Cablegate: Turkey's Military Pension Fund: Powerful, But

VZCZCXRO3887
RR RUEHDA
DE RUEHAK #6555/01 3351332
ZNR UUUUU ZZH
R 011332Z DEC 06
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 0142
INFO RUEHIT/AMCONSUL ISTANBUL 1725
RUEHDA/AMCONSUL ADANA 1387
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 ANKARA 006555

SIPDIS

SIPDIS
SENSITIVE

USDOC FOR ITA/MAC - RUSNAK
TREASURY FOR OASIA - JONATHAN ROSE

E.O. 12958: N/A
TAGS: EFIN PGOV PHUM TU
SUBJECT: Turkey's Military Pension Fund: Powerful, but
Professional

1. (SBU) Summary. One of the many unique institutions with which
outsiders often associate Turkey is its large and powerful military
pension fund, which is often pointed to as a sign of undue military
influence in politics and society. But, along with coups, squatter
housing, leftist terror, and inflation, such specificities are
fading away as Turkey joins the global economy. The pension fund,
known as OYAK, no longer has special status or privileges and
operates as a professionally-managed occupational retirement fund
like others in Europe or the United States. OYAK's practice of
taking equity holdings in commercial enterprises (as opposed to
financial holdings of stocks and bonds) makes it susceptible to
political pressure and economic nationalism, as is arguably
demonstrated by its recent investments in Turkey's steel industry.
In any case, the pressures of the marketplace and EU-related reforms
limit the potential for abuse and are turning OYAK into an advocate
of sound economic policy, transparent corporate governance, and EU
accession. End Summary.

2. (SBU) With assets of over $12 billion, OYAK, the Armed Forces
Pension Fund, is one of Turkey's largest economic entities, ranking
just after private industrial giants like the Koc, Sabanci, Dogus
and Zorlu Groups. OYAK was created by law in 1961 to manage the
retirement savings of military officers and civilian employees of
the Ministry of Defense. In 2006, it has about 230,000 members,
$600 million in annual profits, and 18,000 direct employees.
Reflecting its membership, OYAK's all-male board consists of
generals and admirals, a university rector, and a provincial
governor (all retired), as well as its professional CEO. Membership
in OYAK is mandatory for uniformed personnel and optional for
civilian defense employees, 80% of whom opt to join. OYAK
membership and benefits are supplementary to required universal
participation in Turkey's social security system, SSK.

3. (SBU) In October 2005, Oyak made a $2.7 billion equity
investment in Turkey's formerly state-owned iron and steel company,
Erdemir, which runs ageing steel factories along the Black Sea coast
and the massive Isdemir works on the Mediterranean Gulf of
Iskenderun. OYAK's other equity holdings include the medium-sized
Oyak Bank and joint ventures with foreign companies including the
French companies Renault for automobile manufacturing and AXA in the
insurance sector. The Fund also has equity holdings in Turkish
cement, energy, telecom and other companies. The Fund has a policy
against investing in the defense sector and tends to prefer
investment in wholesale businesses that are not "brand names." OYAK
has no institutional relationship with the Armed Forces Foundation
(TSKGV), a military-run body that owns enterprises that produce
military equipment.

---------------------------
The Military's Hidden Hand?
---------------------------

4. (SBU) OYAK has been accused, particularly from European
quarters, of being a tool used by the Turkish military -- or, more
broadly, the putative "deep state" -- to influence democratic
civilian politics. A 2003 report by the "European Economic and
Social Committee" called OYAK "the secret hand of the Turkish army."
A European Parliament commission report that same year contained
similar conclusions. Former French Ambassador to Turkey and
journalist Eric Rouleau has said much the same, and called on the
Turkish government to end special privileges enjoyed by OYAK. On
the other hand, no "political" document of the European Union (such
as those of the Copenhagen summit) has cited objections to OYAK or
its status.

