World Economic Forum on Europe and Central Asia2008

Report

World Economic Forum on Europe and Central AsiaConfronting Challenges in Defining a Collaborative FutureIstanbul, Turkey 30 October – 1 November 2008

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REF: 241108

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Page 3

Executive Summary

Page 8

Business: Seizing Opportunities

Page 10

Geopolitical Moves

Page 12

Re-emergence of Central Asia

Page 14

Securing Energy and Resources

Page 16

Turkey: Taking the Lead

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Acknowledgements

Contents

2 | World Economic Forum on Europe and Central Asia


Executive Summary

“We have to work together on a regional andglobal future if we want to build a better world.We need to restore confidence and to highlightthe necessity for corporate global citizenship.Now when companies are under so muchpressure we must show that they have, despiteeverything, a deep social responsibility.”

Klaus Schwab, Founder and Executive Chairman,World Economic Forum

The first World Economic Forum on Europe and CentralAsia was both timely and relevant in the wake of theglobal financial crisis. Strategically located as a bridgebetween East and West, Turkey as an establisheddemocracy is well positioned in today’s chargedgeopolitical environment to serve as an anchor for tradeand investment, and as a peace broker across the regionand beyond.

The global financial meltdown loomed over the meeting.Participants remained “cautiously optimistic” about thefuture of the region, despite the clouds of chaos anduncertainty gathering at its borders. There was generalacknowledgement that the financial crisis will have animpact on emerging markets as it is difficult to decouplefrom the seismic global events of the past months.Indeed, the decoupling theory of the financial markets isfailing to withstand the test of a real worldwide crisis andit has proven impossible to remain isolated from theglobal financial turmoil.

Nevertheless, the enormous growth potential of Turkeyand its surrounding regions is likely to soften the impactconsiderably. Developing countries that had been lessintegrated in the global financial architecture may be lessaffected and may even draw some benefits from thecrisis.

“This meeting has taken place in unusually challengingtimes [as we are] facing unusually challenging issues.There was no panic about the global economy or aboutgeopolitical matters. It was a cool review of facts andopportunities,” observed Victor Halberstadt, Professor ofPublic Economics, Leiden University, Netherlands, at theclosing plenary.

One strong message that emerged during thediscussions was that the financial meltdown has resultedin dislocation but has not led to fragmentation of theworld economy. It remains a major challenge andresponsibility of both governments and businesses tocurb tendencies towards fragmentation, which could take

the form of economic nationalism and protectionism inthe near future. Financial models have clearly beendisrupted, but national governments and central bankshave succeeded in working together rather thanindividually, and they have moved swiftly and effectively tocoordinate their efforts in dealing with the problem.

Thomas Mirow, President of the European Bank forReconstruction and Development (EBRD), noted thatTurkey is “well placed” to weather the storm and thatemerging market economies that have developed theirown financial systems are likely to resist better than thosethat depend heavily on external financing. He noted thatthe crisis is likely to foster greater regional cooperationbetween emerging market economies – and perhapseconomic integration.

Many political and business leaders were surprisinglyupbeat about the region’s economic future and pointedout that within a crisis there is always opportunity –fordeeper collaboration, stronger economic cooperationand, in some cases, reconciliation. For example, AliBabacan, Minister of Foreign Affairs and Chief Negotiatorof Turkey, described an era of “new relations” betweenAzerbaijan and Armenia, and Armenia and Turkey,ushering in huge opportunities in communications,transport and energy.

Turkey is also assuming the role of regional peace broker.The conflict in Georgia in August 2008 spurred efforts byTurkey to create a Caucasus Stability and CooperationPlatform to bring countries in the region together todiscuss economic, political and security issues. This is animportant platform as many countries in Central Asia andthe Caucasus still have “dysfunctional” relationships withtheir neighbours. Both regions are resource-rich andstrategically located. As a result, countries in both arebeing courted by the US, India, Russia, Europe andChina. At the same time, the world is grappling with themeaning of a more assertive Russia.


Turkey is determinedly pursuing its candidacy for the EU,while at the same time strengthening its ties with otherregional groups, including the African Union, the GulfCooperation Council and the League of Arab States. Ithas also expressed an interest in becoming a member ofthe Shanghai Cooperation Council. Turkey will be able toexercise more regional clout after having won the bid fora place on the UN Security Council. There were positivesignals from both the Turkish government and the Turkishbusiness community about EU accession, a view thatwas echoed by EU officials.

Improvements in transportation networks,telecommunications and regional cooperation arepowerful incentives that are expected to spur newinvestment. Turkey – singled out as having very large anduntapped potential, in part due to the strong growth of adynamic middle class and a young population – isincreasingly being looked at to galvanize economicdevelopment across the region and beyond. Now is thetime for emerging markets to “develop and improvedomestic capital markets,” advised Jean Lemierre, SeniorAdviser to the Chairman, BNP Paribas Group, France. Itis also time for countries to create enabling environmentsfor foreign direct investment (FDI).

The spectre of corruption still hovers over the region andmust be dealt with if Central Asia is to attract quality FDI.One of the biggest opportunities of this financial crisis isthat it will cease to be business as usual. The taxpayerswho bailed out the system will increasingly demand moreaccountability and transparency. There is a lack ofconsumer and investor trust, which has left a sizeablevacuum. Going forward, transparency is going to be evenmore important to restore the trust and confidence tomake the markets work. Transparency, oversight andgood governance widen the scope for global corporatecitizenship and deeper social responsibility.

While the impact of the global financial crisis had initiallybeen relatively muted in Russia, the situation hasdeteriorated over the last few months with the stock

market plunging and the declining oil and commodityprices depressing investors’ confidence in Russianassets. Nevertheless, prospects for the future growth ofthe Russian economy are still strong; several regionssuch as Tatarstan have embarked on ambitiousinfrastructure projects that will guarantee significantstimulus for the economy over the coming years. Russiais also striving for international recognition of thelegitimacy of its actions and interests in the Caucasus,and asserting leverage over its “near abroad” (term usedin Russia to describe non-Russian states that were oncepart of the USSR). It is working in concert with otherregional powers to cement a Nagorno-Karabakh solutionand become a guarantor of peace between Armenia andAzerbaijan.

