Sanctions on Iran make Turkey’s economy more fragile

by The Region    

 

The tendency of decrease in the overall volume of the trade between Turkey and Iran gave way to an increase in 2017. The crude oil and natural gas imported from Iran have a significant role in the trade. So, it can be said that all fractures and recoveries in trade relations since 2011 have been parallel to the political relations with both Iran and other “alternatives”, notably Russia and Iraq.

Having some advantages of being in the trade with its neighbour state Iran, Turkey sometimes even had the role of a negotiator in Iran’s relations with the US and other countries. Iran had come to the table with P5+1 which is comprised of the five permanent members of the United Nations’ Security Council (USA, Britain, France, Russia, and China) and Germany in Ä°stanbul before 2012 when the trade volume was at its highest with $21,9 billion. However, after the US brought into agenda again some sanctions upon Iran in 2013, the volume drew back to $14,5 billion. Following the weakening of trade, the Preferential Trade Agreement was put into action in early 2015. It was aimed to increase the trade volume to $35 billion.

As a result of the agreement between Iran and P5+1 on the issue of nuclear weapons, the US embargo over Iran was lifted, but the war going on in Syria did not release Turkey of the pressure by the US. The trade volume retreated to $9,7 billion in 2015, and then to $9,6 billion in 2016. In that period, the regression in crude oil was caused by the drop of import from Turkey due to the decrease in Iran’s purchase power linked to the drop in oil prices because Iraq’s oil had increased its weight in the market.

In 2017, while the tendency of decrease was broken, the trade volume has increased for the first time in the last 5 years, and reached $10,752 billion. In this period, when there was a $1,1 billion-increase, the increase in Turkey’s demand of crude oil due to the capacity increase is notable.

THE TRADE IS DOMINATED BY ENERGY RAW MATERIALS

In the data of 2017, when Iran had a trade surplus in relation to Turkey, it is remarkable that the greatest source of that surplus was Turkey’s import of oil and natural gas, with a rate of 80%. The crude oil import from Iran in 2017 was double the one in 2016 – 11 million tonnes. Moreover, the import of energy-dense products such as untreated zinc, nitrogenous minerals, chemical fertiliser, and untreated aluminium, and fresh and dried fruit had an increase of 100%. It is seen that the products imported most after oil and natural gas were materials for chemical and metal industries. Low-cost import is possible from Iran in these products, since energy costs are pretty low in the country.

Export of gold, which has a crucial role in Turkey’s export to Iran, forcing a by-pass of payment restrictions due to sanctions, has retreated almost to null. While Turkey imported $1,306 billion in 2016, the number decreased to $111 million in 2017. As a result of the decrease in gold export, Turkey had a trade gap in relation to Iran.

IMBALANCE IN FOREIGN POLICY INCREASES THE FRAGILITY OF THE ECONOMY

Turkey purchases $6-billion worth of energy raw materials from Iran, and $4 billion of it is for crude oil, while $2 billion is for natural gas.

Before the nuclear agreement in 2015, the US had granted an exemption to Turkey and 8 other countries from the sanctions over Iran. Regarding the import from Iran, Iraq, and Russia, the three countries from which Turkey imports oil most, and the shifts among the countries, it is seen that the demand of Turkey oscillates and increases all the time depending heavily on political incidents. Especially after the capacity modernisation process of TUPRAS (Turkey’s Oil Refineries) that was completed in late 2014, Turkey’s need for crude oil increased approximately 45%. The annual crude oil import, which was around 17-18 million tonnes before 2015, rose to 25 million tonnes that year. The need was met with the oil imported from Iraq, especially through areas controlled by the Islamic State, but then was shifted to Iran due to the tension with the Central Government of Iraq.

Countries such as Turkey, India, and China had had a negative attitude towards the joint sanction attempts of the US and the EU before the nuclear agreement, and had cut 279,000 barrels a day from their import as a sign of good intentions, which had received from Obama an exemption from penal conditions. Besides, the results of the tension of aircraft-shooting between Turkey and Russia in 2015 can also be added to evaluate Turkey’s situation. After the crisis with Russia, the gap that emerged in oil import was filled with an import from Iran and Iraq as a result of US’s inducement.

The amount of crude oil purchased from Iraq at the time doubled, and the tendency of decrease was broken. In the tense period of time, when Russia proved with images of Turkey’s oil shipment through IS-controlled areas, half of the oil import was made through Iraq. Iran, trade relations with which were willingly continued, was brought into agenda again at that point. The biggest oil import was then made with Iran whose position in the market had gained value again with the nuclear agreement in 2015, and THE US’s announcement of the Shared Extensive Action Plan. The oil and natural gas of Iran, which has a very low shipment cost, kept its value for a country that is foreign-dependent in energy, such as Turkey, in every turn when political conditions allowed.

