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August 2, 2010 Inquiry & Analysis Series No. 629

Turkey Throws Iran a Safety Net

August 2, 2010 | By Dr. Nimrod Raphaeli
Turkey, Iran | Inquiry & Analysis Series No. 629

Introduction

Iran and Turkey are two large Middle Eastern neighboring countries with populations of approximately 67 million and 77.8 million, and GDP in purchasing power parity of 876 billion and 863 billion, respectively.[1] While both countries are Muslim, Turkey has a long tradition of a secular and democratic political system, although its secularism has come under stress in recent years under the rule of Justice and Development Party (AKP), which has strong Islamic roots.

The Turkish economy has done relatively well in terms of growth and diversification. Indeed, the IMF praised the Turkish economy for its quick recovery from "the precipitous drop in output triggered by the global crisis."[2]

Iran is a potentially rich country with vast oil reserves estimated at over 130 billion barrels of crude and 27 billion cubic meters of natural gas. It is also rich in water and human resources. But Iran is under UN sanctions, and even more severe sanctions by the U.S. and the European Union, that have clipped its economic wings. The sanctions on Iran are meant to slow down its drive to pursue a nuclear program that almost everyone suspects it intends to have. President Mahmoud Ahmadinejad told a large gathering of enthusiastic supporters in Freedom Square in Tehran that Iran has become a nuclear state capable of enriching its uranium up to 80 percent, and added ominously that "Iran's nuclear train is running without brakes."[3]

Unlike relatively secular Turkey, Iran is a theocratic state with aspirations of regional hegemony, an active supporter of terrorism, and a declared enemy of the United State. The Iranian economy is statist, quite inefficient, and relies heavily on its oil sector which provides most of the government revenues. Private sector activity is typically limited to small-scale workshops. . Farina Adelphi, an Iran expert based in Paris, told the French daily Le Monde: "The industry is gasping for breath and half of the larger companies is said to be in a situation of bankruptcy, because the authorities have a chaotic, aberrant international trade policy." Inconsistencies also prevail in the export sector, as some export items are "heavily subsidized at the discretion of the interests of a few oligarchs." For example, the Samand car, which is derived from the Peugeot 405, costs $7,000 for Iraqis but $12,000 for Iranians.[4]

Heavy subsidies for oil, electricity, water, and food products, estimated at $100 billion, as well as other rigidities, weigh down the economy. Iran also suffers from double-digit unemployment and underemployment, particularly among the 15-25 age group. It is estimated that 14 million Iranians live below the poverty line.[5] According to the World Bank's analysis, Iran struggles with "macroeconomic instability." [6]

Early Cooperation between Iran and Turkey

Early cooperation between Iran and Turkey was rooted in the Economic Cooperation Organization (ECO) - an intergovernmental regional organization established in 1985 by Iran, Pakistan, and Turkey for the purpose of promoting economic, technical. and cultural cooperation among the member states. It was the successor organization to what was the Regional Cooperation for Development (RCD), founded in 1962, which ended its activities in 1979 with the advent of Khomeini in Iran. In the fall of 1992, the ECO expanded to include seven new members - Afghanistan and six former republics of the Soviet Union: Azerbaijan, Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan. [7]

As part of its efforts to break away from its diplomatic isolation, Iran has found in the present Islamic-oriented Turkish government a soul-mate for economic collaboration. In the words of the former Iranian parliament speaker Gholam-Ali Haddad-Adel, Iran and Turkey are "two powerful countries in the region and in the Islamic world," and, as such, they have "a common responsibility about the fate of all Muslims, especially in Palestine, Afghanistan, and Iraq." Fars, Iran's news agency which quoted the speaker, added that "Iran-Turkey relations have significantly improved during the AKP rule."[8] Iran's foreign minister, Manucher Mottaki, added his own superlatives to the burgeoning relations between the two countries: "The current level of economic cooperation between Tehran and Ankara," said Mottaki, "is unexampled [unprecedented] in the history of the countries' relations." He added that the extended cooperation in the oil and gas industry "can serve as a model for expansion of relations in other fields."[9]

Shortly after the election of Barack Obama as president of the United States, Turkish Prime Minister Recep Tayyip Erdogan offered Turkey's good offices as a "mediator between the new Obama administration and Iran." According to Erdogan, a new era in relations between Turkey, Iran, and the United States is about to be opened. "We are ready to be the mediator. I do believe we could be very useful," Erdogan said ahead of a visit to the U.S.[10]

Since the turn of the millennium, trade between the two countries has become increasingly robust. According to one study, in 2000, cross border trade reached nearly $1 billion, a figure that increased to $4 billion in 2005. In 2008, cross-border trade between the two states passed $10 billion annually (see table 1 below and the two charts). Turkey became Iran's 5th largest trading partner that year. According to the IMF, some Turkish officials, including state minister Cevet Yilmaz, and some Iranian news sources, trade fell to $5.63 billion in 2009 due to a slowdown in the global economy. Despite these reports, both Tehran and several government officials in Ankara, including Prime Minister Recep Tayyip Erdogan, maintain a figure of over $10 billion and have stated a goal to triple this figure by 2015. [11]


