IRAN SANCTIONS ACT: PLANS FOR NEW TURKISH DEAL ON

UNCLAS SECTION 01 OF 02 STATE 054797 SENSITIVE E.O. 12958: N/A TAGS: ENRG EPET ETTC IR PREL TU SUBJECT: IRAN SANCTIONS ACT: PLANS FOR NEW TURKISH DEAL ON INVESTMENT IN IRAN'S ENERGY SECTOR REF: A. 08 ANKARA 711 ¶B. 07 ANKARA 1809 ¶1. (U) This is an action message; please see paragraphs 3 and 4 below. ¶2. (SBU) Washington thanks post for its reporting on Turkey's plans to develop Iranian South Pars gas for Turkish and European consumption. On the margins of the April 17 Economic Partnership Commission with Turkey, EEB DAS Hengel raised U.S. concerns about investments in the Iranian oil and gas sector with MFA Deputy Undersecretary Haydar Berk. Hengel underlined that U.S. policy opposing such investment had not changed and that there was much Congressional interest in reports of pending deals with Iran. Hengel also noted our obligations under the Iran Sanctions Act. Berk said emphatically that no investment deals with Iran were moving ahead and that Turkey would not do anything with Iran that would so clearly antagonize the U.S. and Israel. At the same time, he commented that Turkey must think about its long-term energy requirements and therefore needs to continue to engage with the Iranians. ¶3. (SBU) The Embassy is requested to reiterate our concerns at a senior level of the Turkish government to underscore the risks inherent in doing business with Iran, and to discourage the GOT from pursuing these negotiations further with Iran. ¶4. (SBU) In raising our concerns, Embassy may draw as appropriate on the following points. -- We are concerned to hear of Turkish Petroleum Company's (TPAO) continued pursuit of a deal to develop Iran's South Pars gas fields, as well as plans to welcome an Iranian delegation in Ankara. -- Although not directly covered by current UN sanctions, new energy deals such as the one contemplated by TPAO undermine the concept reflected in the P-5 plus 1 proposal of offering enhanced economic and energy engagement as an inducement for Iranian compliance. -- TPAO's signing of new deals with Iran would be a serious blow to the international effort to bring Iran into compliance with UNSC resolutions regarding its nuclear activities. -- This is not the time for "business as usual" with Iran, and TPAO may want to reconsider the risks of being associated with the Iranian regime. We believe that companies should ask themselves whether they really want to do business with a country that is already under sanctions from three UNSC Chapter 7 resolutions. -- The Financial Action Task Force (FATF) stated in October 2007 that Iran's lack of a comprehensive anti-money laundering and combating the financing of terrorism (AML/CFT) regime represents a significant vulnerability in the international financial system. Further, on March 3, 2008, the United Nations Security Council passed Resolution 1803 (UNSCR 1803),calling on all states to exercise vigilance over activities of financial institutions in their territories with all banks domiciled in Iran and their branches and subsidiaries abroad. -- On the financial front, the cost of doing business with Iran has increased. Iran's credit risk rating has gone up, and many banks have stopped issuing letters of credit to companies seeking to do business with Iran. Major international banks including Deutsche Bank, Dresdner Bank and Commerzbank have also scaled back or completely severed their Iran-related business. -- New energy investments in Iran also raise concern under the Iran Sanctions Act (ISA). ISA is triggered when "a person has, with actual knowledge" made an investment of $20,000,000 or more "that directly and significantly contributed to the enhancement of Iran's ability to develop petroleum resources of Iran." The ISA definition of "investment" encompasses, among other things, "entry into a contract that includes responsibility for the development of petroleum resources located in Iran." -- We hope your government understands our concerns. In view of the serious negative consequences involved, we ask that you urge TPAO to reconsider going forward with this deal. -- More broadly, we hope the Turkish government will discourage Turkish firms from entering into new energy investments with Iran. ¶5. (U) The Department would appreciate further information from post regarding the nature and terms of TPAO's planned investment. Please send any updates to Paul Malik in EUR/SE and Sonata Coulter in EEB/ESC/TFS. RICE