Turkey Worries Over Impact of Anti-Iran Sanctions

Turkey’s Economy Minister Nihat Zeybekci said his country “will continue to trade with Iran as much as possible and will not answer to anyone in this regard”.

This statement on May 11 came in response to US President Donald Trump’s decision to withdraw from the Joint Comprehensive Plan of Action, reimpose sanctions on Iran and punish any other nation that cooperates with it.

Although Zeybekci vowed to maintain his country’s commercial ties with Tehran, whether Ankara will be able to do this when sanctions are enforced remains questionable, as Turkey could suffer further under US sanctions.

In his speech on May 22, US Secretary of State Mike Pompeo threatened to impose the strongest sanctions in history on Iran, which will be reimposed in two stages on August 6 and November 4.

The US sanctions would target the Iranian economy’s most critical sectors, including the country’s trade in gold and other precious metals, as well as its oil industry and finance.

Although Pompeo acknowledged that Trump’s decision will pose financial and economic difficulties for a number of US allies, he warned that Washington will carry on with its threats to punish any company that continues doing business with Iran.

This will hit the core of economic relations between Ankara and Tehran, and negatively impact the Turkish economy, reads an article published by Washington-based foreign-policy think tank The Carnegie Endowment for International Peace. The full text follows:

> Bilateral Trade Vis-a-Vis JCPOA

In 2012, trade between Turkey and Iran reached an all-time high of around $22 billion before it fell sharply to around $14 billion in 2014, mainly because of the US sanctions on Iran. The sanctions made it difficult for Ankara to pay for its imports—mainly oil, natural gas and plastics—from Iran, which was isolated from the international banking system. Consequently, the two countries had to resort to a “gold for gas scheme” in which Ankara paid for its imports from Iran with Turkish lira held in Halkbank accounts, and with this money, Iran bought gold in Turkey and shipped it back or exchanged it for foreign currency in third countries, mainly via the UAE.

The adoption of the Joint Comprehensive Plan of Action, the formal name of Iran's nuclear deal with world powers (including USA), in October 2015 removed the previous restrictions on commercial ties between Ankara and Tehran.

According to former Iranian ambassador to Turkey, Alireza Bigdeli, 174 Turkish companies had already opened a branch in Iran by January 2015 in anticipation of the lessened sanctions. Although both countries had high hopes this meant that the volume of trade would rapidly return to its previous levels, the pace of recovery has been slow, in part due to their regional political differences over Syria, Iraq and the Persian Gulf region.

Most importantly, Tehran was not prepared to take advantage of Ankara’s increased investment in several Iranian sectors, particularly energy, manufacturing and telecommunications, mainly due to lack of transparency and inadequate legal environment.

As a result, the total volume of trade fell back down to $9.6 billion in 2016, and recovered only slightly to $10.7 billion in 2017, when Turkey and Iran agreed to use local currencies for bilateral trade (as opposed to euros).

> Sanctions Costs for Turkey

Some observers assume that because the Turkish economy is more diversified and connected to the global economy, US sanctions of Iran will have minimal impact on the Turkish economy. This might be true, if Ankara were not heavily dependent on Iran for energy imports.

When sanctions on Iran’s shipping and petroleum-related transactions come into effect in November, Turkey will have to significantly reduce the volume of its crude oil purchases from Iran to avoid being punished by the United States.

Yet despite Turkey’s efforts to diversify its energy imports, Ankara is still extensively reliant on Iran and Russia to meet most of its oil and gas needs. In 2017, Iran surpassed Iraq as Turkey’s biggest source of energy, providing around 44.6% of total oil supplies and 17% of total gas imports to the country; the rest mainly comes from Iraq, Russia, Kuwait and Saudi Arabia.

Reducing oil imports from Tehran means that Turkey would need to increase its imports from elsewhere—most likely from Iraq and the Persian Gulf states—which would be more expensive because of higher transportation costs and the different characteristics of the oil these countries produce.

Global oil prices are set to increase if sanctions limit Iranian production. Iran produces around 2.5 million barrels of oil per day, which is equal to about 3% of the global demand. Estimates indicate that sanctions could reduce Iran’s oil exports by an average of 400,000 barrels per day—or even up to 1,000,000 depending on how many companies choose to abide by the US sanctions.

Ankara is already paying a huge bill for its energy imports. Data obtained from the Turkish Statistical Institute show that the country’s energy import bill increased from $27.16 billion in 2016 to $37.19 billion in 2017. This massive increase can be attributed to the hike in global oil prices from as low as $36 per barrel at the beginning of 2016 up to around $60 by the end of 2017, and to an increase in domestic gas consumption.

According to Volkan Ozdemir, the head of the Institute for Energy Markets and Policies, Turkey expects its total energy imports to remain above $40 billion over the next few years.

For a country that is highly dependent on energy imports—92% and 99% of oil and gas needs, respectively, come from outside Turkey—energy prices have an effect on the macroeconomic indicators. The combined increase of global oil prices and domestic demand in Turkey is expected to widen the current account deficit, which will in turn increase inflation and decrease economic growth.

According to estimates by Turkey's former deputy prime minister, Ali Babacan, for every $10 increase in global oil prices, inflation in Turkey will rise by 0.5% and growth will decrease by 0.3%.

These factors will put further pressure on the value of the Turkish lira, which already lost 20% of its value against dollar since the start of the year. As the lira falls and the current account deficit widens, Ankara will need to convert even more lira to dollars than before to pay for its energy imports, which means that the damage from sanctions on Iran will be twofold.

Aware of such negative implications on the Turkish economy, officials in Ankara—such as Minister of Economy Nihat Zeybekci and Ibrahim Kalin, the chief advisor to prime minister—promise that they will keep resisting US demands that they stop trading with Iran, arguing that Tehran is committed to the nuclear deal.

They also claim that as long as the sanctions are unilateral and not imposed by the United Nations Security Council, Ankara will not abide by them.

However, if the European Union decides to abide by US sanctions, or Iran decides to abandon the nuclear deal and resume its nuclear program, Ankara’s capability to maneuver around sanctions will be limited.

Ankara will soon face a dilemma. Either it has to maintain its commercial relations with Tehran and access to relatively inexpensive oil and gas, thereby risking US punishment—which would further complicate bilateral relations and push Ankara more toward Russia and Iran—or abide by the US sanctions on Tehran and bear the expected negative impact on its economy.