Iran-Turkey Economic Relations: What Their Rapid Growth Means for Iran's Nuclear Program

Key Points

• Since 2000, trade between Turkey and Iran has increased tenfold, from $1 billion annually in 2000 to $10 billion annually in 2008. 
• This trade has drawn the Islamic Republic and Turkey closer together and has influenced Turkey’s actions with regard to Iran’s nuclear program.  Turkey has supported Iran’s nuclear program despite International Atomic Energy Agency (IAEA) concerns about Iran’s nuclear activities and has opposed international sanctions, most recently at the United Nations.
• Turkey likely believes it can only achieve its aspirations to become a regional economic superpower with Iran’s help. 
• Even beyond providing cover for its nuclear program, Iran seeks to use Turkey as a tool to help it attain its own regional economic ambitions 
  

BACKGROUND

Since its founding in 1923, the Republic of Turkey has had mostly peaceful relations with Iran. In 1926, the two nations signed a treaty of friendship, detailing joint efforts at containing each nation’s Kurdish population.  Ties of cooperation deepened in 1955 when the United Kingdom created the Central Treaty Organization (CENTO), a mutual security pact consisting of Iran, Iraq, Turkey, and Pakistan.[1]  Immediately after the Islamic Revolution of Iran in 1979, relations quickly soured between the two states.  Turkey, an American ally and NATO member, found itself in direct opposition to the Islamic Republic, and the two nations entered a period of muted hostility that lasted nearly two decades. Tensions increased further in the 1980s and 1990s over the Kurdish separatist group the Kurdistan Workers’ Party (PKK), which used the Turkish-Iran border region to launch attacks into Turkey.[2]  

Since the turn of the millennium, however, Turkey and Iran have grown increasingly close.  In 2000, cross border trade reached nearly $1 billion, a figure that increased to $4 billion in 2005.[3] In 2008, cross-border trade between the two states passed $10 billion annually; Turkey became Iran’s 5th largest trading partner that year.[4] According to the IMF, some Turkish officials including state minister Cevdet Yilmaz, and some Iranian news sources, trade fell to $5.63 billion in 2009 due to a slowdown in the global economy. [5] Despite these reports, both Tehran and several government officials in Ankara including Prime Minister Recep Erdogan maintain a figure of over $10 billion and have stated a goal to triple this figure by 2015.[6]

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) 

Recep Erdogan’s election as president of Turkey in 2003 has helped accelerate bilateral trade, as he has increased cooperation with Iran while distancing Turkey from Western countries.[9] Iran’s Minister of Economic Affairs and Finance, Shamseddin Hosseini, described the relationship between the two states in 2010 as being “at the highest level.”[10] Even long-standing sources of tension have faded. The two states have, for instance, agreed to cooperate against terrorist organizations in the region as they have improved bilateral ties. This cooperation included moves by Tehran to classify the Kurdistan Workers Party (PKK) as a terrorist organization and a rising campaign against the Party of Free Life of Kurdistan (PJAK), a Kurdish separatist group within the Islamic Republic, that included cross-border attacks into Iraqi Kurdistan.[11]  Turkish and Iranian cooperation on economic matters has increased broader ties between the two countries and provided a major boon for the Iranian economy.[12]

CURRENT PICTURE 

According to Turkish and Iranian sources, since the beginning of 2009, cross-border trade has continued its upward trend.   According to Iranian media reports, non-energy trade between the two nations climbed to $2.7 billion in 2009. Iran exports industrial products – such as cathodes, polymers, propylene – and consumer goods to Turkey while Turkey exports textiles, machinery, steel, and chemicals to Iran.[13]  This trade represents for Iran an 11 percent increase over the same period from the year before in non-energy exports to Turkey, making Turkey the sixth largest consumer of Iran’s non-oil goods.[14]   

Beyond non-energy trade, there have been many other signs of increased economic cooperation since January of 2010.  In February of 2010, the Central Bank of Iran approved the establishment and operation of a Turkish-owned bank in Bandar Abbas.[15] In that same month, Iran signed a customs memorandum of understanding with Turkey that opened up the Bazergan, Khoy, Saro, and Maku border points for trade. This agreement has also mandated the revival of the joint border markets in Kuzrosh and Salmas. [16] Several days later, a second round of talks produced agreements about the creation of a joint industrial town on the border of the two nations, a project that appears to be moving forward.[17]  Finally, Turkey was one of just twelve nations with which Iran signed preferential and free trade agreements, highlighting the Islamic Republic’s desire to further improve trade relations.[18]

REASONS FOR TRADE 

Geographic and economic factors provide a basis for significant Iran-Turkey trade. Both countries share a border, and Erdogan’s desire to align Turkey more closely with its eastern neighbors makes Iran an ideal partner. Yet there is another reason for this increase in economic ties: Turkey’s growing energy needs.  Turkey has been purchasing Iranian oil and gas to fuel its booming growth, with 12 percent of its energy supplies coming from the Islamic Republic.[19]  In 2009 alone, Ankara imported 5.1 billion cubic meters of natural gas from Iran, a 35 percent increase over the year before.[20]   The growth in the purchase of Iranian natural gas seems likely to continue. In February of 2010, Turkey announced it was prepared to link, via pipeline, its northeastern port city of Trabzon with the Iranian port city of Bandar Abbas.[21]  Even more recently, from March 20 to May 5, the Islamic Republic increased its gas exports to Turkey by 98 percent compared to the same period last year.[22]  