Several business and political leaders called for a “newworld order”. Klaus Schwab, Founder and ExecutiveChairman of the World Economic Forum, called for “anew business ethos” and told participants that in anincreasingly interdependent and interconnected world,there is a need to find new ways for global cooperation.“It remains to be seen whether we will be able to create aworld community that will find the right balance betweennecessary regulation and maintaining entrepreneurialdynamism. It is now more important than ever not tochoke off the engine of the real economy,” he said.

This first World Economic Forum on Europe and CentralAsia took place in the eye of the maelstrom. Themeeting’s theme – Confronting Challenges in Defining aCollaborative Future – is the task of world leaders todayas they look for solutions for tomorrow. The meetingdefined challenges, identified opportunities and laid thegroundwork for the World Economic Forum AnnualMeeting 2009 to be held in Davos-Klosters, Switzerlandon 28 January – 1 February, under the theme Shapingthe Post-Crisis World. At the Annual Meeting 2009,governments and business will sit together and focus onan agenda designed to tackle the key issues facing theworld and how best to restore sustained economicgrowth.

“A new world order is likely to emergefrom the current economic crisis, but it isimportant that it be inclusive rather thanexclusive and that it favours dialoguebetween nations in the region.”

Recep Tayyip Erdogan, Prime Minister of Turkey


This report on the World Economic Forum on Europe andCentral Asia is centred on five essays linked to theprogramme’s themes: Business: Seizing Opportunities;Geopolitical Moves; Re-emergence of Central Asia;Securing Energy and Resources; and Turkey: Taking theLead.


Assessing the effects of the current financial turmoil andeconomic slowdown on the region and identifyingbusiness opportunities stemming from the crisis will helpdetermine the path towards rebuilding consumer andinvestor confidence.

• No one country is immune to the effects of the globalfinancial meltdown, but Turkey is well positioned toweather the storm. It is viewed as a strategic anchorthat is expected to energize the integration of theCaucasus and Central Asian regions into the worldeconomy. Turkey has a well-balanced economy withgrowth supported by domestic consumption andexports.

• Emerging market economies that have developed theirown financial systems are likely to fare better thanthose that depend heavily on external financing. Thereare unique investment opportunities across the region,particularly in energy infrastructure and transportationnetworks.

• The information technology and communicationssector (ICT) holds out a beacon of hope as it will notbe affected to the extent of other areas of the economyby the global slowdown. This is because the crisisoffers new business opportunities as businesses in allsectors look to technology to raise productivity andimprove efficiency.

• There is tremendous potential across the Caucasusand Central Asia, which is expected to be unleashedthrough strengthened economic cooperation. However,economic diversification is key, despite the vast energyresources in some of the region’s oil-rich countries –70% of the world’s fossil fuels are produced south andsoutheast of Turkey.

Geopolitical Moves

Reassessing recent geopolitical developments across theEurasian continent and rebuilding confidence in politicalcooperation is critical in today’s charged – and changing– environment.

• Still-shifting power equations – especially theresurgence of Russia on the world stage – impinge onan array of issues including the enlargement of theEuropean Union and the expansion of the NorthAtlantic Treaty Organization (NATO), the extent ofregional cooperation among countries in Central Asiaand the Caucasus, and even Turkey’s critical role as anaspiring EU member and a bridge between East andWest.

• “Frozen conflicts” across the region include lingeringethnic divides and territorial disputes that could quicklywiden, particularly if extremists take to terrorism. Iran’sgreater assertiveness in the Middle East and the US-led invasion of Iraq and the ongoing war there, as wellas in Afghanistan, have stirred up concerns andsimmering resentment. The conflict that eruptedbetween Russia and Georgia this August over thestatus of South Ossetia suggests that long-standingenmities and rivalries in Central Asia and the Caucasusdie hard.

• Conflict resolution efforts are critical. New regionalcooperation based on common security frameworks,political dialogue, economic interdependency andmulticultural coexistence could be a way forward.

“Enlargement is even more relevant now. The Turkish businesscommunity is practically integrated into Europe. But we wouldlike to have higher transparency and more international normsin our business. In times like these, this is even moreimportant. The reforms we are expecting will affect ourgovernment structures. We need this.”

Güler Sabanci, Chairman and Managing Director, Haci Ömer Sabanci Holding, Turkey

“Taxpayers saved the day by bailing out the system to savethe economy and ultimately their jobs. Taxpayers won’taccept business as usual. They will ask for measures tocorrect the system.”

Jean Lemierre, Senior Adviser to the Chairman, BNP Paribas Group, France


• Turkey’s deft diplomacy during the Russian incursioninto Georgia in August 2008 highlighted its potential asa crucial bridge between East and West, betweenEurope and Central Asia and the rest of Asia, andbetween Western and Eastern Europe includingRussia. Turkish leaders have underscored this uniquerole as a key reason for Turkey to join the EU. Europeneeds Turkey as much as Turkey needs Europe.


Understanding the economic and political integrationprocesses underway in Central Asia and the region’semerging role in global political, economic and securitystructures is complex, but necessary to identifyopportunities and avoid pitfalls in the post-crisis world.

• The geopolitics of Central Asia are becoming morecomplex and contested. Countries in Central Asia andthe Caucasus are fragile and still in shock following theAugust 2008 conflict in Georgia. Russia’s action notonly highlighted the vulnerability of pro-Western nationsin the Caucasus, but also the vulnerability of oil andgas pipeline routes from Central Asia that run throughGeorgia and bypass Russia. At the same time, bothregions are being courted by the US, India, Russia,Europe and China – as they compete either forresources or influence, or both.

• Turkey is the linchpin of the Central Asian region, acrossroad for Europe, the Caucasus, Asia and theMiddle East. There is a potential “new Silk Road”, bothreal and virtual.

• There is a need for deeper cooperation across theregion and beyond. Energy is likely to be the currencyof a new Silk Road, but there are opportunities forcooperation in regional development across a range ofeconomic sectors – industry, agriculture and services –and good prospects for attracting extra-regional capitalto help finance them.

• The market potential is huge, particularly if it stretchesout to the Middle East, where economic activitycontinues apace and exports to Central Asia are rising.Exports from Central Asia to the Middle East have risenby more than tenfold from 1997 to 2006. The Gulfcountries are important investors in Central Asia. At thesame time, fears of a brain drain from the region couldmaterialize as talent is attracted to the wealth of theGulf.


