher and Istanbul Econ officer met November 5 with Karadeniz Holding Company director Orhan Karadeniz; Kartet director Nuray Atacik; and Kartet,s director of energy generation and investments Alican Takunyaci. (Our discussion on Kartet,s electricity exports to Iraq is reported septel.) ¶3. (SBU) Atacik, evincing frustration with the Turkish press, explained that media reports confused and conflated Karadeniz Holding's import deal with the much larger and broader Turkish-Iranian MOU on electricity cooperation and exchange. (Comment: According to Turkish press reports, that MOU calls for the development of cross-border electricity transmission lines through which three to six billion kilowatt hours, or three to six million megawatt hours, of electricity during peak hours of consumption will be exchanged annually between Turkey and Iran. That MOU reportedly also called for Turkish assistance in building several power plants in Iran. Asked to comment on that MoU, Atacik described the proposal to exchange 3-6 billion kWh annually with Iran as wildly unrealistic, and she suggested that under perfect current conditions, absent a drastic expansion of the electricity grid, the maximum capacity for annual electricity exchange would be around 1.5 billion kWh. End comment.) ¶4. (SBU) Karadeniz,s deal is a ten-year electricity purchase agreement with Iran's Tavanir Holdings. According to Tavanir,s website, it is an Iranian state-owned electricity generation and distribution company that employs 51,000 workers, generates 36 million kW of electricity annually, and is currently under consideration for privatization under Article 40 of the Iranian constitution. Under this deal, Karadeniz envisions importing annually about 55 mW (55,000 kW) of electricity over two existing power-lines from Iran over the next few years, as this is the capacity limit of the local electricity grid. The deal actually allows for the import of up to 150 mW annually, but Atacik did not expect that in the coming few years the local grid would expand the number of power-lines necessary to be able to handle such an increase. Contributing to the capacity limitations of the existing power-lines is the fact that 60% of the existing lines are already dedicated to other electricity transmission, allowing only 40% of the lines, capacity to be used for this deal. At the moment, Kartet is waiting for EMRA, Turkey's energy market regulator, to approve Kartet's import license request, and expect the request to be approved within the next few weeks. ¶5. (SBU) Atacik suggested that Karadeniz may review the deal in a few years to see whether local expansion of the electricity grid would allow Karadeniz to increase electricity imports from Iran. Atacik took pains to insist that Karadeniz is not investing in Iran's energy sector or electrical infrastructure, but rather relying on existing infrastructure. Atacik added that the electricity imported from Iran will be used domestically in southeast Turkey. The electricity that Karadeniz exports to Iraq is generated locally in Turkish power-plants. That said, she acknowledged that importing Iranian electricity makes it easier for Karadeniz to export the electricity from its own power-plants to Iraq. ¶6. (SBU) Atacik explained that Karadeniz Holdings, as Turkey's only electricity import/export company, is familiar with other electricity exporting companies throughout the region, and is indeed a competitor to Tavanir Holdings with regard to electricity exports to Iraq. The two companies had been discussing off-and-on for three years a deal to import electricity to Turkey, but both the GOI and GOT had blocked the deal. This year, the Turkish state electricity generation company (EUAS) decided to restrict the electricity available for Karadeniz to export from Turkey, creating a need for Karadeniz to import electricity from Iran, to offset the lost electricity from EUAS and still allow Karadeniz to export electricity to Iraq. Atacik noted that in this region only Iran is a net producer of electricity, and sells electricity to Afghanistan, Pakistan, and others. Views from the Boss on dealing with Iran -------------- ¶7. (SBU) Karadeniz Holdings Board member Orhan Karadeniz laid out the commercial arguments for his company's decision to make this deal with an Iranian company. He reiterated Atacik,s point that Iran is the region's net electricity exporter, and underscored that Turkey's own rapidly growing energy needs require it to expand its electricity imports and/or increase generation inside Turkey. Warming to that point, Karadeniz argued that if importing energy from Iran is inevitable, not only for Turkey but for Iraq and other friends of the United States, Washington should welcome having a "trustworthy" company like Karadeniz Holdings playing a key brokering role, an argument he claims he has also made to Embassy Baghdad and to Embassy Ankara. ¶8. (SBU) Iran watcher shared information about the recent USG decision to designate the IRGC, IRGC-QF, affiliated entities, and additional Iranian banks under U.S. executive orders, as well as the recent FATF and US Treasury advisory notices, and cautioned Karadeniz Holdings against entering into transactions with any named or designated entities. Iran watcher also reviewed current ISA sanctions provisions to discourage Turkish investment in Iran's energy sector. Karadeniz pledged that his company is exercising vigilance about the Iranians with whom it is working, and reaffirmed that his company is not making any investments in Iranian energy sectors, only buying a commodity. He acknowledged the importance from a business and reputational risk standpoint of avoiding any deals with sanctioned companies and entities, and welcomed receipt of the USG designation list. "In this region, nothing is black and white. But I am trying to make sure we stay within a whiter shade of gray." ¶9. (SBU) Turning to a possible third UNSC sanctions resolution on Iran, Karadeniz offered the personal view based on recent travels to Iran that the current sanctions regime is not having a significant impact on the economy or on the regime's decision-making. He suggested that for sanctions to work the international community would need to target Iran's energy sector. Absent such UNSC sanctions, however, he predicted that Russia, China, and others will continue to do extensive energy business with Iran. He also concluded from his travels to Iran that the international community is "somehow losing a winning argument" to President Ahmadinejad on why a country as rich in hydrocarbons as Iran is willing to face international condemnation to pursue a supposedly peaceful nuclear energy program. Comment and action request -------------- ¶10. (C) Karadeniz welcomed the opportunity to meet with USG officials and pledged continued transparency regarding the company's electricity purchase from Iran. As noted, Karadeniz is trying to approach this deal with Iran strictly as a simple business transaction: Turkey needs to import electricity, and Iran is the only regional supplier thereof. On the other hand, he also claims to appreciate the growing risks of doing business with Iran, pledged that he will not do business with designated entities or individuals, clearly values his contacts with the USG and wants his company to stay on the right side of the international community's efforts to press Tehran. Action request: If Washington develops information suggesting explicit links between Iran's Tavanir Holding company and the Iranian regime's support for terrorism and/or WMD proliferation, post believes sharing that linkage with Karadeniz might prompt him to reassess the business merits of this deal. End comment. WIENER