TURKEY-IRAN JOINT ECONOMIC COUNCIL ADVANCES

C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 000216 SIPDIS SIPDIS E.O. 12958: DECL: 02/06/2018 TAGS: ETRD ECON PREL TU IR SUBJECT: TURKEY-IRAN JOINT ECONOMIC COUNCIL ADVANCES INCREASED BILATERAL TRADE RELATIONS REF: ISTANBUL 56 ANKARA 00000216 001.4 OF 003 Classified By: Economic Counselor Dale B. Eppler for reasons 1.4 (B) & (D). ¶1. (C) Summary: Turkey's economic relationship with Iran continues to grow, with the bilateral trade volume increasing from $1 billion in 2000 to $7.4 billion in 2007. 80% of this trade, however, continues to be Iranian fuel exports to Turkey, totaling $5.2 billion in 2006. The number of Iranian tourists to Turkey has also increased significantly, from 380,000 in 2000 to 865,900 in 2006, and an estimated one million in 2007. Turkey and Iran conduct annual Joint Economic Council (JEC) meetings where they discuss ways to enhance their bilateral economic relationship. At the December 2007 JEC, Turkey persuaded Iran to ratify the Economic Cooperation Organization Trade Agreement (ECOTA) and also discussed issues in banking, customs, trade, investment, transportation and energy. Iran also finally gave permission to two Turkish banks with long-standing applications to start doing business in Iran. Given the current political climate, however, the leadership of these banks are consulting with Turkey's MFA, Foreign Trade Undersecretariat and other relevant agencies about the risks of doing business in Iran. Turkish trade officials are optimistic about their growing economic relationship with Iran and feel that Iran is making concessions to Turkey in part to alleviate the isolation being pushed by the U.S. Turkish foreign trade officials told us that Turkey will abide by UN sanctions against Iran, but is unlikely to go beyond what those sanctions require. End summary. ¶2. (SBU) Turkey's economic relations with neighboring Iran continue to grow despite an historical distrust between the two nations. Bilateral trade increased from $1 billion in 2000 to $7.4 billion in 2007, about 80% of which is Iranian fuel exports to Turkey. The tables below give a breakdown of their bilateral trade. Reported bilateral investment between the two countries is modest. Iranian investment in Turkey grew from $675,000 in 2005 to $12 million (new investment) in ¶2006. Figures for 2007 show a decline, however, with only $215,000 newly invested through August. Turkish investment in Iran is also meager, a cumulative total of $22.1 million. From 2000 to 2006, Iranian tourists to Turkey were one of the fastest growing arrival groups. 380,000 Iranians visited Turkey in 2000. That number more than doubled to 865,900 in 2006, and an estimated one million in 2007. Turkey-Iran Bilateral Trade Data -------------- Year Exports Imports Volume Balance -------------- -------------- -------------- -------------- -------------- 2000 $235.8 mil $815.7 mil $1.05 bil -$579.9 mil 2001 $360.5 mil $839.8 mil $1.20 bil -$479.3 mil 2003 $533.8 mil $1.86 bil $2.39 bil -$1.33 bil 2004 $813.0 mil $1.96 bil $2.78 bil -$1.15 bil 2005 $912.9 mil $3.47 bil $4.38 bil -$2.56 bil 2006 $1.06 bil $5.62 bil $6.68 bil -$4.57 bil '06(Nov)$937.5 mil $5.29 bil $6.22 bil -$4.35 bil '07(Nov)$1.19 bil $6.20 bil $7.39 bil -$5.01 bil Turkey's Main Exports to Iran -------------- Product 2004 2005 2006 -------------- -------------- -------------- -------------- Iron & Steel $145.6 mil 84.9 mil 138.0 mil Tobacco and products $ 32.3 mil 62.7 mil 110.3 mil Textiles and products $ 92.2 mil 104.7 mil 99.3 mil Road Transport Vehicles $ 64.2 mil 100.9 mil 75.3 mil Electric machines/appliance $ 54.3 mil 49.7 mil 66.8 mil Cork & wood products $ 42.5 mil 46.1 mil 65.4 mil Non-metal mineral products $ 31.9 mil 34.6 mil 45.2 mil Industrial machinery $ 57.4 mil 72.5 mil 79.7 mil Furniture $ 20.4 mil 25.7 mil 33.2 mil Textile fibers $ 38.0 mil 25.5 mil 32.7 mil Turkey's Main Imports from Iran -------------- Product 2004 2005 2006 -------------- -------------- -------------- -------------- Crude Oil Products $1.35 bil 2.39 bil 3.66 bil Petroleum products $509.1 mil 926.3 mil 1.60 bil Plastics and products $ 11.7 mil 34.1 mil 143.0 mil Metal essence, ores, scraps $ 9.1 mil 21.8 mil 62.1 mil Non Iron metals & products $ 6.2 mil 8.3 mil 40.2 mil Iron & Steel $ 666,433 1.8 mil 17.5 mil Textile fibers & products $ 13.8 mil 17.4 mil 14.1 mil Organic chemical products $ 5.3 mil 6.9 mil 13.5 mil Non-metal mineral products $ 5.2 mil 7.1 mil 10.1 mil ¶3. (SBU) Turkey has long argued that Iran must work to ANKARA 00000216 002.4 OF 003 rectify the sizable trade imbalance between the two countries, which grew from a $580 million surplus for Iran in 2000 to a $5 billion surplus for Iran in 2006, at which time Iran exported $5.2 billion in crude oil and petroleum products to Turkey. Iran has countered that its natural resources are a "gift from Allah" and cannot be included in bilateral trade statistics. In order to discuss such trade issues, Turkey conducts regular Joint Economic Council (JEC) meetings with Iran, the most recent of which was held in December 2007. During that meeting, the two countries negotiated