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Turkey’s Iran Problem #TurkeyIran

Turkey’s Iran Problem <a class="hashtagger" href="">#TurkeyIran</a>

Trump administration is increasing economic and military pressure on Iran, while Tehran threatens to pull out of the Nuclear Accord and continues to harass Israel through proxies in Syria.

Oil prices jump in response to fears of cut-off in Iranian deliveries.  One of the countries which will be squeezed between these Powers will be Turkey, which is huge importer of energy and maintains friendly relations with the neighbor.

Trump not to grant waivers to Turkey

The United States urged its allies and companies to stop buying crude oil from Iran by Nov. 4 or they will face sanctions, a U.S. State Department official told reporters on Tuesday.

The official indicated that there would be no additional phase-out period after the sanctions kick in at the end of the 180 days from when President Trump unilaterally withdrew from the Iran nuclear deal in May.

Also, there will likely be no waivers. The U.S. Treasury Department said that same day that U.S. sanctions on Iran would take effect in 90-day and 180-day periods – after Aug. 6 and Nov. 4.

Since a Turkish-Iranian gold trader, Mr. Reza Zarrab was accused in a New York court of violating sanctions on Iran (he later turned state’s evidence) and a Halkbank executive  (Mr. Hakan Atilla) was convicted of the same crime, American eyes have been fixed on Turkey to make sure similar branches won’t happen again.  The implied threat is sanctions, perhaps a large fine for Halkbank to demonstrate to Ankara how serious Washington is.

Ankara won’t heed US rules

Turkey will not cut off trade ties with Iran at the behest of other countries, Foreign Minister Mevlüt Çavuşoğlu said on Friday in an interview with broadcaster NTV.

Çavuşoğlu made the comment after the United States told countries this week to cut all Iranian oil imports by November.

“If the United States’ decisions are aimed at peace and stability, then we’ll support them, but we don’t have to follow every decision. Being allies doesn’t mean following every decision word for word,” the foreign minister said. “Iran is a good neighbor and we have economic ties. We are not going to cut off our trade ties with Iran because other countries told us so.”

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Sanctions Costs for Turkey

When sanctions on Iran’s shipping and petroleum-related transactions come into effect in November, Turkey will have to significantly reduce the volume of its crude oil purchases from Iran to avoid being punished by the United States, comments Financial Tribune, an Iranian publication.

In 2017, Iran surpassed Iraq as Turkey’s biggest source of energy, providing around 44.6% of total oil supplies and 17% of total gas imports to the country.

Reducing oil imports from Tehran means that Turkey would need to increase its imports from elsewhere—most likely from Iraq and the Persian Gulf states—which would be more expensive because of higher transportation costs and the different characteristics of the oil these countries produce.

Global oil prices are set to increase if sanctions limit Iranian production. Iran produces around 2.5 million barrels of oil per day, which is equal to about 3% of the global demand. Estimates indicate that sanctions could reduce Iran’s oil exports by an average of 400,000 barrels per day—or even up to 1,000,000 depending on how many companies choose to abide by the US sanctions.

Ankara is already paying a huge bill for its energy imports. Data obtained from the Turkish Statistical Institute show that the country’s energy import bill increased from $27.16 billion in 2016 to $37.19 billion in 2017. This massive increase can be attributed to the hike in global oil prices from as low as $36 per barrel at the beginning of 2016 up to around $60 by the end of 2017, and to an increase in domestic gas consumption.

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According to Volkan Ozdemir, the head of the Institute for Energy Markets and Policies, Turkey expects its total energy imports to remain above $40 billion over the next few years.

For a country that is highly dependent on energy imports—92% and 99% of oil and gas needs, respectively, come from outside Turkey—energy prices have an effect on the macroeconomic indicators. The combined increase of global oil prices and domestic demand in Turkey is expected to widen the current account deficit, which will in turn increase inflation and decrease economic growth.

According to estimates by Turkey’s former deputy prime minister, Ali Babacan, for every $10 increase in global oil prices, inflation in Turkey will rise by 0.5% and growth will decrease by 0.3%.

Aware of such negative implications on the Turkish economy, officials in Ankara—such as Minister of Economy Nihat Zeybekci and Ibrahim Kalin, the chief advisor to prime minister—promise that they will keep resisting US demands that they stop trading with Iran, arguing that Tehran is committed to the nuclear deal.

However, if the European Union decides to abide by US sanctions, or Iran decides to abandon the nuclear deal and resume its nuclear program, Ankara’s capability to maneuver around sanctions will be limited.

Ankara will soon face a dilemma. Either it has to maintain its commercial relations with Tehran and access to relatively inexpensive oil and gas, thereby risking US punishment—which would further complicate bilateral relations and push Ankara more toward Russia and Iran—or abide by the US sanctions on Tehran and bear the expected negative impact on its economy.

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