Today, as the US retreats from the nuclear agreement and brings into agenda the sanctions against Iran, though seems hard, it is still uncertain whether Turkey will receive another exemption from the sanctions. It is a subject of curiosity how Turkey will meet the amount that is equal to half of its oil import. It is known that TÜPRAÅž, sold to the Koç Holding in 2008, provides half of their oil stock through the import from Iran.

An increase was seen in the sale of TUPRAS stocks after reports were released on that Trump was putting pressure on the allies of the US to cancel out oil import from Iran. It is also expected that the Star Refinery under the roof of Petkim, which was sold to the Azerbaijani oil giant SOCAR in 2008, and which will start to operate in October, would significantly increase the oil need.

The crude oil import, which was around 25 million tonnes in 2017, is expected to increase, with the start-off of the Star Refinery, to over 30 million tonnes in 2019. Though it is thought that the biggest businesses of Turkey would substitute Iran with Russia and Iraq in the face of this uncertainty, both options bear handicaps regarding the cost and political liabilities. In the past, the US was uncomfortable with the fact that Turkey was dependent heavily on Russia for crude oil and natural gas, especially after the US Navy passed the straits of Turkey and went around in the Black Sea during Russia’s crisis with Georgia, Turkey was “inspired” to reduce its dependency on Russia in energy. Turkey then went towards Iran and other alternatives.

TURKEY IS DEPENDENT UPON IRAN’S NATURAL GAS

Another import item of Turkey from Iran in 2017 was natural gas worth over $2 billion. Besides being an important buyer, Turkey is also a vessel for the Middle East and Europe for the natural gas of Iran, one of the biggest producers of natural gas with a reserve of 33,5 trillion cubic metres. Another crucial point for Turkey is that natural gas is not included in the sanctions.

Approximately 10 billion cubic metres of natural gas enters Turkey annually through Iran via the pipeline. It is thought that, in the case of a potential sanction on natural gas, Turkey would end up a loser as it provides 15% of its import from Iran. Iran, who cannot increase its natural gas production despite having an enormous reserve, does not have the sources to increase the amount it already exports to Turkey.

On the other hand, it seems probable that Turkey goes towards Azerbaijan and Russia for its growing need. The Turkic Current Natural Gas Pipeline between Turkey and Russia is anticipated to increase Russia’s share from this respect, which will be active in December 2019. The dependence on Russia is seen to have increased in the demand that also grows each year independent of the political incidents between Iran and the US. Turkey meets the biggest part of its natural gas need each month from Russia with nearly 1 billion cubic metres. However, it doesn’t seem possible for Turkey to give up on Iran’s gas.

SUPPLY COSTS WILL BE ADDED TO OIL PRICES

Turkey’s Minister of Economy, Mehmet Simsek, had pointed out that the increase in oil prices might be to Turkey’s benefit. In contrary to ÅžimÅŸek, who claimed that much higher profits would be made, experts point out that, regarding the projection of the increase in oil prices to Turkey’s import bill and the losses that may occur in the trade with Iran, the loss would be way higher than the increase Mehmet Simsek mentioned.

In the case that the US pressure against import from Iran increases, it is hard for Turkey to meet its need only from Russia. The political relations with Iraq may not allow a large-scale shift, as well. Purchasing from the spot market and the change in route may cause additional costs higher than the increase in oil prices. Adding the demand of the Star refinery in 2019, there will be a need for new sources for nearly 15 million tonnes together with the substitution of Iran. It can be said that this additional expense would worsen the current deficit that already grows fast, and might cause several other irregularities. Not only that the energy bill is going to swell, but also that there will be an uncertainty about almost half of the need for crude oil is important also from the aspect of “energy supply safety”.

Regarding the possible projections of the increase in the global markets on the fuel oil prices and the petrochemical products, it is anticipated that the daily products will also be impacted negatively. It is seen that the increase in oil prices, which has positive effects on the foreign trade deficit and nominal growth of the US, decreases the purchasing power in countries like Turkey that are foreign-dependent in raw materials and energy.

WILL TURKEY LOSE THE IRAN “MARKET”?

From the aspect of the “opportunities” emphasised by Mehmet Simsek, the most promising “market” for Turkey’s capitalists is Iran. Besides the final consumption products, together with the increase in oil revenues from Iran, investments for modernisation were expected to increase, as well as a growth in the export opportunities of the sectors that manufacture intermediate products such as automotive sub-industries or machinery and investment products. However, such a “move” looks difficult with the current sanctions.

In the same time, in addition to energy raw materials, the attempts to decrease the cost of production by increasing the import of intermediate products from Iran in some energy-dense sectors are also prevented. On the other hand, the question of to what extent Turkey can be prevented from trading with a neighbouring country is still unanswered. It is possible for the Turkish government trying to use the “forces” like the Reza Zarrab case.

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