The state of energy and resource security across thecontinent depends on identifying, managing and findingsolutions for geopolitical, economic, social, technological,ecological and even geological risks.

• Central Asia, Russia and the Middle East may haveabundant supplies of energy, but the logistics of gettingthem to European markets are fraught withcomplexities and hazards.

• The security of supply is a major concern for Europeand Turkey, while Russia and other producers inCentral Asia and the Middle East want to be sure thatdemand from Europe and Turkey is strong. All sideshave an interest in keeping transport routes open andestablishing new reliable ones.

• Infrastructure deficiencies are a pressing problem.Stronger partnerships among developers, consumersand host governments, along with more leadershipfrom these governments, will be necessary to set aframework for future infrastructure development.

• Turkey is likely to be a critical bridge in helping to bringnew sources of oil and gas to European markets.Turkey could also play a crucial role in addressing thewater stress problems of Central Asia. The ongoingdebate on the impact that the use of water for biofuelshas on food production and the prices of staples suchas corn and rice has underscored how big the problemof water stress is across regions.

“The EU’s long-term vision is to create an integrated marketthat includes neighbouring countries, a market of more thanone billion people. In the world of tomorrow, integratedstructures will be the best model for success.”

Günter Verheugen, Vice-President and Commissioner, Enterprise and Industry, European

Commission, Brussels

“The new attitude should be that instead of just reacting tocrises we should have a vision of order. Instead of waitingfor the storm, we should act …. We will create a new visionof order and everybody will win.”

Ahmet Davudoglu, Chief Adviser to the Prime Minister, Turkey



There are high expectations for Turkey’s economic growthand presence in the region, as well as its leadership rolein easing tensions relating to energy security. The countryis also expected to play an important role in promotingmulticultural and multi-religious societies.

• In October 2008, Turkey won a non-permanent seat onthe United Nations Security Council for two years,winning 151 votes out of a total 192 UN members.That Turkey mustered such widespread support is areflection of the country’s increasing weight ininternational politics and the growing confidence of theinternational community.

• Turkey’s proactive diplomacy to diffuse the Russia-Georgia conflict, in concert with the EU’s efforts,demonstrated both the special influence that Turkeywould bring to Europe and the convergence of Turkishand European geopolitical and economic interests.Both sides need each other. EU membership wouldfurther open up European markets to Turkishcompanies and open Turkey to even more investmentfrom Europe.

• Turkey’s labour force is not cheap, but it is highlyqualified and very productive. There is a pool ofqualified management talent, and Turkey is positionedat the centre of a market that represents roughly 1.2billion people. Promising growth sectors include energy,infrastructure, transport, the automotive industry,consumer products, agriculture, mobile telephony andinformation communication technology (ICT).

• Turkey is in a strategic position for internationalcompanies that use it as a base for running operationsin up to 90 other countries. Within a radius of fourhours by plane, there is a market of 1.3 billionconsumers. Foreign direct investment in Turkey hasskyrocketed from around US$ 1 billion until 2005 tomore than US$ 20 billion in 2007. And there is furtherscope for investment both in Turkey and across theregion.



No one country is immune to the effects of the globalfinancial meltdown, but Turkey’s position at thecrossroads of East and West, makes it a strategicanchor that is expected to energize the integration ofsurrounding regions into the world economy.Prospects for Turkey and Central Asia as a region aregood, but there will be an inevitable slowdown.Nevertheless, most business leaders are more thancautiously optimistic – they are upbeat about thefuture.

“Turkey has a lot to offer in the long run despite thecurrent doom and gloom,” Mehmet Simsek, Ministerof Economy of Turkey, told participants. “Turkey willremain attractive simply because of the sheer size ofits domestic market. It is the second most populouscountry in Europe, and it has one of the mostattractive demographics.” Turkey is going through amajor transformation in its business practice, legalsystem, institutional set-up and even in terms of itsmindset. “This transformation means that you invest inTurkey as an emerging country offering high-growthpotential but at a relatively lower risk in the long run,”he said.

Jean Lemierre, former EBRD president and currentlySenior Adviser to the Chairman, BNP Paribas Group,said that Turkey has been “a very competitive marketand is even more so today.” According to Lemierre,

the Caspian Sea needs an anchor and Turkey willbecome that “anchor for trade and investment.”

Ahmet Ashaboglu, Chief Financial Officer, KoçHolding, Turkey, reminded participants that althoughTurkey’s labour force is not cheap, it is highly qualifiedand very productive. There is a pool of qualifiedmanagement talent, and Turkey is positioned at thecentre of a vast market that represents roughly 1.2billion people. Promising growth sectors includeenergy, infrastructure, transport, the automotiveindustry, consumer products, agriculture, mobiletelephony and IT.

Khojamyrat Geldimyradov, Deputy Prime Minister ofTurkmenistan, said his country is developing itsinternational gas pipeline network beyond Russia andKazakhstan with a new link to China soon to go intooperation and another planned to Afghanistan,Pakistan and India. Turkmenistan has embarked on aprogramme of economic reform aimed at attractingoutside capital not only in exploiting its vast oil andgas reserves, but also in new sectors such as tourism,textiles, energy derivatives and food processing.

Thomas Mirow, President of the European Bank forReconstruction and Development (EBRD), pointed out

“Diversification of our economy isaimed at developing its real sectors,increasing market-oriented reforms andpromoting small and mediumbusinesses.”

Khojamyrat Geldimyradov, Deputy Prime Minister of

Turkmenistan

“There are a lot of opportunities in theMiddle East and Central Asiancountries. But bureaucracies areunbelievable …. We need to wake upand be more business-oriented.”

Khalid Abdulla-Janahi, Chairman, Ithmaar Bank, Bahrain


that emerging market economies which havedeveloped their own financial systems are likely to farebetter than those that depend heavily on externalfinancing. The question on the minds of many peopleis whether emerging economies can survive, despitethe financial maelstrom churning up markets anderoding consumer confidence beyond its borders. Theconsensus is “yes”. Participants agreed that thetremendous economic potential within Turkey, CentralAsia and the Caucasus would be unleashed throughstrengthened regional cooperation.

