Subscribe to FDD

Nuclear Deal: Impact on Iran-Turkey Economic Relations

Jonathan Schanzer
3rd February 2016 - FDD Press

Co-authored by Mert Yildiz, Gareth Hollins, and Rachel Ziemba

Download the full report here

Foreword by Jonathan Schanzer

The recent implementation of the Iran nuclear deal (Joint Comprehensive Plan of Action, or JCPOA) will have a profound impact on the Middle East. From heightened tensions between Iran and Saudi Arabia to Iran’s ability to finance terrorist proxies with sanctions relief, there are many reasons for Iran’s neighbors to worry. But not every country is fraught with concern. Turkey has hailed the deal as a diplomatic success.

More to the point, Ankara sees the potential for real economic opportunity with its long-sanctioned neighbor. As this report from Roubini Global Economics explains, a more prosperous Iran with access to foreign currency affords Turkey a new market to sell industrial and commercial goods, and to offer tourism services, as well. Energy, not surprisingly, will dominate Iran’s exports to Turkey.

But Ankara, much like the rest of the world, will need to be careful how much it relies on Tehran. The fear of Iran violating the JCPOA, and thereby inviting renewed international sanctions, is a constant factor among all of the many countries and companies looking to cash in on the economic opportunities. Of course, Turkey has already taken great liberties by exploiting a loophole in those sanctions by executing an elaborate “gas-for-gold” sanctions-busting scheme that yielded Iran some $13 billion in Turkish gold from 2012 to 2013.  This “golden” loophole was closed by the U.S. Congress in 2013. 

The JCPOA has now lifted substantial sanctions against Iran,  and Turkey is looking to profit in more traditional ways through legal trade and investment. But as the Roubini team acknowledges below, the relative advantages that Turkey will have in the early going may wane over time as Iran becomes more competitive, and the two may compete over investment from third countries. And over the long term, Ankara’s ability to cash in hinges on Iran’s ability to implement economic and financial reforms. And that is certainly not guaranteed. The political pragmatists generally associated with such reforms may be increasingly sidelined in next month’s elections.

In the meantime, it is not entirely clear if the current political climate is supportive of an uptick in Turkey-Iran economic ties. While Ankara had nothing to do with Saudi Arabia’s controversial execution of Shiite cleric Nimr al-Nimr in early January, the Iranian press linked it to a visit to Riyadh by Turkish President Tayyip Erdogan. In response, Turkey summoned Iran’s ambassador and harshly condemned the media reports.

Turkey’s December deployment of troops near Mosul to train and aid local Sunni and Kurdish forces to fight against the Islamic State also elicited some harsh Iranian reactions. Turkey is, of course, a Sunni country aligned with NATO whose vision for Syria and Iraq is antithetical to that of Tehran. Iran therefore responded that the troops would create chaos and risk regional security, while calling on Ankara to seek permission from the Iran-backed government in Baghdad before taking action. 

Finally, in a story that has evaded headlines, Iran’s Oil Ministry is suing the privately owned Turkish airline Onur Air, claiming that the company is a hidden asset of alleged sanctions-busters.  This is the first Iranian lawsuit against a Turkish company in history, and is even more significant considering that Onur Air is Turkey’s largest private airline. 

Despite all of this, with the end of international sanctions, the economic ties between Iran and Turkey are likely to expand. Turkey is keen to cash in, and so is Iran, despite their lingering differences. The key to long-term prosperity for these two unlikely partners will hinge on Iran’s readiness to implement economic reform and its willingness to abide by the constraints of the nuclear deal that makes all of this possible. Neither are guaranteed.

Tags

economics, iran, jcpoa, turkey