Source: International Monetary Fund Directory of Trade Statistics (DOTS)


Source: International Monetary Fund Directory of Trade Statistics (DOTS)


Source: International Monetary Fund Directory of Trade Statistics (DOTS)

UN Sanctions on Iran

The UN Security Council has imposed a series of four separate sanctions on Iran because of its refusal to cooperate with the IAEA and its subsequent refusal to suspend its nuclear enrichment program, which is viewed as a precursor for building nuclear weapons.

The first set of sanctions was imposed in December 2006 under Resolution 1737. The resolution called on states to block Iran's import and export of "sensitive nuclear material and equipment" and to freeze the financial assets of those involved in Iran's nuclear activities.

With Iran's nuclear program ongoing, in March 2007 the Security Council voted to toughen sanctions by passing Resolution 1747, which banned all of Iran's arms exports. It also froze the assets and restricted the travel of people it deemed involved in the nuclear program. Further restrictions imposed in March 2008 in Resolution 1803 encouraged scrutiny of the dealings of Iranian banks. It also called upon countries to inspect cargo planes and ships entering or leaving Iran if there were "reasonable grounds" to believe they were carrying goods prohibited by previous resolutions. [12]

UN Security Council Resolution 1929 of June 9, 2010, has so far been the most comprehensive in terms of sanctions on Iran. The Resolution targeted goods and services supporting Iran's nuclear and missile program. The Resolution prohibits the supply of heavy military equipment to Iran, targets Iranian investment in business relating to missile technology, and, perhaps most significantly, calls on states to prevent the provision of financial services, including insurance or re-insurance, and the transfer of any financial or other assets or resources where there is reason to believe that such services, assets, or resources could contribute to Iran's proliferation programs.[13]

The Resolution was passed by 13 votes, and only two rotating member countries - Turkey and Brazil - voted against it, because their attempt to broker a deal with Iran regarding its uranium enrichment program was rejected by the U.S. and the European countries. In fact, Turkey has opposed all along sanctions on Iran. In September 2009 Turkish Foreign Minister Ahmad Dovutoglu said Turkey opposed the imposition of sanctions on Iran on account of its nuclear activities because that could have an effect on trade in the region.[14]

The EU Sanctions

The European Union and Canada imposed new sanctions on July 26 against Iran. The sanctions went beyond the fourth set of UN sanctions imposed over Tehran's refusal to freeze nuclear work and follow similar sanctions imposed by the United States and Australia. The EU measures include a ban on the sale of equipment, technology, and services to Iran's energy sector, hitting activities in refining, liquefied natural gas, exploration, and production. New investments in the energy sector are banned.

The Iranian banking sector was also hit by restrictions, forcing any transaction over 40,000 Euros ($52,000) to be authorized by EU governments before they can go ahead.

Crafting a diplomatic response, Iranian foreign ministry spokesman Ramin Mehmanparasat was quoted as saying that "Sanctions are not considered an effective tool…and they will only complicate the situation."[15] Not known for his refined style, Iranian President Mahmoud Ahmadinejad was quick to characterize the sanctions as a "used handkerchief."[16] Ahmadinejad boasted that the Iranian economy is one of "the strongest and largest economies in the world."[17]

The Sanctions are Biting

There is hardly any doubt that the most recent set of sanctions, those by the UN Security Council and most recently by the EU, are beginning to bite into the flesh of the national economy. There are many reasons why the sanctions will hurt.

The most significant aspect of the sanctions is the inability of Iran's ships to secure maritime insurance, without which they will be denied access to European ports. By one account Iran received only three shipments of gasoline so far this month, because tankers carrying gasoline destined for Iran were diverted because of the sanctions.[18] Iran will also have problems opening letters of credit for its business transactions with Western suppliers. It will mean that Iran will need to cover many of these transactions by cash or through intermediaries. which will increase the cost of the transactions.