The information communication technology (ICT)sector holds out a beacon of hope: it will be affectedby the global slowdown, but not to the extent of otherareas of the economy. In fact, the financial crisis offersnew business opportunities as businesses in allsectors look to technology to raise productivity,improve efficiency and get closer to their customers.This resilience – and potential – stems from the factthat the industry is structurally different and healthybecause of its debt-equity ratio.

In emerging markets, demand is still there and overallpenetration still low. Milko van Duijl, President, LenovoEMEA, France, is also upbeat about the future. Thesheer size of emerging markets is growing along withpurchasing power. For example, Turkey currently has apopulation of 71 million and PC market penetrationthat is roughly 10%. In three years, the market isexpected to double and experience 20% PCpenetration.

Alper Akdeniz, Managing Partner, Central Asia andCaucasus, PricewaterhouseCoopers, Kazakhstan,saw no immediate prospect for regional economicintegration, but a strong outlook for increasingcooperation in health, education, energy and mining.He suggested that in the energy sector attention

should be paid to developing sustainable alternativesto hydrocarbons, especially wind power which couldbe an especially promising source of energy in someCentral Asian countries.

Bolat Akchulakov, Vice-Minister of Energy and MineralResources of Kazakhstan, called for the developmentof common rules and regulations for biofueldevelopment, which would allow them to be traded asa commodity like oil. He pointed out that advances inbiofuel development and use are happening in parallelto his country’s extensive oil and gas development.

Notably, 70% of the world’s fossil fuels are producedsouth and southeast of Turkey. Economicdiversification – including focusing on energy andnatural resources in Central Asia – is key, despite thevast energy resources in some of the region’s oil-richcountries. Infrastructure remains a major challengeacross Central Asia and the Caucasus, but within thischallenge is an opportunity for investment, particularlyin infrastructure and transportation networks.Connectivity spells promise – connectivity in IT, energy,transport, markets and financial systems.

Foreign Direct Investment in Europe and Central Asia

Source: UNCTAD

Growth rate of inward FDI stock in Russia have fallen below EU27 growth rates

80%

60

40

20

0

-20

Ann

ualc

hang

ein

inw

ard

FDIs

tock

s

20022001 2003 20062005

Central Asia

Turkey

Russia

EU27

2004

“There is going to be less investment to cover deficits inthe United States. The US will not be so attractive anymore. This region [the Middle East and Central Asia] willprove to be a great attraction.”

Mohamed Nahavandian, President, Iran Chamber of Commerce, Industries and Mines

(ICCIM), Islamic Republic of Iran

“ICT can play a fundamental role in helping companies in allsectors face the crisis by facilitating cost-cutting, productivitygains and enabling businesses to get closer to theircustomers. It is a time to come up with new and better thingsbecause the world needs new technology.”

Ali Faramawy, President, Microsoft Middle East and Africa, and Vice-President, Microsoft

International, Microsoft, Turkey


Geopolitical Moves

Nearly two decades since the collapse of the SovietUnion, the disintegration of the cold war order is stillhaving an impact on the geopolitics of Europe andCentral Asia. Still-shifting power equations, especially theresurgence of Russia on the world stage, impinge on anarray of issues including the enlargement of the EuropeanUnion and the expansion of the North Atlantic TreatyOrganization (NATO), the extent of regional cooperationamong countries in Central Asia and the Caucasus, andeven Turkey’s critical role as an aspiring EU member anda bridge between East and West.

Of particular concern is what Turkish Foreign AffairsMinister Ali Babacan called the “frozen conflicts” acrossthe region. They include lingering ethnic divides andterritorial disputes that could quickly widen, particularly ifextremists take to terrorism. “If they are not addressed ina timely manner through diplomacy and dialogue, thesecan turn into real difficulties,” Babacan warned. “Ourworld does not need new cold or hot wars, butconstructive peace,” said Turkish Prime Minister RecepTayyip Erdogan.

Yet Iran’s greater assertiveness in the Middle East as wellas the US-led invasion of Iraq and the ongoing war there,as well as in Afghanistan, have stirred up concerns andsimmering resentment. The conflict that erupted betweenRussia and Georgia this August over the status of SouthOssetia suggests that long-standing enmities and rivalriesin Central Asia and the Caucasus die hard. “The biggestdiplomatic and economic problem these fragiledeveloping states [in Central Asia] have is that theirfriends don’t talk to each other and they haven’t workedout their differences,” reckoned S. Frederick Starr,Chairman, Central Asia-Caucasus Institute at JohnsHopkins University.

Participants agreed that conflict resolution efforts arecritical. “We need a new regional framework for all thesefrozen conflicts based on common security frameworks,political dialogue, economic interdependency andmulticultural coexistence,” argued Ahmet Davudoglu,

“There will be no real domesticreconciliation in all countries withoutregional reconciliation because ourdemography is so heterogeneous.Turkey has played and can continue toplay the role of a very good regionalbroker. Regional brokers are a healthysupplement, but they are absolutely nosubstitute for internationalorganizations such as the UN.”

Mowaffak Al Rubaie, National Security Adviser, National

Security Council, Iraq

“There are frozen conflicts across theregion. If they are not addressed in atimely manner through diplomacy anddialogue, this can turn into realdifficulties …. By using its specialposition in the region, Turkey iscontributing more and more to stabilityand peace in the region and furtheraway.”

Ali Babacan, Minister of Foreign Affairs and Chief Negotiator of

Turkey


Chief Adviser to the Prime Minister of Turkey. “There willbe no real domestic reconciliation in all countries withoutregional reconciliation because our demography is soheterogeneous,” said Mowaffak Al Rubaie, NationalSecurity Adviser on Iraq’s National Security Council.Concluded Iranian Foreign Affairs Minister ManouchehrMottaki: “There must be greater consultation andconvergence among countries in the region.”

The conflict in Georgia clearly highlighted the need forEurope and the US to come to terms with a resurgentand more assertive Russia. At the meeting, the GeorgianForeign Minister Ekaterine Tkeshelashvili claimed thatRussia’s incursion into her country was aimed atchanging the government in Tbilisi. Moscow, she insisted,is concerned about Georgia’s success as an independentstate that is developing its democratic system and therule of law, liberalizing its economy and becoming “part ofan expanded Europe in political terms.” Russia, addedRobert Simmons, NATO Deputy Assistant Secretary-General and Special Representative to the Caucasus andCentral Asia, “acted disproportionately. What Russia didwas directed against all three countries in the Caucasus.”Norwegian Deputy Minister of Defence Espen B. Eide toldparticipants: “We need to reach out and get the Russia-NATO dialogue back on track.”