5. (SBU) OYAK executives assert that OYAK is a professionally and
transparently managed pension fund, differing from other
occupationally-based pension funds only in that it includes large --
in many cases controlling -- equity stakes in its investment
portfolio, as opposed to only buying non-controlling shares in
traded equities. The executives explain this by pointing to the
relative thinness and small capitalization of the Turkish stock
market. OYAK publishes annual reports and financial statements that
are audited by international accounting firms in accordance with
International Accounting Standards. For example, OYAK's 2005 annual
report contains an auditors' statement by Deloitte Touche. OYAK has
credit ratings from Moody's and Standard and Poors, and has issued
bonds on international markets. OYAK also publishes extensive
verbatim transcripts of its annual membership meetings, although
these may be edited to delete commercially sensitive information.

-----------------------------------------
Economic Nationalism vs. Sound Management
-----------------------------------------

ANKARA 00006555 002 OF 002

6. (SBU) When current CEO Coskun Ulusoy took over in 2000, he
brought with him from the Koc Group a team of outside business
professionals like Executive VP Ergun Okur and Aydin Muderisoglu.
The Fund has thrived under the new team, with assets mushrooming
from $5.8 billion in 2003 to 2005's $12.3 billion. Ulusoy asserts
that OYAK's "first duty is to safeguard the value of its members'
savings." Nonetheless, observers sometimes perceive non-economic
motives in OYAK's investment decisions. The decision to acquire
Erdemir, which stretched the Fund's financial and managerial
capabilities, is a recent example. Erdemir's privatization took
place at a time of rising economic nationalism and fears that large
foreign companies, like Mittal and Arcelor in steel, would take over
key economic sectors. OYAK's high bid was welcomed by politicians
as a "national" solution, while financial analysts viewed the price
as excessively high. Similarly, there has been controversy in the
press about OYAK's desire to sell its mid-size Oyak Bank to a
foreign bank despite OYAK management's argument that a relatively
small, nationally-based bank can not be competitive against major
international banking giants, like Citigroup, BNP and Dexia, that
are buying into Turkey's banking sector.

-----------------------
No "Special Privileges"
-----------------------

7. (SBU) OYAK officials also deny that the Fund enjoys special
privileges. They rebut charges, such as Eric Rouleau's, that
military banking accounts held at Oyak Bank are a hidden subsidy by
explaining that individual military units' decisions on where to
hold their salary accounts are commercially-based. In Turkey,
ministries, the military, and private corporations pay salaries
through the banking system. Banks compete for this business by
offering non-cash incentives to the managers of individual units.
In some cases, these incentives can be substantial, such as new cars
or buildings. Oyak Bank has apparently won the business of many
military units by providing such goodies to commanders, ostensibly
for the enjoyment of their units. In any case, this issue will
become moot once Oyak Bank is sold.

8. (SBU) Further reforms in OYAK's structure and relationships
will be necessary as part of Turkey's EU accession process. In
particular, Turkey currently lacks a "second pillar" retirement
insurance system that supplements government social security plans.
Creation of such a system, as required by EU legislation, would
require creation of an independent regulatory body and additional
transparency regulations. OYAK executives say they would like to
open up membership to non-military personnel and even the public,
but such deregulation seems remote at the present given the priority
EU countries give to government run social security systems.

-------
Comment
-------

9. (SBU) Unlike military-owned and operated commercial enterprises
in some other countries, like China, OYAK is not a source of income
that gives the Turkish military independence from the civilian
financial control through the national budget. At the same time,
there is no doubt that some politicians, particularly of the
nationalist strain, see OYAK as a handy source of finance for
would-be "national champion" companies. It is also true that OYAK,
given its size and military origins, carries influence with
politicians that could be used to protect its institutional and
business interests. Indeed, the Fund's current management uses its
influence to support the orthodox economic policies implemented by
the AK Party government, including the IMF program. There is no
evidence that OYAK uses its financial resources covertly to
influence politicians. In fact, the author of the 2003 European
Economic and Social Committee report, Tom Etty, has, according to
OYAK executives, retracted his earlier views about OYAK's "secret
hand." As Turkey proceeds on the path to EU membership, OYAK should
continue the process of becoming a professional pension fund on the
European and U.S. model.

This report is available on Intellipedia for editing and commenting:
http://www.intelink.sgov.gov/wiki/OYAK.
WILSON

© Scoop Media