agreements on several outstanding issues within their bilateral economic relationship. The meeting opened with a one-day business event in Istanbul, organized by the Turk-Iran Business Council (reftel),during which Turkish businessmen were able to discuss their issues of concern with Iranian businessmen and government officials. This event was followed by two days of government-to-government talks in Ankara. ¶4. (SBU) The JEC's agenda focused on broad topics, including banking, customs, trade, transportation and energy. Turkey's Foreign Trade officials were most pleased with Iran's January 2008 ratification of the Economic Cooperation Organization Trade Agreement (ECOTA). With Iran's ratification, which Turkish officials did not expect so soon after the JEC, the stage is set for a subsequent meeting of the five ECO signatories to the agreement, Turkey, Pakistan, Afghanistan, and Tajikistan. Turkish officials hope to finalize this meeting by the end of April 2008. ¶5. (SBU) Trade issues figured prominently in the bilateral discussions. They finalized plans for their 2008 trade promotion activities. Iranian businessmen plan to participate in Turkish trade fairs in Izmir and Gaziantep, the later of which will focus on doing business in Iraq, Erzurum and Trabzon. Turkish trade delegations from the construction and medical devices fields hope to visit Tehran in the first half of 2008. ¶6. (C) Turkish banks have traditionally had problems in the Iranian banking sector because the GOI has traditionally not allowed foreign banks to operate within Iran. During the JEC meeting, however, the Iranian government gave permission to two Turkish banks with long-standing applications to do business in Iran, Isbank and Halkbank. Although the permission has been granted, however, Orhan Cakiroglu, Department Head in the Foreign Trade Undersecretariat's (FTU) Middle East Agreements Department, told us that bank leaders are hesitant about starting business in Iran and may well decide against doing so. Cakiroglu added that the banks are currently discussing the ramifications of doing business in Iran under the present political conditions with the MFA, FTU and other government agencies. In a January 2008 meeting with Treasury Under Secretary Stuart Levey, Halkbank executives advised they have decided not to open operations in Iran. ¶7. (SBU) An issue of interest to the GOI has been the subject of Border Trade Centers, which were created to assist in the development of border city economies. Unfortunately, according to Cakiroglu, these centers have not achieved their goal for the Turkish border cities because most of the Turkish goods came from Istanbul. They had hoped for yearly trade of over $1 million, but the reality has been less than $500,000. Therefore, Turkish and Iranian officials will meet biannually in the centers to discuss alternatives. The first meeting will be in February in Van, Turkey. ¶8. (SBU) Another issue of importance to both sides is the border gate crossings between Turkey and Iran. Conditions in Turkey en route to the Gurbolak (Turkey)-Bazargan (Iran) crossing are fine, but Iran has done little to improve the infrastructure on its side of the border. Iran announced during the JEC, however, that money has been allocated to improve roads and conditions by the end of 2008. FTU hopes that these improvements will help to expand trade by providing a second crossing through which goods can pass from one to the other. ¶9. (SBU) Finally, Turkey tried to negotiate concessions to lower fuel prices charged to Turkish truckers operating in Iran. Turkey provides all vehicles transporting Turkish goods in Turkey value-added tax and special-consumption tax exemptions when purchasing gas. Iran, however, charges Turkish vehicles operating within Iran a fuel differentiation rate that is equivalent to the price of fuel in Turkey. In addition, Turkish transport vehicles entering Iran must pay this fuel differentiation rate for the fuel that is in their tanks at the time of entry. Iran is considering a Turkish proposal that would allow Turkish vehicles to purchase fuel in Iran at the normal Iranian prices and without being ANKARA 00000216 003.4 OF 003 charged for fuel in their tanks upon entry into Iran. 10 (C) Comment: Turkish Foreign Trade officials expressed optimism about their warming relationship with Iran. Traditionally difficult to negotiate with, they feel that Iran is making concessions with Turkey in an attempt to strengthen the bilateral relationship at a time when the U.S. is seeking to isolate Iran. These officials also stressed to us that Turkish businesses are watching carefully the current political situation and are concerned about starting new ventures in Iran when UN sanction discussions are ongoing. This message and caution was reconfirmed during Treasury Under Secretary Levey,s January visit to Turkey. While Turkey will most likely not go beyond what is or will be required by the UN, they told us, it will dutifully follow whatever directives are agreed to by the UN Security Council. End comment. Visit Ankara's Classified Web Site at http://www.intelink.sgov.gov/wiki/Portal:Turk ey WILSON