The EU and Turkey played critical roles in defusing theconflict in Georgia. “This is the first Georgian crisis inwhich the EU took charge. It was the French presidencyof the EU that stopped the tanks moving into Tbilisi,”explained Pierre Morel, EU Special Representative forCentral Asia. While supporting the EU’s efforts, Turkeywas spurred to propose the creation of a CaucasusStability and Cooperation Platform that would bringtogether countries in the region including Russia todiscuss economic, political and security issues.

Turkey’s deft diplomacy highlighted its potential as acrucial bridge between East and West, between Europeand Central Asia and the rest of Asia, and between

Western and Eastern Europe including Russia. Turkey’sleaders have underscored this unique role as a keyreason for the country to join the EU. Europe needsTurkey as much as Turkey needs Europe. “[EU]enlargement [to include Turkey] is even more relevantnow,” said Güler Sabanci, Chairman of Turkish groupSabanci Holding. “For us in the business community,accession to Europe is a civilization project.”

It would also be a key step in enhancing Turkey’s regionaland global stature as it leverages its good relations withits neighbours including Iran and Israel, and with strategicpartners such as the US, to take on a more active role inthe international community. Turkey’s membership in theEU would enhance the security of Europe.

“Enlargement and an open door policy is providing abuffer zone of safety for the EU,” said Babacan. “Turkey’srole is very important. When Turkey is an EU member,other regions will feel the EU coming closer to them.”That alone would be a significant contribution to peaceand stability in Europe, Central Asia and the Caucasus –and, of course, the rest of the world.

Source: IMF

Turkey's Trade Partners

100%

75

50

25

0

Sha

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tota

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por

tsan

dex

por

tsw

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rkey

20031999 2007*

China

* through three quarters

Rest of world

EU

US

Middle East

Russia

Trade with China and Russia rose from 5.8% of Turkey's trade in 1999 to 15.1% in 2007

“We need to reach out and get theRussia-NATO dialogue back ontrack.”

Espen B. Eide, Deputy Minister of Defence of Norway

“This is the first Georgian crisis in which the EU tookcharge. It was the French presidency of the EU thatstopped the tanks moving into Tbilisi.”

Pierre Morel, EU Special Representative for Central Asia, Council of the European Union,

Brussels



For thousands of years, the ancient Silk Road was acrossroad for the flow of people, goods and ideasbetween European, Western Asia, South Asia andEast Asia. Today, Turkey is the lynchpin of the CentralAsian region, a crossroad for Europe, the Caucasus,Asia and the Middle East. The region’s history hasbeen shaped by both climate and geography. Itsaridness traditionally made agriculture difficult and itwas cut off from vital trade routes by its distance fromthe sea. Today, countries of the region are close topolitical hot spots such as Iraq and Afghanistan,increasing their strategic influence. But Central Asiancountries are no strangers to conflict – their historyhas been marked by conflict.

The geopolitics of Central Asia are becoming morecomplex and contested. Countries in Central Asia andthe Caucasus are fragile and still in shock followingthe August 2008 conflict in Georgia. Russia’s actionhighlighted the vulnerability of pro-Western nations inthe Caucasus, but also the vulnerability of oil and gaspipeline routes from Central Asia that run throughGeorgia and bypass Russia. At the same time, many

countries have “dysfunctional” relationships with theirneighbours, while both resource-rich regions are beingcourted by many suitors – the US, India, Russia,Europe and China – as they compete either forresources or influence, or both.

Numerous participants pointed to the potential of a“new Silk Road”, both real and virtual. The foundationfor a new Silk Road is strengthened regionalcooperation and, perhaps, eventual economicintegration – even more important now in light of theglobal financial crisis. However, several participantspointed out that fostering such cooperation is mucheasier said than done. S. Frederick Starr, Chairman,Central Asia-Caucasus Institute, Johns HopkinsUniversity, said that that the region is “smothered” withorganizations but that they do not speak to each otheror solve problems for the countries themselves. Starrdescribed the Central Asian region as fragile statessurrounded by nuclear neighbours, adding that aspost-colonial states they are defensive about theirsovereignty and cautious when dealing withneighbours.

“The new Silk Road is developing and isboth physical and virtual. But there areimpediments such as restrictions on themovement of people and goods as wellas weaknesses within the educationalsystem. But these impediments are ontheir way out. They will not be there in20 years. I am confident that today’syouth are more imaginative in solvingproblems than previous generations.”

Hamid Karzai, President of Afghanistan

“The transportation Silk Road isembodied by a new cross-continentalrailway, as well as numerous pipelines.The resources Silk Road has at its coreapproximately 50% of the world’speople, and a significant amount of theworld’s natural resources. Each of theseroads provides unique investmentopportunities that can be convergedinto a win-win situation for everyone.”

Bulent Bulgurlu, Chief Executive Officer of Koç Holding, Turkey


Ali Babacan, Minister of Foreign Affairs and ChiefNegotiator of Turkey, underscored the specialrelationship and cooperation Turkey has with CentralAsia based on the fact that the origins of many Turkishpeople come from that area. “I strongly believe a lotmore can be done to strengthen relationships in theregion. They have a lot of common interests and havea lot to gain by cooperating.” Babacan also describedthe importance of oil and gas pipelines and a railwaythat would connect Central Asia to Europe via Turkey.“This will be important to make Central Asiancountries more connected to the Western world.”

Mohamed Nahavandian, President, Iran Chamber ofCommerce, Industries and Mines (ICCIM), IslamicRepublic of Iran, confirmed: “There are very realreasons to have more cooperation in the region.” Thebursting of the financial bubble in the US means“global capital will want to have more destinations.”Growing doubts about globalization as a result of thecrisis will mean more attention is paid to regionalcooperation. “In our region, there are a lot of giantprojects that could be invested in if everyone joinshands,” he said.

Many political leaders called for deeper cooperationacross the region and beyond. Energy is likely to bethe currency of a new Silk Road, but there areopportunities for cooperation in regional developmentacross a range of economic sectors – industry,agriculture and services – and good prospects forattracting extra-regional capital to help finance them.There is also a strong outlook for increasingcooperation in health, education, energy and mining.Although the region is oil and gas rich, economicdiversification is vital – and small markets hinderdiversification.