The United Arab Emirates was among the first to take measures against Iran. This is quite significant because Dubai, one of the seven emirates of the UAE, was the principal transit port for goods destined for Iran. UAE closed down 40 international and local firms as part of a crackdown on companies that violate UN sanctions on Iran. These corporations have been dealing in "dual-use and dangerous materials barred under UN resolutions and the nuclear non-proliferation treaty." The UAE has declared its commitment to carry out the sanctions in full.[19]

Even Venezuela, whose leader Hugo Chavez is a close friend and ally of Ahmadinedjad, is having a problem meeting a prior commitment to ship 20,000 tons of benzene daily to Iran. Problems with the country's three refineries and a shortage of oil by-products in Venezuela itself will make it difficult for Venezuela to meet Iran's needs.[20]

Perhaps the most harmful result of the sanctions is the brain drain. It is estimated that between 150,000 and 300,000 educated Iranians try to escape unemployment and political and social oppression by seeking employment abroad.[21] For example, the spokesman on energy matters in the Iranian Majlis (parliament) Imad Husseini estimated that 60 percent of the most qualified Iranian oil workers have left Iran for much higher wages in the Gulf countries and Europe. Some professional employees were forced out because of what Ahmadinejad referred to as "the oil mafia."[22]

Turkey Comes to the Rescue

An article in the Financial Times quoted extensively by the on-line reform paper Elaph depicts the efforts by Turkey to extricate Iran from the worst consequences of the UN and U.S./EU sanctions. While Turkey has declared that it will honor UN sanctions, it made it clear that it will not adhere to sanctions imposed by individual countries (referring to the U.S., EU countries, Australian, and Canada). By its words and action Turkey appears determined to provide Iran a safety net, while at the same time promoting, in the words of the Turkish Finance Minister Mehmet Simsek, "closer trade links with Iran." After a number of international and private companies have stopped selling refined oil products to Iran, state-owned Turkish refiner Tupras has stepped up its sale of oil to Iran.

With Dubai imposing restrictions on transit goods to Iran, the Turkish foreign economic relations board said that Turkey's ports of Mersin and Trabzon will fill the slack. Turkey is also offering Istanbul in lieu of Dubai as an attractive place for real estate investments by Iranians. Turkey will watch Russia and China to determine how far it can go in ignoring U.S. unilateral sanctions. On the other hand, Turkish banks appear to be more reluctant to violate the sanctions because the value of Turkish export to Iran is merely $2 billion, which is too small an amount for the Turkish banks to risk falling under punitive measures by the US/EU. [23] The real danger is that Turkey can help Iran circumvent sanctions by smuggling banned freight over the common border.[24]And it would be necessary to watch whether Turkish imports of certain goods register a large and sudden spike.

Iran and Turkey Ink Deal to Construct New Gas Pipeline

Notwithstanding the sanctions that restrict investment in Iran's energy sector, Iran and Turkey signed a contract for the construction of a 660km (412.5 miles) gas pipeline which will pass through Turkey and transfer Iran's national gas to Europe, at a cost of one billion euros.

Based on the contract, the pipeline is expected to be completed over the next three years, and upon completion it will export 50 to 60 million cubic meters of natural gas per day.

Iran currently exports 25 million cubic meters of natural gas to Turkey per day, and the figure could be increased to 30 million cubic meters per day. [25]

* Dr. Nimrod Raphaeli is a senior analyst at MEMRI.

Endnotes:

[2] IMF, "Turkey – 2010 Article IV Consultation and Post-Program Monitoring: Preliminary Conclusions," May 26, 2010.

[3] Al-Quds Al-Arabi (London), June 5, 2010.

[4] Alain Faujas, "In Iran, the Economy Pays the Price of Political Choices," Le Monde (July 2010), quoted by the Iraqi daily Al-Sabah Al-Jadid, July 12, 2010.

[5] Al-Quds Al-Arabi (London), July 17, 2010.

[6] World Bank, "Country Brief," web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/MEM

[7] "The Growing Economic Relations between Iran and Turkey," memrieconomicblog.org/bin/printerfriendly/pf.cgi , January 4, 2008

[8] Fars News Agency (Iran), December 27, 2007.

[9] Tehran Times, December 26, 2007.

[10] "Turkey Volunteers to Mediate U.S. Iran Talks," International Herald Tribune, November 12, 2008.

[11] David Pupkin, "Iran-Turkey Economic Relations: What Their Rapid Growth Means for Iran's Nuclear Program."www.Irantracker.org/analysis/Iran-turkey-economic-relations-wha (June 24, 2010). The table and the two charts were originally published by the IMF, Directory of Trade Statistics, May 2010.

[12] BBC News, September 25, 2009.

[13] [13][13] Australian Minister for Foreign Affairs' media release: Iran – UN Security Council Resolution (Resolution 1929 of 2010).

[14] Al-Quds Al-Arabi (London), September 30, 2009.

[15] Jordan Times, July 27, 2010.

[16] Alarabonline.org July 24, 2010.

[18] Alsumaria.news July 27, 2010.

[19] Alghdad.com June 22, 2010.

[20] Al-Sharq Al-Awsat (London), July 28, 2010.

[21] Al-Sharq Al-Awsat (London), February 19, 2010.

[22] Annabaa.org, May 20, 2010.

[23] Elaph.com and Financial Times, July 26, 2010.

[24] "Turkey Alliance with Iran is a Threat to World Peace," Telegraph.co.uk, June 10, 2010.

[25] Farsnews.com, July 23, 2010.

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