Turkey's parliament resoundingly approved a motion on October 17th allowing troops to cross into northern Iraq to hunt down Kurdistan Workers Party (PKK) terrorists there, but its Western allies and Baghdad urged Ankara to refrain from military action.

As Turkish Parliament voted by 507 votes to 19 in favor of the motion, US President George W. Bush said it would not be in NATO member Turkey's interests to send troops into Iraq and the Pentagon said it did not think Ankara had the appetite for such a move.

Washington fears a Turkish incursion could destabilize the relatively most peaceful part of Iraq and possibly the wider region by encouraging others such as arch-foe Iran to intervene. Iraq's government sent a team to Ankara for talks to find a peaceful solution to the crisis although there were no concrete results out of the meetings. NATO and the European Union also urged restraint.

Turkish Prime Minister Tayyip Erdogan has played down expectations of any imminent attack but the parliamentary vote gives NATO's second biggest army the legal basis to cross the mountainous border as and when it sees fit. Erdogan is under heavy public pressure to act after a series of deadly attacks on troops by the terrorists from the outlawed PKK, who use northern Iraq as a base.

Turkey says economic sanctions to hurt only PKK militants??¦

Turkey said that planned economic sanctions against Kurdish militants in northern Iraq would be targeted at groups providing support for the terrorists. Officials declined to say what the new measures would include but made clear they would not harm Turks and Iraqis not connected to the outlawed Kurdistan Workers Party (PKK), which has been launching attacks on Turkey from across the border. Prime Minister Tayyip Erdogan said the measures, agreed at a cabinet meeting on October 31st, were not yet in force and he denied a television report that Turkey had closed its airspace to flights to and from northern Iraq.

Turkey has sent troops to the Iraqi border, backed by tanks, artillery and aircraft, ready for a possible military incursion into northern Iraq against PKK militants there.

High level diplomatic efforts by Turkey intensified to solve the PKK issue??¦

Turkey??™s Prime Minister Erdogan and the US President Bush met in Washington D.C. on November 5th mainly to discuss the rising terrorist attacks by the PKK. Prime Minister Tayyip Erdogan, has made clear that he wants concrete action from Washington to combat the PKK, which has been launching attacks on Turkey from Iraqi soil. The Turkish prime minister seemed satisfied with the talks but did not indicate whether Bush had persuaded him to delay a military operation. After the meeting, Bush said that the PKK was a terrorist organization, and they were an enemy of Turkey, they were an enemy of Iraq and they were an enemy of the United States. Bush said Erdogan had strongly urged the United States to work with Iraqi leaders to cut off money flows to the Kurdish terrorist group, adding that they also talked about the need to have better intelligence sharing, and the need for two countries??™ militaries to stay in constant contact.

Meanwhile, Iraq said on November 3rd that it was ready to hunt down and arrest Kurdish terrorist leaders responsible for cross-border raids into Turkey in an effort to avert a major incursion by the Turkish military. Major powers and countries in the region that have met in Istanbul on November 2-3 to discuss Iraqi security, sought to ease tensions on the Turkish-Iraqi border that could escalate into a bigger regional crisis. U.S. Secretary of State Condoleeza Rice has promised more action from the United States but provided scant details on how far Washington was prepared to go except to offer improved intelligence-sharing on the PKK. A declaration after the meeting of ministers from major Western powers and the region included condemnation of all terrorism in Iraq, applauded bilateral arrangements between Iraq and its neighbours and supported the country's full sovereignty.

What is next?

The impression that we get from all the meetings and the following announcements of the last two weeks is that Turkey will wait until the very last minute to give a chance to diplomacy and cooperation before taking any military action into Iraq. It seems that both the Iraqi and the US aouthorities understood how determined Turkey was to avert any further terrorist attacks from the PKK. Hence, it is plausible to expect some actions from them in the coming days. Turkey, on the other hand, does not seem to be at a point to start a large-scale military action towards Iraq, ignoring what other related parties say. Therefore, we are expecting a period of relative calm and continuing political efforts to solve the problem unless the PKK launches further terrorist attacks. Meanwhile, it is also plausible to see some very limited military action by Turkey towards selected targets in Northern Iraq, given that the US, Turkey and Iraqi authorities announced that they will work more closely on intelligence sharing.