The groundwork has been laid for such cooperation.Yerbol Ornybayev, Deputy Prime Minister ofKazakhstan, noted that water levels in Kyrgyzstan are

so low that hydroelectric power is becomingunreliable. Cotton crops in Tajikistan may not receivethe irrigation they need. Kazakhstan, he said, has justsigned an agreement with neighbouring countries toprovide energy resources in exchange for waterresources during the summer months. In addition,there is a greater level of cooperation betweenKazakhstan and Europe through a framework agreedto in a 2005 memorandum of understanding. Severalparticipants emphasized the importance of resolvingthe status of the Caspian Sea; without such resolutionfuture developments will be impaired.

Deputy Prime Minister Khojamyrat Geldimyradov ofTurkmenistan said his country has embarked on aprogramme of economic reform aimed at attractingoutside capital not only to exploit its vast oil and gasreserves, but also to initiate reform in new sectorssuch as tourism, textiles, energy derivatives and foodprocessing.

The market potential is huge, particularly if it stretchesout to the Middle East, where economic activitycontinues apace and exports to Central Asia arerising. Exports from Central Asia to the Middle Easthave risen by more than tenfold from 1997 to 2006.The countries of the Gulf are important investors inCentral Asia. At the same time, fears of a brain drainfrom the region could materialize as talent is attractedto the wealth of the Gulf.

Markets depend on infrastructure. China is alreadyrecreating the Silk Road eastward, with its investmentof US$ 100 billion in building roads and railways toopen up remote Central Asia and Turkey to the rest ofthe world. More than 20,000 kilometres of rail trackwill be built in the coming decade to bring Chinesegoods into Central Asia and carry oil and metals toChina.

“The biggest diplomatic and economic problem these fragiledeveloping states have is that their friends don’t talk to eachother and they haven’t worked out their differences.”

S. Frederick Starr, Chairman, Central Asia-Caucasus Institute, Johns Hopkins University, USA

“The countries within Central Asia should cooperate and givemore development of their institutions, for example by creatinga Central Asian Union. There are many obstacles at themoment, but the future – and progress – lies in this direction.How can Kazakhstan be prosperous when our neighbours areweak or poor?”

Yerbol Orynbayev, Deputy Prime Minister of Kazakhstan



Energy and resource security hinges on managinggeopolitical, economic, social, technological,ecological and even geological risks. Central Asia,Russia and the Middle East may have abundantsupplies but the logistics of getting them to Europeanmarkets are fraught with complexities and hazards.“The resources are massive,” said Jay Johnson,Managing Director of Chevron Europe, Eurasia andMiddle East Exploration and Production, Eurasia SBU,referring to untapped opportunities in Kazakhstanwhere he is based. “But the technological difficultiesassociated with them, combined with the remoteness,make for a very difficult environment to bring them tomarket.”

According to Katherine Hardin, Senior Director andHead, Russian and Caspian Energy, CambridgeEnergy Research Associates (CERA), USA, to achievereal energy security involves ensuring supply, demandand delivery. The security of supply is a major concernfor Europe and Turkey, while Russia and otherproducers in Central Asia and the Middle East want tobe sure that the demand from Europe and Turkey isstrong. All sides have an interest in keeping transportroutes open and establishing new reliable ones.

Infrastructure deficiencies are a pressing problem.Chevron, for example, is using thousands of railwaytankers to transport Kazakh crude oil becausepipelines are at maximum capacity. Building newconduits will take decades, huge investment andcooperative agreements that will require lengthy andtricky negotiations. “We are going to need strongerpartnerships among developers, consumers and hostgovernments, and probably more leadership fromthese governments in setting a framework for futuredevelopments,” Johnson explained.

Geopolitics have long been a wild card. “The energypolicies that we have are deeply embedded ingeopolitics,” reckoned Ethan B. Kapstein, PaulDubrule Professor of Sustainable Development,INSEAD, France. As Poland, a major producer of coal,was locked behind the Iron Curtain during the Post-World War II reconstruction of Europe under theMarshall Plan, the US hooked the continent on MiddleEastern oil in alignment with its own geopoliticalinterests. With the collapse of the Soviet Union andthe end of the cold war, “today, we are in a verydifferent geopolitical framework,” Kapstein explained.“We really are in a multipolar world.”

As a result, new sources of energy have opened up;demand from fast-growing economies in Asia such asChina, and in Europe, particularly in Eastern Europeand Turkey, has increased sharply. While Russia hasbecome a key supplier of oil and gas, its use of thepipeline spigot as a foreign policy tool and its conflictwith Georgia in August have raised concerns aboutenergy security in the international community, mostacutely in Europe. Georgian Foreign Affairs MinisterEkaterine Tkeshelashvili suggested that Georgia’semergence as a rival conduit for oil to Western Europewas a factor in Russia’s incursion in her country.

On energy matters, the interdependence betweenEurope, Russia and Central Asia has clearlydeepened. Kazakhstan’s Vice-Minister of Energy andMineral Resources Bolat Akchulakov told participantsthat Central Asia is ready to be an energy source forboth East and West, cooperating not only in oil andgas but in other areas including nuclear power. Likesuppliers in the Middle East, Central Asian players areeager to diversify beyond petroleum. According toAkchulakov, Kazakhstan has 20% of the world’suranium reserves.


On the demand side, diversification of supply sourcesis also essential. Europe should strengthen its internalenergy position, said Fatih Birol, Chief Economist atthe International Energy Agency. The continent shoulddiversify the technologies driving electricity generationand sources of natural gas, partly through theexpanded use of liquified natural gas (LNG). Europeneeds to address its energy relationship with Russia.“We cannot replace Russia,” Birol acknowledged. “Butwe should create competitors to Russia, and withinRussia.” Russia, he argued, should be encouraged todiversify its economy to mitigate the risks it faces froma sharp decline in oil and gas prices and, in turn,address its own concerns about the security of energydemand.