This relationship, strengthened by energy, goes beyond imports and exports between the two states; Iran and Turkey rely on each other’s territory for access to vital markets.  Turkey is one of the major gateways to Europe through which energy flows. Iran has recently announced that, in order to fulfill a large gas contract to Switzerland, it may use Turkish pipelines to reach the continent (see further details on this project here).[23] This relationship goes in the reverse direction as well: gas from Turkmenistan bound for Turkey flows through Iran. This link is vital in maintaining Turkey’s energy security and allows Ankara to distance itself from more expensive Russian suppliers.[24] These pipeline transfers create nearly $2 billion in trade a year and form another vital economic link between the two countries.[25] As with non-energy trade, this relationship is growing at a rapid rate.  In addition to Turkey’s increased gas purchases there have been reports in Iran that Turkey has been granted the rights to ship half of the natural gas extracted from the Islamic Republic for sale to European customers.[26]

TURKISH INVESTMENT IN IRAN

This economic relationship expands beyond exports and imports.  Turkey is not only a client of Iran’s but an investor as well, evidenced by numerous recent cases of Turkish involvement in projects in Iran.  Turkey has recently been in discussions with Iran over a $5.5 billion investment in the South Pars gas field.[27] The Turkish energy company ABS has signed a memorandum of understanding with Tehran on the financing of the development of South Pars phases 17 and 18.[28]  Turkey has also signed onto a $2 billion project to build an oil refinery in northern Iran. This joint venture seeks to lay the foundations for a project that would bring Iranian gas to Europe through Turkish energy companies.[29] Turkey has also expressed interest in investing in “green” energy projects in Iran, including several wind farms, in cooperation with a number of Chinese firms.[30]   

Iran invests reciprocally in Turkey. Iran is currently engaged in several power projects in Turkey.[31] Furthermore, Iran relies on Turkey to provide it with access to advanced European fiber optics networks through telecommunications cables that run through Turkey.[32]  Projects like these have deepened Iranian and Turkish ties.[33]

TURKISH REFUSAL TO JOIN SANCTIONS AND CONCLUSION

Turkey has continued to do business with the Islamic Republic despite repeated calls to join international sanctions efforts targeting Iran.[34] Ankara has refused to engage in economically isolating the Tehran regime.  Turkey voted against the June 2010 United Nations Security Council (UNSC) resolution imposing additional sanctions on Iran, one of three countries on the UNSC that voted against the resolution or abstained from voting.[35] Further, in February of 2010, the chairman of the Turkish Parliament’s Foreign Relations Commission, Murat Mercan, stated that Turkey wished to “not only to explore possibilities for further developing our relationship [with Iran] but also to discuss a number of regional and international issues of common interest.”[36]  Finally, Erdogan announced his belief that Iran’s nuclear program was only for civilian purposes and spoke of Iranian President Mahmoud Ahmadinejad as a “friend” and added, “I told him I don’t want to see nuclear weapons in the region.”[37] 

The Turkish-Iran economic relationship has not proceeded without problems. Since November 2009, there have been calls in Iran for Turkey’s natural gas contract to be canceled.[38] In addition to this, according to the IMF, Turkish-Iranian trade fell to nearly half of what it was the previous year in 2009, although Iranian and Turkish officials cite a figure that does not show any decline from 2008. Furthermore, in April of 2010, a major deal with Turkish state run oil company TPAO collapsed as the Turkish firm failed to decide on proceeding with the project quickly enough for Iranian authorities.[39]   

These incidents, however, have not caused any significant damage to the relationship, because the rapid growth of economic links between the two countries has demonstrated the political will of the leadership in Ankara and Tehran to increase ties for mutual profit.   

The recent Turkish and Brazilian-brokered nuclear swap deal is only the clearest example of strong ties (see more details on the implications of the deal for Iran’s nuclear program here). In exchange for storing uranium for Iran, Turkey would continue to receive even greater access to the Iranian economy and Iranian energy sources.  Ankara seeks to become a regional economic superpower by becoming an energy hub for Europe.[40] To do this, it needs Iranian assistance.   

This economic relationship is not one-sided, however.  By enlisting the aid of Turkey, Tehran transforms its main economic rival in the region into an ally. Tehran has, in the past several years, attempted to consolidate its position at the center of a region which stretches from Central Asia to Turkey.   One way it seeks to do this is through the construction of a massive interconnected power grid that runs from Afghanistan to Lebanon, supplying much of the Middle East with electricity.  By enlisting Turkey’s aid on this project, Tehran seeks to make its neighbors “increasingly interdependent with Tehran and the Iranian economy.[41]” By maintaining good relations with Iran, these border states of the Islamic Republic are able to receive the energy they need.  Furthermore, thanks to this alliance between Ankara and Tehran, Turkey can no longer be counted on as an alternate supplier.  Because of this developing Iranian-Turkish cooperation in regards to energy generation, the Islamic Republic’s regional position is strengthened by becoming a top supplier of energy in the region with competitors either made into allies or lacking the needed infrastructure to supply the region. 

By increasing economic ties with Iran and supporting the Islamic Republic politically, Turkey gains an ally in its quest for energy supremacy in Europe. As the economic and political ties between the two countries deepen, Turkey will likely continue to impede efforts to isolate Iran and dismiss the threat posed by Iran’s nuclear ambitions.