EU progress report expected to criticize Turkey, albeit in a softer than anticipated tone??¦

A draft of the progress report from the European Union (EU) about Turkey that is due on November 6th shows that the EU will criticize Turkey on human rights, the role of the military and its failure to open its ports to Cyprus. Despite the shortcomings, however, the annual progress report will applaud Turkey for its handling of a constitutional crisis this year and for reforms leading to strong economic growth. The draft, prepared by Enlargement Commissioner Olli Rehn said that limited progress was achieved on political reforms in 2007, adding that further efforts were needed in particular on freedom of expression, on civil control of the military and on the rights of non-Muslim religious communities.

The draft praised Turkey for bringing its laws on goods and services closer to EU standards, helping its economic growth. But it saw insufficient progress in fighting corruption and said torture by security forces has been reduced but not disappeared.

Turkish Cypriots seek greater UN role to start talks??¦

Turkish Cypriot leader Mehmet Ali Talat urged United Nations (UN) Secretary General Ban Kimoon to take a more active role in trying to restart stalled talks to reunite the divided island of Cyprus.

After a major diplomatic push by Ban's predecessor Kofi Annan, Greek Cypriot voters rejected a UN power-sharing blueprint in 2004 which the Turkish Cypriots accepted. Days later, Greek Cypriots entered the European Union as the Republic of Cyprus, leaving the Turkish Cypriots out in the cold. Talat said he had asked Ban for his "active involvement" in ending the international isolation of the Turkish Cypriots and launching negotiations. He also proposed a package of confidence-building measures, including steps he said would affect the military and crossing points between the two sides.

A deal in July 2006 outlining a two-track process of discussions on confidence building, and tackling harder subjects related to the conflict itself, was never carried through because of disputes over the agenda. Talat met Greek Cypriot President Tassos Papadopoulos last month but they failed to make progress on relaunching talks. Ban said he was disappointed by the lack of progress in those talks and had urged Talat to help build confidence by steps such as greater cooperation on easing border controls.

Turkey says IMF review to be completed soon??¦

Turkish Treasury announced that an International Monetary Fund delegation is expected to come to Turkey to complete talks for the seventh review of the country's economic program. The statement from the Treasury also said they expected Turkey's current account deficit to stabilize and to stay below 8% of the gross national product this year. It said the key overall primary surplus would be 4.3% of GNP, rather than 6.5% as the government had targeted.

Meanwhile, Turkish officials announced that they planned to cut the total primary surplus target for 2008 to 5.5% of gross national product from 6.5% in previous years, but denied it was taking risks with fiscal policy. The 2008 draft budget, unveiled by Finance Minister Kemal Unakitan, envisages a primary surplus target of YTL 38.24 billion and a budget deficit of YTL 17.75 billion.

IMF expects Turkish growth rising with inflation headed down??¦

International Monetary Fund (IMF) said that Turkey's economic outlook was bright with growth mounting and inflation heading down, but it still criticized the country's fiscal performance in 2007. The IMF noted that in 2008 economic activity was expected to accelerate moderately to 5.5%; inflation should continue declining gradually; and the current account deficit appears to be stabilizing below 8% of GNP.

IMF said that Turkish public spending had picked up this year while tax revenues weakened. As a result, the IMF warned that the government would fall well short of its target for a primary surplus of 6.7% of GNP. Noting that tighter fiscal policy would permit a looser setting for monetary policy, and therefore interest rate cuts, the IMF said that it supported Turkey's plan to aim for a surplus of 5.5% of GNP in 2008. The IMF also gave thumbs up to the Central Bank's recent decision to cut interest rates.

Turkey plans income tax, power reforms in 2008...

The Turkish government plans to present an income tax reform bill to parliament in the new year and implement a new system of electricity pricing. The tax bill aims to broaden revenues and shrink a large unregistered black economy while electricity price rises will improve the finances of state enterprises, as urged by the International Monetary Fund. Price rises are also seen as necessary for a series of energy sector privatizations.

Economy Minister Mehmet Simsek said the government aimed to implement the new pricing system, whereby electricity prices rise or fall according to an established indicator, in the first half of next year. The change will be closely monitored by the inflation-fighting central bank, which has warned that utility prices could pose a risk to the downward inflation trend.

ArcelorMittal JV to invest USD 500 million in Turkey??¦

ArcelorMittal, the world's largest steelmaker, said that it would form a 50/50 joint venture with Turkish peer Borusan to build a new hot strip mill in the country, involving an investment of USD 500 million. ArcelorMittal Executive Board Member Michel Wurth also said ArcelorMittal had no plans for joint initiatives with Erdemir, which Turkish group Oyak bought in a privatization tender after ditching a plan to buy it in partnership with Arcelor. ArcelorMittal said the new plant in Turkey was expected to be operational by the first half of 2010 and have a capacity of 4.8 million tonnes.