The world, Birol concluded, needs to continueinvesting across the energy value chain – in oil, gasand alternative energy. Lower oil prices, however,discourage investment, while concerns over climatechange have taken a back seat since the financialcrisis broke, possibly tempering zeal for investment inrenewable energy sources. It is essential thatproducers, transporters and consumers engage eachother to overcome geopolitical tensions in their mutualinterest, said Georgian Energy Minister AlexanderKhetaguri. Consumer countries, in particular, have tobe more active in building bridges with producers andtransporters. China is a good example. Eager tosecure its energy and commodity needs to fuelgrowth, the Chinese have become closely engaged inCentral Asia, Africa and Latin America.

Turkey, meanwhile, is likely to be a critical bridge, anintegral player in helping to bring new sources of oiland gas to European markets. Because of its strategicposition and its own energy needs and capacity,Turkey may emerge as a major source of hydroelectricpower for Europe. “This could be of enormouspotential, especially if the grid is connected toEurope,” said Ahment C. Dördüncü, Chief ExecutiveOfficer of Haci Ömer Sabanci Holding.

Turkey could also play a crucial role in addressing thewater stress problems of Central Asia. The ongoingdebate on the impact that the use of water for biofuelshas on food production and the prices of staples suchas corn and rice has underscored how great theproblem of water stress is across regions.

Source: BP Statistical Review of World Energy 2008

Oil and Gas in Europe and Central Asia

40%

30

20

10

0Sha

reof

wor

ldp

rove

dre

serv

es/c

onsu

mp

tion,

2007

Oil consumptionOil reserves Gas consumptionGas reserves

Central Asia

Other Europe and Eurasia

NorwayEU15

Russia

The region's energy needs are larger than its reserves

“When we look at technology, we findnew ways to discuss energy security.”

Waldemar Pawlak, Deputy Prime Minister and Minister of

Economy of Poland

“The goal of reliable, affordable energy is becomingincreasingly difficult to achieve.”

Jay Johnson, Managing Director, Chevron Europe, Eurasia and Middle East Exploration and

Production, Eurasia SBU, Kazakhstan

“The energy policies that we have aredeeply embedded in geopolitics.”

Ethan B. Kapstein, Paul Dubrule Professor of Sustainable

Development, INSEAD, France



Turkey’s proactive diplomacy to diffuse the Russia-Georgia conflict in concert with the EU’s effortsdemonstrated both the special influence that Turkeywould bring to Europe and the convergence of Turkishand European geopolitical and economic interests.Both sides need each other. EU membership would ofcourse open up European markets further to Turkishcompanies and open Turkey to even more investmentfrom Europe. It would integrate Turkey and its 72million people into a Europe that is growing rapidly inglobal influence.

But Turkey will not be held for ransom over the EU’smembership criteria and argues that the EU has asmuch, if not more, to gain from Turkish accession.Further, Turkey’s proposal for a Caucasus Stability andCooperation Platform to bring countries in the regiontogether to discuss economic, political and securityissues showed that, while it supported andcomplemented EU efforts to resolve the Georgia crisis,Turkey is taking its own leading role in the CentralAsian and Caucasus regions. Of particular significanceis its contribution to the Middle East peace process byleveraging its long-standing relationship with Israel andits ties with the Arab world.

“It is time for East and West to developa new way of looking at each other.”

Recep Tayyip Erdogan, Prime Minister of Turkey

During the meeting, many participants called onTurkey to provide a much-needed anchor – mitigatingthe risks of security, energy and demography in bothEurope and Central Asia. Turkey is expected togalvanize economic activity in the region. The countryis certainly reaching out to its neighbours and beyond,making both political and economic overtures. Eventshave converged in 2008 to ballast the country’sposition as a broker.

Even while it pursues its candidacy for the EU, Turkeyhas been successfully strengthening its ties with otherregional groups. In October 2008, Turkey became amember of the UN Security Council for two years,winning 151 votes out of a total 192 UN members.That Turkey mustered such widespread support is areflection of the country’s increasing weight ininternational politics and the growing confidence of theinternational community. It is an active member of theOrganization of Islamic Conferences and the Ad HocLiaison Committee. Turkey also recently strengthenedties with the African Union, the Gulf CooperationCouncil and the League of Arab States.

Indeed, Turkey has become an important bridgebetween East and West, between developed anddeveloping economies, between Europe and CentralAsia and the Middle East, between Europe andRussia. Over the years, Turkey has built up a trackrecord as an honest broker in the several regions itstraddles. It pivots easily from maintaining long-standing links with Israel to cultivating connections inthe Middle East, including with Iran, and fromsustaining an important strategic relationship with theUnited States to building ties with Russia and China. Itis literally and figuratively at Europe’s doorstep, ageographic gateway and a country aspiring tobecome a member of the European Union.


“By using its special position in the region, Turkey iscontributing more and more to stability and peace inthe region and further away,” said Turkish ForeignAffairs Minister Ali Babacan. As Turkey takes itsposition on the UN Security Council, “our theme is‘security for all’ by using peaceful methods anddiplomacy to solve problems,” he added.

While it suffered through a financial crisis a few yearsago, Turkey has managed to put its economic housein better order. Turkish government and businessleaders, as well as many foreign investors, wereconfident that Turkey would weather the gatheringglobal financial storm well. “As a strongly emergingeconomy, Turkey will strengthen the European Union,”declared Günter Verheugen, Vice-President andCommissioner, Enterprise and Industry, in theEuropean Commission. “It will not be an economicburden for us.”

Turkey is highly unlikely to become an economicburden for the EU. Rather, it has the potential tobecome a regional economic powerhouse. JeanLemierre, former EBRD president who is currentlySenior Adviser to the Chairman, BNP Paribas Group,said Turkey has been “a very competitive market andis even more so today.” BNP Paribas is engaged in a“real partnership” with Turkey and is expanding its

Source: IMF

Turkey's Trade Partners

100%

75

50

25

0

Sha

reof

tota

lim

por

tsan

dex

por

tsw

ithTu

rkey

20031999 2007*

China

* through three quarters

Rest of world

EU

US

Middle East

Russia

Trade with China and Russia rose from 5.8% of Turkey's trade in 1999 to 15.1% in 2007

“The GCC [the Gulf CooperationCouncil] is looking at Turkey verypositively. This is the time when you canattract foreign direct investment fromthe GCC.”

