Erdogan’s Diplomacy Faces Deadlock in Tehran

During his recent visit to Tehran, Turkish Prime Minister Recep Tayyip Erdogan and Iranian president Hassan Rouhani exchanged compliments and pleasantries, eager to present relations between the two countries as warm and friendly.

The January 29th visit, which lasted only one day, followed numerous attempts to improve political and economic relations between the two countries. Erdogan, who was accompanied by Turkey’s Minister of Energy, Minister of Economy, and the Foreign Minister, met with President Rouhani, high ranking officials and the Supreme Leader Ayatollah Khamenei.

Yet divisions were so deep that Erdogan returned to Ankara a day earlier than planned. Although it was presented as an exercise in building further economic ties between the two countries, media outlets in both Iran and Turkey described the visit as an opportunity for officials to come to an agreement on Syria. Erdogan told Turkish state TV that Turkey and Iran had been unable to reach an agreement on the crisis. The two countries have been bitterly divided on the issue, with the Iranian government showing strong support for the Assad regime and Turkish officials calling for him to be ousted.

But Syria is not the only point of contention between the two countries. Iran has been setting its gas prices at a higher level than other suppliers, including Russia and Turkmenistan. During the annual session of the United Nations General Assembly in September, Iranian and Turkish foreign ministers Mohammad Javad Zarif and Ahmet Davutoglu were reported to have taken a walk together along the Hudson River, and in early January, Zarif traveled to Turkey to meet with Davutoglu. Both discussions led to speculation about improved ties between the two countries and a move towards an agreement over energy matters. So far, however, there have been no real signs of progress. Erdogan brought his team of economists to the Tehran meeting, but the two sides came no closer to resolving their disagreement over gas prices. 

Trade agreements continue

IranWire spoke with Dr Mehrdad Emadi, an economist from the London-based Betamatrix Consultancy, about the failure of the two sides to reach an agreement. “With increased pressure on Iran near the end of 2005, Turkey, which functions as an economic bridge between Iran and Europe, managed to benefit from the situation. Since July 2012, when the European Union placed sanctions on Iran, Turkey has attempted to receive discounts, including those that were not financially beneficial.” Following the November 24th Geneva interim agreement and bearing in mind the fact that sanctions will be eased, he added, Turkey’s continued insistence on discounted gas from Iran “shows that it is not in touch with the reality of Iran’s foreign policy. More importantly, in addition to sanctions being reduced in the next 12 months, the crisis in Ukraine and other countries neighboring Russia have once again made Iran a possible secure importer of gas to Europe.”

Four agreements were signed during the Tehran trip, however, including the establishment of a Turkish–Iranian high-level cooperation council; the fifth document of joint trade committee; a preferential trade agreement on lowering customs tariffs for 220 export and import items – including technology goods produced in Turkey and food imported from Iran – and a media agreement between the Islamic Republic News Agency (IRNA) and Turkey’s Anatoly News Agency.

During the ten-year crisis over Iran’s nuclear program, trade relations between Iran and Turkey have rarely been affected by international sanctions. In 2003, Iran-Turkey trade exchanges amounted to two billion dollars; by the end of 2012, this amount had increased 11 times, reaching 22 billion dollars.

Eased Sanctions will Affect Exports

In 2013, however, following an increase in sanctions, the rate of gas and oil exports from Iran to Turkey was radically reduced. The volume of the trade exchange between the two countries dropped by 40 per cent, amounting to 13.5 billion dollars.

Because of sanctions, Turkey was forced to pay Iran in gold for a portion of its gas imports. This resulted in a substantial increase in the rate of gold exports from Turkey to Iran. According to Turkey’s economy minister, 60 per cent of Turkey’s gold exports goes to Iran.

Iran has also used banks in Turkey as intermediaries in order to receive payments for its oil exports. For example, oil sales to India were handled by Turkey’s Halkbank, meaning that Turkish intermediaries received substantial amounts of money.

Mehrdad Emadi says,“When Iran was under international sanctions, countries such as Turkey and the United Arab Emirates (UAE) acted as Iran’s middlemen for foreign trade. They managed to earn unprecedented benefits by performing as intermediaries. This trend will not continue, however, now that there is a new agreement and the sanctions placed on Iran are being reduced. Iran no longer needs to use countries such as UAE and Turkey as intermediaries. The private sector in Iran will also deal directly with European countries.”

In addition, according to Turkey’s Minister of Development, Iran’s balance of trade was positive over the course of 2013. In other words, Iran has exported more to Turkey than Turkey has exported to Iran. Turkey is eager to increase its exports to Iran.

At the same time, the collapse of Turkish currency over the past few months has resulted in Turkish products becoming less expensive and therefore well-positioned to compete with products in the Iranian market. This has led to a certain amount of worry in Iranian economic circles. Iran’s Minister of Industries and Mines has criticized Turkey’s methods of operation and has expressed a desire for future trade transactions to be conducted in Iranian Rials and Turkish Lira.

Emadi told IranWire that, because of tough international sanctions, Iran has not had access to the amount of high quality technology that other countries have had, meaning that the Iranian work force yields less profit. Therefore, Iranian products are more expensive than those of neighboring countries, making it difficult for Iran to compete.

But following the agreement between Iran and the P5 +1 countries (the United States, the United Kingdom, Russia, China, France and Germany) in November, the gates of diplomacy have opened and Iran has seen visits from foreign ministers and high ranking international officials.

Emadi has observed that “these new developments have worried Turkey as well as those Iranians who were key figures in doing intermediary deals with Turkey. Naturally, both parties will resist and even lobby in favor of continuing trade with Turkey. My prediction, however, is that in the meantime we will see an increase in the volume of trade between Iran and European countries and a decrease in trade between Iran and its neighbors.”

Iran has extended invitations to the largest European oil companies to visit Tehran. They in turn have offered to sell to Iran, making Turkey’s proposals less attractive. But there is still time. Hassan Rouhani plans to visit Ankara soon. It remains to be seen whether Turkey will be able to come up with an offer that Iran is willing to accept.