TURKEY-IRAN COMMERCE: "MOSTLY JUST NATURAL GAS

C O N F I D E N T I A L SECTION 01 OF 04 ISTANBUL 000094

SIPDIS

LONDON FOR XXXXXXXXXXXX; BERLIN FOR XXXXXXXXXXXX; BAKU FOR XXXXXXXXXXXX;
BAGHDAD FOR XXXXXXXXXXXX AND XXXXXXXXXXXX; ASHGABAT FOR XXXXXXXXXXXX;
DUBAI FOR IRPO

E.O. 12958: DECL: 03/06/2019
TAGS: ECON PREL PGOV ETRD IR TU
SUBJECT: TURKEY-IRAN COMMERCE: "MOSTLY JUST NATURAL GAS
AND HOT AIR"

REF: (A) 2007 ISTANBUL 104 (B) 2007 ISTANBUL 152 (C)
2007 ISTANBUL 557 (D) ISTANBUL 22

Classified By: Deputy Principal Officer Sandra Oudkirk; Reason 1.5 (d).


1. (C) Summary: Despite two recent trade-related
Ministerial visits to Iran and accompanying press suggesting
a rapidly expanding bilateral trade relationship,
Turkish-Iranian Business Council contacts assured us that
beyond Turkey's interest in Iranian natural gas, the trade
relationship is "mostly hot air." Total trade between Turkey
and Iran in 2008 reached USD 10.3 billion, of which over USD
seven billion represented Turkish imports of Iranian
hydrocarbons. Turkish exports to Iran accounted for USD two
billion. GOT State Minister for Trade Tuzmen, visiting Iran
in January, agreed with GOI counterparts on a target goal of
USD 20 billion in bilateral trade by 2011, but our contacts
called this a fantasy, predicting that bilateral trade would
rise to no more than USD 12 billion in coming years. Our
contacts said "2008's big success story," a Turkish
consortium's purchase of one of Iran's largest petrochemical
companies for USD 630 million, is "2009's big failure." They
downplayed Iran's request to conduct all future trade in
local currencies, but revealed that Iran wants to deposit USD
500 million in Bank Mellat's Istanbul branch to serve as a
line of credit and admitted that if Iran can modernize its
banking industry, closer bilateral banking ties could lead to
more growth in bilateral trade. Our contacts also pointed to
rivalries both among Turkish associations and within the
Iranian bureaucracy that complicate trade negotiations, and
dismissed the recent transportation MOU as "just a piece of
paper for the ECO Summit." End Summary.

Reports of Expanding Turkish-Iranian Trade ties?
--------------


2. (C) ConGen Istanbul's NEA Iran Watcher met recently with
XXXXXXXXXXXX (please protect),the XXXXXXXXXXXX of the
Turkish-Iranian Business Council, a trade promotion
association under the auspices of Turkey's Foreign Economic
Relations Board (DEIK),and separately with XXXXXXXXXXXX
(please protect),the Turkish-Iranian Business Council's
XXXXXXXXXXXX, to discuss recent signs of expanding trade
contacts between Turkey and Iran. We took note of recent
meetings between Turkish and Iranian trade delegations,
including:

-- The Istanbul-based "Developing Eight" (D8) Commissioners
meeting in Istanbul on January 10, attended by a "large and
energetic" Iranian delegation (according to a D8 contact).
Press reports indicated the Iranian side called for closer
banking cooperation with D8 member states including Turkey.


-- Turkish Minister for Foreign Trade Tuzmen led a delegation
of GOT and business officials, including XXXXXXXXXXXX, on a late
January visit to Tehran and Mashhad. He met with Iranian
Vice President Davoodi, Oil Minister Nozari, Commerce
Minister Kazemi, Minister for Industry and Mines Nahavandian,
and Agriculture Minister Eskandiari. Press reports indicated
the two sides pledged to expand bilateral trade to USD 20
billion by 2011, and quoted Tuzmen claiming that his visit
resulted in USD 250 to 300 million in bilateral trade deals
signed. Local press also quoted Nahavandian saying that Iran
wants to use Turkish ports like Trabzon as primary transit
venues for importing European goods to Iran, replacing
Persian Gulf ports like Dubai. According to Iranian press,
Davoodi said both sides also discussed a proposal to conduct
future trade only in Turkish Lira and/or Iranian Rials,
rather than in dollars or Euro.