Ibrahim S. Dabdoub, Group Chief Executive Officer, National

Bank of Kuwait, Kuwait, and Chair of the Arab Business Council

“Imagine a region in which you havetotally new relations betweenAzerbaijan and Armenia, and Armeniaand Turkey. The consequences fortrade, for communications, fortransport, for energy – and theopportunities are huge – so we will doour best to normalize the situation assoon as possible.”

Ali Babacan, Minister of Foreign Affairs and Chief Negotiator of

Turkey


business. “We have a very good reform of the bankingsystem. It is a well-balanced economy with growthsupported by domestic consumption and exports.”

Ahmet Ashaboglu, Chief Financial Officer, KoçHolding, Turkey, reminded participants that althoughTurkey’s labour force is not cheap, it is highly qualifiedand very productive. There is a pool of qualifiedmanagement talent, and Turkey is positioned at thecentre of a market that represents roughly 1.2 billionpeople.

Promising growth sectors include energy,infrastructure, transport, the automotive industry,consumer products, agriculture, mobile telephony andinformation communication technology (ICT). Speakingas a major player in industry, Ashaboglu noted that thepotential to develop the automotive market remainsvery high.

For many, Turkey remains an attractive country inwhich to do business. Feyhan Yasar Kalpaklioglu,Chairperson of Yasar Holding, Turkey, a large food andbeverage company, noted that despite the financialcrisis “there is still a strong export potential” in theconsumer products sector. Ali Y. Koc, President of theKoc Information Technology Group, and a YoungGlobal Leader, shared her optimism. “Our naturalresource is food. We can distribute fresh food to amarket of 600 million; we have the water and we havethe climate,” he said.

Turkey is also in a strategic position for corporations.Alparslan Korkmaz, President, Investment Supportand Promotion Agency of Turkey, pointed out thatinternational companies use Turkey as a base forrunning operations in up to 90 other countries.Microsoft, for example, manages its operations in 80other countries out of Turkey. Within a radius of fourhours by plane, there is a market of 1.3 billionconsumers.

Foreign direct investment in Turkey has skyrocketedfrom around US$ 1 billion until 2005 to more thanUS$ 20 billion in 2007. There is a lot more space forinvestment both in Turkey and across the region. Asone participant noted, there is a need for “urgentinvestment” in infrastructure and transportationnetworks.

Central Asia's Trade with the Middle East

Source: IMF

Imports have risen sharply since 2003, while exports accelerated in 1999

Exports

Imports

$4,000

3,000

2,000

1,000

0

Cen

tral

Asi

aex

por

ts/im

por

tsto

/fro

mM

idd

leE

ast

(US

$,m

illio

ns)

2001 2002 20031997 1998 1999 2000 2004 2005 2006

“Turkey has all the ingredients to be a regional powerhouse. Ithas shown that it is willing to be a broker of peace in theregion. The biggest challenge will be to see who will win thetug of war for influence and resources in this country. In thepast we have leaned towards the West, but today we have alot more alternatives.”

Ali Y. Koç, President, Koç Information Technology Group, Koç Holding, Turkey; Young Global Leader

“Turkey has played and can continue to play the role of avery good regional broker. Regional brokers are a healthysupplement, but they are absolutely not a substitution forinternational organizations such as the UN.”

Mowaffak Al Rubaie, National Security Adviser, National Security Council, Iraq


Acknowledgements

The World Economic Forum would like to thank Prime Minister Recep Tayyip Erdogan of Turkey and hisgovernment for their generous support in co-hosting the World Economic Forum on Europe and Central Asia.

The World Economic Forum wishes to recognize the support of the following companies as Partners orSupporters of the World Economic Forum on Europe and Central Asia:

Strategic Partners

AudiChevron CorporationThe Coca-Cola CompanyCredit SuisseDogus GroupKPMGLenovo GroupMicrosoftMorgan StanleyPricewaterhouseCoopersSatyam Computer ServicesXenel Group

Regional Partners

Ithmaar BankKoç HoldingSabanci Holding

Meeting Supporters

Abraaj CapitalGulf Finance HouseInternational Finance Corporation


Contributors

Børge Brende is Managing Director, in charge of Governments, Regional Activities and Constituents at theWorld Economic Forum. Christophe Weber is Head of Europe and Central Asia at the Forum. The WorldEconomic Forum on Europe and Central Asia was under his direct responsibility, with Benita Sirone,Associate Director, Europe and Central Asia, Programme Development; Chantal Adamson, SeniorSpecialist Events and Meeting Coordinator; and Thomas Berglund, Senior Community Relations Manager,Europe and Central Asia.

The report writers, Alejandro Reyes and Dianna Rienstra, worked with Nancy Tranchet to produce thereport.

The World Economic Forum would like to express its appreciation to the summary writers for their work atthe meeting. Session summaries are available on the World Economic Forum website (www.weforum.org).

Associate Director, Editing: Nancy Tranchet

Design and Layout: Kamal Kimaoui, Associate Director, Production and Design

Photographs: Serkan Eldeleklioglu, Ozan Atasoy, Bora Omerogullari

This publication is also available in electronic form on the World Economic Forum website at thefollowing address:

World Economic Forum on Europe and Central Asia report:http://www.weforum.org/pdf/summitreports/europecentralasia2008 (HTML)

The electronic version of this report allows access to a richer level of content from the meeting,including photographs, session summaries and videos of selected sessions.

The report is also available as a PDF:http://www.weforum.org/pdf/summitreports/europecentralasia.pdf (PDF)

Other specific information on the World Economic Forum on Europe and Central Asia, Istanbul,Turkey 30 October – 1 November can be found on the following links:

KnowledgeConciergehttp://www.weforum.org/europecentralasia2008/knowledgeconciergeProgramme http://www.weforum.org/europecentralasia2008/programmeSession summaries http://www.weforum.org/europecentralasia2008/summariesInterviews with participants http://www.weforum.org/europecentralasia2008s/interviewsWebcasts http://www.weforum.org/europecentralasia2008/webcastsMembers’ area http://www.weforum.org/europecentralasia2008/membersPhotos http:// http://www.weforum.org/europecentralasia2008/photos

The World Economic Forum is an independentinternational organization committed to improvingthe state of the world by engaging leaders inpartnerships to shape global, regional andindustry agendas.

Incorporated as a foundation in 1971, and basedin Geneva, Switzerland, the World EconomicForum is impartial and not-for-profit; it is tied tono political, partisan or national interests.(www.weforum.org)

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