Power Shifts in Iran's Post-Covid19 Economic Relationship with Turkey
ACIS Iran Pulse no. 108 | July 13, 2020
After almost three-month closure due to the COVID-19 outbreak, border crossings between Iran and Turkey were re-opened for truck transport during the first week of June 2020. Marking the first step in a process of restoring one of Iran's vital trade links, the IRI Customs Administration spokesman reported that 150 Iranian trucks discharged cargoes in Turkey, passing the Sorrow, Razi and Bazargan border crossings. Even with the fullrestoration of overland commercial transport, Iran's post-COVID-19 trade wit hTurkey reflects a major shift in the economic relationship between the two countries. Iran no longer constitutes one of Turkey's main suppliers of crude oil and natural gas while the increase in business cooperation between the two countries has witnessed the emergence of Turkey as a major home for Iranian capital flight. Although starting prior to the pandemic, the shift in Iran-Turkey trade synamic has accelerated because of COVID-19.
From January to April 2020, a period that includes a severe phase of Iran's COVID-19 outbreak, Iran's bilateral trade with Turkey plummeted by 75% compared to the same period in 2019. However, the volume of Iranian exports to Turkey had already been declining as part of a major transformation in the economic relationship between the two countries. The renewal of U.S. sanctions against Iran starting in November 2018, combined with ongoing weakness in the Turkish economy, had already caused a drastic decline in Iranian exports to Turkey in 2019. During the first nine months of 2019, a period that takes in five months in which Turkey enjoyed a sanctions waiver enabling partial purchases of Iranian oil, Iran exported only $3 billion dollars worth of goods to Turkey, representing a 47% decline year-on-year. Thus, even prior to the COVID-19 outbreak, the Iran Chamber of Commerce Industries, Mines, and Agriculture (ICCIMA), forecasted a reversal in the trade balance inTurkey's favor.
The trend has been further accelerated by the precipitous decline in Turkish imports of Iranian natural gas in 2020. Turkey has long been seeking to diversify its natural gas supply mix to reduce its strategic dependency on both Russia and Iran. Taking advantage of the March 31, 2020 PKK terrorist attack on the Iran-Turkey natural gas pipeline, Ankara halted natural gas deliveries and has delayed repairing the damaged pipeline segment located near the Bazargan border crossing. Tehran has complained about Ankara's stalling the repairs on the pipeline, which at one time transported 10 billion cubic meters of Iranian gas annually to Turkey, representing by itself close to 20% of Turkey's annual consumption. Claiming the repairs could be accomplished in a few days, Iranian Oil Minister Bijan Namdar Zanganeh, placed the blame squarely on the Turkish government stating that "Iran offered to help repair the pipeline but the other side did not welcome it." From March 2019 to March 2020, Turkey's natural gas purchases from Iran declined by 33%. Exploiting the glut in the spot LNG market, Turkey replaced a siginificant portion of its Iranian and Russian imports with LNG purchases from Qatar and the United States, with the latter seeing a 300% jump in its LNG exports to Turkey.
The push to restore maximal cross-border trade is related to the new economic dynamic evolving between Iran and Turkey. Accompanying the border re-opening were calls for the convening of a new session of Joint Economic Commission (JEC), which has not met in 2020 due to the COVID19 crisis. The JEC is an important Turkish-Iranian fourm seeks that seeks to increase bilateral economic cooperation by devising means to provide each country a comparative advantage. Following the last JEC meeting in Ankara in September 2019, Turkey participated in the 16th meeting of the Iranian Business Council in November 2019. At the international forum held in Tehran, the chairman of Turkey's Foreign Economic Relations Board (DEIK), re-affirmed Ankara's commitment to the goal jointly declared by Turkey and Iran in 2016 to raise the annual volume of their bilateral trade to $30 billion. Whereas Tehran may have once look forward to reaching the $30 billion target through the increased sale of oil, petroleum products, and natural gas to Turkey following Iran's signing the JCPOA, Ankara has been pushing for joint business ventures and Iranian capital investments in Turkey through the DEIK-linked organization, the Turkey-Iran Business Council.