-- The Governor of Iran's East Azerbaijan Province Ahmad
Alireza Beighi, Chairman of the Iran-Turkey Trade Council
Rahim Sadeghian, and Iranian Ambassador to Turkey Bahman
Hosseinpour led a group of 120 Iranian officials and
businessmen to a "trade promotion exchange" in Istanbul on
February 24-26, hosted by Turkey's National Association of
Industrialists and Businessmen (USIAD). DEIK Chairman Rona
Yircali and Independent Industrialists and Businessmen's
Association (MUSIAD) Chairman Cihat Vardan also attended, and
welcomed prospects for expanded trade ties.

-- Turkish Transport Minister Yildirim visited Tehran
February 28-March 3 to chair a "Turkey-Iran Joint Commission
on Transportation" meeting. He signed a transportation MOU
with GOI Transport Minister Behbehani reportedly committing
both sides to improving road, rail, and air links between
Turkey and Iran, including a project that would link Turkey,
Iran, and Pakistan by a single freight-train rail-line.
Yildirim also met President Ahmadinejad. Turkish press
quoted both of them as reaffirming the goal of reaching USD
20 billion in bilateral trade by the end of 2011.

"Don't Believe the Press"
--------------


3. (C) Despite this spate of recent meetings, our
Turkish-Iran Business Council contacts dismissed claims of a
warming or expanding bilateral commercial relationship.
Instead, they highlighted a number of economic and political
challenges in dealing with the GOI and Iranian companies, and
acknowledged that the global economic downturn was negatively
impacting Turkish businesses' interest in Iranian markets.


4. (C) Trade volumes: XXXXXXXXXXXX explained that trade between
Turkey and Iran had indeed expanded in 2008, reaching a total
annual volume of USD 10.3 billion. However, more than USD
seven billion of that was Turkey's import of Iranian
hydrocarbons (mostly natural gas),while Turkish exports to
Iran -- mostly iron and steel, tobacco products, textiles,
and automotive parts -- accounted for only USD two billion.
(Current trade figures are available at the GOT's statistical
agency's website, www.tuik.tr, under the tab "VeriBilgi" and
then "Ulkelere Gore Dis Ticarat".) XXXXXXXXXXXX predicted that
Turkish imports of Iranian gas would increase in 2009-2010,
but would be offset by declining bilateral trade in most
other sectors. He speculated that bilateral trade would not
reach more than USD 12 billion by 2011, "with 80-90% of that
being hydrocarbon imports."


5. (C) A "showcase" deal gone bad: Our contacts said one of
Trade Minister Tuzmen's objectives in his January trip to
Tehran was to press the GOI to allow the Turkish
petrochemical company Gubretas, which in February 2008
purchased Iran's one of largest petrochemical companies, Razi
Petrochem, for USD 635 million (ref A),to restructure the
deal. XXXXXXXXXXXX told us that Gubretas's Chairman, a member of
DEIK, admits that the deal was a bad one, "losing tens of
millions" of dollars in the past several months from
lower-than-expected fertilizer prices, lower-than-expected
production from Razi's aging factories, overly-leveraged
balance sheets, and a GOI order in January that all
petrochemicals sold through Iran's Mercantile Exchange (IME)
must only be sold domestically rather than exported.
According to XXXXXXXXXXXX, the January 2008 deal required Gubretas to assume Razi's USD 320 million in debt, to pay USD 125
million at the time of sale, and to deposit the remaining USD
510 million in an Iranian escrow account, to be paid in full
in five years. Gubretas reportedly asked Tuzmen to press the
GOI to give Razi permission to export its petrochemicals
abroad and to ease restrictions on the use of Gubretas's
escrow deposit, but so far Iran has refused.


