The Economic Turn in Turkish-Iranian Relations

Despite the latest frictions between Turkey and Iran over the conflict in Syria’s Idlib in February 2020, both countries have noticeably succeeded in scaling down tensions through multilateral dialogue and conflict management platforms in the last few years. Iran vehemently opposed the military coup attempt in Turkey in 2016. Turkey, in turn,  was critical of protests in Iran in 2018 and Iraq in 2019, both of which had the potential to shake up the Iranian establishment and its regional influence. Several factors have bolstered the rapprochement between the two countries: varying levels of skepticism and hostility towards the United States’ role in Syria, a perceived growing threat by the Kurdistan Workers' Party (widely known by its Turkish acronym PKK) and its regional offshoots, a unified position on the Qatar embargo, and a shared animosity towards Riyadh, and Abu Dhabi, and Israel. 

The U.S.’ “maximum pressure campaign” against Iran, comprised of economic sanctions and political efforts to isolate the regime, took its toll on trade, and more broadly, economic relations between Ankara and Tehran. These ties were a pillar of the multifaceted and complicated relationship between both countries. The U.S.’ unilateral sanctions imposed on Iran in late 2018 caused the volume of bilateral trade between Turkey and Iran to decrease from around $10.7 billion in 2017 to just $5.6 billion in 2019, which amounts to a 50 percent drop.¹  According to a report by the Tehran Chamber of Commerce, Industries, Mines and Agriculture (ICCIMA), Iranian exports to Turkey were resilient until the third quarter of 2018, but in the following quarters and during 2019, its exports have been continuously declining. Such decrease can be explained by Turkey’s decision to cut crude oil and oil products imports from Iran after the U.S. did not renew special sanctions waivers for Turkey and other countries—which constituted a large segment of its imports from Tehran. 

The trade balance has been in Iran’s favor for many years. The same can be said in 2019 overall, but the balance did reach a deficit during third and fourth quarters. According to the ICCIMA report, because the share of crude oil and oil products in Turkish imports from Iran has decreased by 63 percent, the trade surplus in Iran’s favor has decreased by 79 percent. ICCIMA foresees the trade balance to flip in Turkey’s favor if the trend over the last two quarters of 2019 persists. In contrast to the decline of Iranian exports, Turkey’s non-oil exports to Iran have been minimally affected over 2018 and 2019.  Iran is set to lose more from declining economic relations, but it will diligently try—more than Turkey—to keep these relations from deteriorating even if it overwhelmingly benefits Turkey. In this case, Turkey can be used as an economic lifeline while Iran experiences unprecedented economic pressure.

Turkey and Iran have managed to decouple their economic relations from their regional rivalries over the past decade, yet, at the same time, economic cooperation indirectly contributed to geopolitical restraint, in part to shield their shared economic interests. In terms of the economic merits that each can offer to one another, Turkey views Iran as a strategic source for crude oil and natural gas supplies that is essential for its energy security and diversification efforts. Iran’s sizable population also makes it an important market for its non-oil exports. Additionally, Turkey increasingly uses Iran as a transit route to Central Asian markets. For Iran, Turkey is the biggest importer of its natural gas and a key importer of its crude oil. It is a future economic gateway to European energy and non-oil energy markets. Turkey also holds the legacy of being an economic backup channel for Iran in times of crises. During the eight year war between Iraq and Iran, Turkey helped Iran procure economic needs and when it faced difficulties in the Persian Gulf due to maritime disruptions.²  More recently in 2012, Turkey played a vital role in helping Iran evade sanctions through a large scheme involving paying for Iranian oil and natural gas with gold. 

Turkey’s role as a backup economic channel is resurging as Iran again faces economic pressures from U.S. sanctions. Cementing economic relations between Turkey and Iran has been dominating discussions in meetings between Turkish and Iranian state officials after the US imposed sanctions in 2018.³  While external economic pressures on Iran affect Turkey’s non-oil exports to Iran in the medium-term, and potentially its security if Iran is destabilized, these pressures also provide Turkey with some economic opportunities. For example, many Iranian citizens invested in Turkey’s real estate sector in 2019. Iranians were the second nationality after Iraqis to buy properties with 5432 units. Iranian citizens were the first to establish companies in Turkey last year with 978 companies. Around 600 Iranian companies operate in the economically vital Izmir Province in Turkey.⁴  Overall, Turkish investments in Iran during 2019 are believed to have increased.⁵

Iranians have several motivations to buy property and create businesses in Turkey. A segment of Iranians is seeking to live in a more stable country and socially-open society that is also close to their home country. Another segment  are probably connected to Iranian efforts aimed at evading U.S. sanctions through the development of new business networks. Some of the newly established Iranian companies in 2019 are thought to be United Arab Emirates-based companies relocating after Dubai hardened business conditions for Iranian traders due to their attempts to evade U.S. sanctions.⁶  Excluding the banking system from financial transactions due to U.S. sanctions and the usage of informal methods such as exchange offices do not help carry out significant financial transactions, as they are costlier.⁷  However, the proliferation of Iranian businesses involved in export activities in Turkey is likely to help non-oil bilateral trade thrive in the medium  to long term if U.S. sanctions are lifted. 

The medium to long term outlook of Iranian natural gas exports to Turkey is nonetheless complicated. This is largely due to the fact that Turkey  plans to reduce energy imports for domestic consumption, diversifying gas imports, and increasing the share of domestically procured fuels to enhance the country’s energy security. Turkey is transforming itself into a regional energy hub by connecting natural producers in the east with European consumers, with competition between suppliers to Turkey’s national energy market increases. As a result, Iran could be forced to reduce the price of its comparably expensive gas to that of cheaper Russian and Azerbaijani gas with more liquefied natural gas inflowing, especially from the U.S. While the magnitude of Iran’s natural gas exports to Turkey has been growing over years, its share in Turkish gas imports declined from 21 percent in 2010 to 15.61 percent in 2018, reflecting Turkey’s diversification of gas imports as it turns cements its own energy security. Iranian natural gas exports to Turkey are currently waived by the U.S because Turkey cannot easily replace Iranian supplies due to infrastructure limitations. Meanwhile, Iran is unable to receive its proceedings from exports in hard currency—instead, it is paid in the form of goods from Turkey as part of a “gas for commodities” scheme.⁸  The current gas contract expires in 2026. As such, both sides will have to negotiate earlier on the conditions of a new contract. 

The erosion of economic relations between Turkey and Iran may be having knock-on consequences on political relations and the often-perceived constrained regional rivalry between both countries. If these countries maintain and expand shared threat perceptions and attempt to restrain geopolitical differences through institutional mechanisms, their relationship may persist against the economic downturn in the short-term, yet both countries will struggle to keep their trade from falling.

Tamer Badawi is an Associate with the Middle East Directions Programme at the European University Institute, focusing on Iran’s foreign policy toward its neighbors. Follow on Twitter @Tamerbadawi1. 

Notes:

  ¹Aggregate data based on author’s calculations derived from the Turkish Statistical Institute: Foreign Trade Statistics Database. 
  ²Author’s interview with Mohammad Farazmand, the Ambassador of the Islamic Republic of Iran to the Republic of Turkey, Ankara, February 2020. 
  ³Author’s interview with Hakkı Uygur, the Director of Center for Iranian Studies in Ankara (IRAM), Istanbul, March 2020. 
  ⁴Author’s interview with Mohammad Farazmand 
  ⁵Author’s interview with Mohammad Farazmand.
  ⁶Author’s interview with Hakkı Uygur. 
  ⁷Author’s interview with Hakkı Uygur.
  ⁸Author’s interview with Mohammad Farazmand.