Operating under the joint auspices of Turkey's DEIK and Iran's ICCIMA, the Turkey-Iran Business Council works to promote bilateral trade by improving business relations between Turkey and Iran. Working in parallel to the JEC, the Turkey-Iran Business Council focuses on deepening cooperation in banking, transportation, contracting, and bilateral investments through the elimination of legal and other barriers between the two countries. The efforts of the Turkey-Iran Business Council dove-tail Ankara's general efforts to attract foreign capital to Turkey. To help relieve the chronic strain on the Turkish Lira, Ankara initiated a new program in 2017 to attract foreign capital by offering Turkish citizenship to foreigners making large property and capital investments in Turkey. Under this program, Iran has become one of the main sources foreign capital inflow to Turkey.
When Turkey's 2018 currency crisis began to drag the Turkish economy into a recession, Ankara slashed its property investment threshold by 75 percent, reducing the requirement from $1 million of real estate assets in Turkey to only $250,000. Likewise, Ankara reduced the fixed capital investment threshold for Turkish citizenship from $2 million to $500,000 and the Turkish bank deposit threshold from $3 million to $500,000. Occurring the immediate run-up to the United States' November 4, 2018 re-imposition of sanctions, the Turkey's reduction in the investment thresholds for citizenship has attracted a flood of Iranian investors to Turkey.
Taking advantage of falling housing prices in the Turkish market, wealthier Iranians purchased 5,423 homes in Turkey in 2019, making Iranians the second largest foreign purchasers of real estate in Turkey. In 2019, Iranians opened 970 companies in Turkey, accounting for the largest number of companies opened in Turkey by foreign citizens. This capital flight from the Islamic Republic made Iran the third largest capital investor in Turkey in 2019, third only to Germany and the Netherlands. Accordingly, Iranians were the largest group of foreign nationals to receive Turkish citizenship through investment program.
The transfer of Iranian capital to Turkey and the expansion of the number of Iranians holding Turkish citizenship is likely to continue. "Turkey has become the single route for the Iranian capital expecially after the U.S. embargo was imposed," explained Fatih Çayabatmaz, the Tehran representative of Turkey's Independent Industrialists' amd Businessmen's Association (MUSIAD). The MUSIAD reprentative, who also heads a consulting firm to aid Iranians to invest in Turkey and acquire Turkish citizenship, predicted continued capital flight to Turkey, stating, "We expect this interest to continue to grow in the upcoming years as well."
Turkey has traditionally provided the Islamic Republic of Iran an economic lifeline during times of international conflict. Beginning with Turkish assistance to Iran to import vital goods during the 1980s when the Iran-Iraq War disrupted Persian Gulf maritime trade routes to Turkey's more recent alleged assistance to Iran to evade the previous sanctions regime by paying for Iranian oil in gold, Turkey's role as an Iranian economic back-channel was bound up with its dependence on Iranian hydrocarbon imports. The current trend of Iranian capital investment in Turkey is occurring under a qualitatively different set of circumstances and reflects a shifting power dynamic in Turkey's favor.
The duration of this change in the Iranian-Turkish economic relationship and its long-term consequences remain unclear. In the immediate short-term, the upsurge of Iranian capital and Iranian citizens in Turkey will form an additional incentive for Ankara and Tehran to compartmentalize their conflicting interests in Syria and seek methods for de-confliction. A longer term consequence may be greater Iranian-Turkish cooperation in an Eurasian commercial framework. The neighboring countries together comprising one of the key geographic corridors for the future of Asia-to-Europe commerce. The new dynamic in the Iranian-Turkey economic relationship may turn out to induce Tehran toward greater cooperation with Ankara in developing commericial connectivity across the southern tier of Eurasia. Whether in the Middle Eastern or Eurasian geopolitical contexts, the shifting dynamics of Iran's economic relationship with Turkey seem to augur for a more accommodating attitude from Tehran toward Ankara.
* Prof. Michaël Tanchum is a senior fellow at the Austrian Institute for European and Security Studies (AIES), a fellow at the Truman Research Institute for the Advancement of Peace, the Hebrew University, Israel, and non-resident fellow at the Centre for Strategic Policy Implementation at Başkent University, Ankara, Turkey. @michaeltanchum
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Iran Pulse No. 108 ● July 2020
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