6. (C) Pressed about the other reported outcomes of Tuzmen's
Iran trip, XXXXXXXXXXXX said it had been "a waste of time." The USD 300 million in deals reportedly signed during Tuzmen's visit
really only referred to the January 2009 bilateral trade
volume (USD 426 million). XXXXXXXXXXXX claimed the press
misunderstood what Tuzmen was saying, and he insisted that no
significant deals were signed during that trip. He laughed
off Nahavandian's claim that Trabzon could replace Dubai as
Iran's primary transit port for European imports, noting that
as a Trabzon native he was familiar with its port facilities,
which would need massive expansion to rival Dubai's
facilities or cut into Dubai's Iran trade. "We asked if Iran
would help invest in port improvements at Trabzon, or highway
improvements from Trabzon to Iran, they declined. I would
love to see Trabzon become like Dubai, but it will never
happen. Nahavandian just wants to talk about Trabzon to
press the Emirates to stop fingerprinting Iranian
businessmen."


7. (C) Dueling trade groups, murky Iranian rivalries: XXXXXXXXXXXX
said DEIK was caught by surprise at the February visit of the
East Azerbaijan province Governor and trade group. He noted
that even though DEIK should act as the single contact for
Iranian trade delegations, independent Turkish trade
associations, including MUSIAD and USIAD, think they can
deliver better bilateral trade deals for their members than
DEIK, and thus reach out to Iran directly. "Iranian
businessmen don't care who sponsors them; they just want a
free trip to Turkey." When XXXXXXXXXXXX learned of that trade
delegation he called USIAD and demanded a seat at the table,
which USIAD grudgingly gave. XXXXXXXXXXXX told us that Iran's
Ambassador to Turkey, Hosseinpour, and its Consul General in
Istanbul, Yasini, argued about this trip, with Hosseinpour
insisting that bilateral trade visits work only through DEIK,
while Yasini (supported by Iranian-Turkish Business Council
Chair Sadeghian) lobbied the GOI to work through MUSIAD (a
Islamist oriented trade association),USIAD (a nationalist
trade association) and others. XXXXXXXXXXXX also lamented the
"murky power rivalries" within Iran, which Turkish companies
find difficult to navigate. As one example, he cited a deal
that a Turkish hotel chain wanted to buy some Iranian hotels
in 2008, a deal supported by the Iranian MFA and Commerce
Ministry. Somehow it ran afoul of the "Supreme Leader's
Representative" to one of the ministries, and the deal died.
"When that happens, it is not over politics or ideology, but
always over who gets what cut from the deal."



8. (C) Banking expansion: Asked about the press reports of
a proposal to use national currencies in bilateral trade,
XXXXXXXXXXXX said Turkish businesses would never accept payments in
Iranian Rials. He acknowledged that Iran had tabled a
proposal under which it would deposit a sum of money ("maybe
around USD 500 million") in Bank Mellat's Istanbul branch
(ref D),as a line of credit for Iranian businesses importing
Turkish goods, as well as for hard currency payments by the
GOT for its hydrocarbon purchases. But the two sides
disagree on key terms, including over the initial deposit.
According to XXXXXXXXXXXX, Turkey proposed Iran make the full
deposit using Euros from its foreign exchange reserves which
would then be deposited in a Turkish Lira account, while Iran
proposed making the deposit in Rials, which would be
converted to Lira at a favorable rate. Iran also pressed for
agreement to expand its banking presence in Turkey "to
facilitate the arrangement," but Tuzmen declined. XXXXXXXXXXXX told us the proposal was "going nowhere" but he professed surprise
when shown an Iranian Commerce and Industry press release
reporting that Iran's Export Development Bank has already
deposited an initial tranche of 50 million Euros into Bank
Mellat's Istanbul branch for this purpose. XXXXXXXXXXXX admitted
that if Iran can modernize its banking industry, closer
banking ties between Turkey and Iran could lead to
significantly expanded bilateral trade.

Next Steps: ECO Summit, Ahmadinejad's visit
--------------


9. (C) XXXXXXXXXXXX called the transportation MOU signed between
Transport Ministers March 3 "just a piece of paper." He said
Iran wants Turkey to finish constructing rail and ferry links
that would allow Iran to send goods by train into Turkey's
eastern Van province, over Van Lake, and on to central and
western Turkey. Turkey wants Iran to reduce the fuel tariff
it charges to Turkish truckers entering Iran (to protect
Iran's domestic fuel subsidies),which drives up the cost of
Turkish exports to Iran and points farther east. Neither
issue was fully resolved in the transport MOU, per XXXXXXXXXXXX.
Instead, it commits Turkey and Iran to build a freight rail
link with Pakistan. Although "real improvement of regional
transportation links and infrastructure would be a great
benefit to regional trade" the current MOU with Iran "is just
for show, for the ECO Summit in Iran" on March 11.


10. (C) XXXXXXXXXXXX said the GOT has not invited DEIK or any trade associations to attend the ECO Summit. XXXXXXXXXXXX was dismissive of ECO's (and the D8's) role in promoting regional trade,
calling ECO a "paper organization" whose weakness is
exploited "by a few member states" to pursue strictly
national goals. "It does nothing to make Turkish trade with
Iran more profitable." He speculated that the real talks at
the ECO Summit will be about pipelines, not trade or
transportation, with President Gul trying to convince Central
Asian ECO member states to support the Nabucco pipeline.


11. (C) XXXXXXXXXXXX did not know if President Ahmadinejad plans to bring trade officials with him when he visits Istanbul March
16-20 for the World Water Forum. He promised to inform us if
Ankara asks DEIK to organize trade talks with the Iranian
delegation, though he asserted that many of his GOT contacts
are distracted by preparations for Turkish municipal
elections March 29, and won't focus on trade issues until
afterwards.


12. (C) XXXXXXXXXXXX separately told us he has been asked to begin preparations for the next Turkey-Iran Joint Business Council
Meeting, to be held in Istanbul in early May. That meeting
will continue discussions on Iran's banking proposal and the
outstanding transportation issues, and will also focus on new
potential areas for trade and commercial cooperation
including Turkish interest in expanding into Iran's USD one
trillion "halal" (religiously approved) food market, as well
as "tourism expansion" (ref C).

Comments
--------------


13. (C) It is likely that our contacts' efforts to downplay
prospects for expanded bilateral trade, and to highlight the
difficulties of dealing with Iran, were partially motivated
by self-interest. As businessmen with years of experience
pursuing Iranian trade deals, they are well aware of the US
and international sanctions on Iran, probably well
experienced at navigating as close as possible to the limits
of those sanctions, and eager not to attract USG attention in
the event Washington increases economic pressure on Iran. On
the other hand, their frustrations with Iran were palpable.
That a neighboring market of such potential -- 70 million
mostly young, western-minded, consumer-oriented people -- is
still largely off limits to some Turkish goods and
unprofitable for others because of the GOI's unhelpful
economic and political policies is genuinely galling to
Turkish businessmen like XXXXXXXXXXXX and XXXXXXXXXXXX. They asked the
USG to support Turkish-Iran trade cooperation as "the easiest
and least threatening way" to modernize Iran's economy, "to
free it from Iranian government mismanagement." But they
ultimately concurred that absent a decision by the Iranian
government itself to reform its economic system, the focus of
Turkish-Iranian trade in coming years would likely remain
"mostly just natural gas and hot air."



14. (C) Bio note: XXXXXXXXXXXX's full-time job is as Chairman of
"Forum Fairs and Promotions," which Turkey's Under
Secretariat for Foreign Trade uses to organize international
fairs with trade partners. (Indeed, XXXXXXXXXXXX asked if the USG
would like to participate in a Turkey-Iraq trade fair in
Gaziantep, May 22-24.) As noted, XXXXXXXXXXXX is from Trabzon,
where he previously was (among other business ventures)
Deputy Chairman of TrabzonSpor, one Turkey's best soccer
teams. XXXXXXXXXXXX speaks good English. End comments.
Wiener