Turkey and Iran warily eye closer relations

Turkey and Iran warily eye closer relations
Turkish President Recep Tayyip Erdogan and Iranian President Hassan Rouhani.
By Carmen Valache in Istanbul February 15, 2016

Under pressure from slowing domestic consumption growth, Turkish manufacturers have set their sights on the large and retail-hungry Iranian market. But as textile, home appliance and furniture producers scramble to attract some of the 30mn-strong Iranian middle class, Tehran and Ankara need to contain growing animosities over Syria and trade barriers, experts say.

On the surface, Iran and Turkey could become thriving commercial partners, now that the European Union (EU) and Canada have lifted sanctions on Tehran, by building on already established trade relations. The two neighbours, with populations of almost 80mn each, have complementary needs: Iran produces oil and gas, Turkey needs it; Iran needs consumer goods, Turkey produces them; Turkey is seeking to attract foreign tourists to make up for a shortfall in tourism this year, and Iran can supply them.

A member of the World Trade Organisation (WTO) and a close commercial partner of the EU's, Turkey could also function as a stepping-stone for Iran's technocratic president Hassan Rouhani in his pursuit of enhanced ties with the West, while mitigating concerns of the more conservative elements in Tehran that the country is heading too far too fast. Turkey and Iran's relationship could also be a partnership among equals, a welcome break for Tehran after decades of Western criticism for its human rights failings and nuclear programme.

Treading carefully

But previous attempts to build economic links have failed to meet their original expectations. Take for instance the much-anticipated preferential trade agreement (PTA) that Ankara and Tehran signed in January 2014 and which came into force a year later.

The result of 11 years of negotiations, the PTA ostensibly promotes trade in non-hydrocarbons by lowering tariffs on some 265 industrial and agricultural exports in order to reach a target of $35bn in commercial exchanges. However, a few months after it took effect, Iranian manufacturers began to complain about the terms of the agreement, which lowered tariffs for Turkish value-added goods, but not for Iranian ones, for Ankara had only agreed to lower tariffs for Iranian agricultural exports.

The PTA with Iran is a typical example of Turkey's trade policies with its neighbours, Nader Habibi, Economics professor at Brandeis University, argues. "To make bilateral trade with its Middle Eastern neighbours attractive and sustainable, Turkey cannot focus on a strategy of exporting industrial goods in exchange for natural resources and agricultural products... Instead, it must allow its imports from these economies to include a minimum amount of manufactured and industrial products".

The deal failed to rekindle bilateral trade, which reached its peak at $21.9bn in 2012, but which has more than halved since to $9.7bn in 2015. Sanctions only explain part of the steep decline in Turkish exports to Iran, which dropped from $9.9bn in 2012 to a mere $3.6bn in 2015. According to Baris Gorguc, secretary general of Turkish furniture association Mobsad, Turkish companies have also lost market share.

"Iran used to be our second export market for furniture after Iraq up until 2008-2009, but sanctions and the emergence of a domestic furniture industry in Iran have severely affected sales," he tells bne Intellinews, adding that he nevertheless hopes that Iran will retake its place as the second largest importer of Turkish furniture by 2017.

Meanwhile, energy, the most important area of cooperation between the two countries has been an apple of discord as well, for Ankara and Tehran took their dispute over reliability of supplies and prices to the International Court of Arbitration, where the former won a modest 15% price cut. Turkey, which imports some 10bn cubic metres (bcm) of gas from Iran a year at the exorbitant price of $487 per 1,000 cubic metres (cm), had requested a 40% cut. In comparison, Azerbaijan supplies Turkey with 6bcm of gas a year at a price of $340 per 1,000cm and Russia some $30bcm for $418 per 1,000cm.

"Our authorities obviously made a mistake when they negotiated the 25-year gas deal with Iran in the mid 1990s", Huseyin Bagci, Professor of International Relations at the Middle East Technical University, tells bne Intellinews. The lifting of sanctions could have prompted Ankara to turn to Tehran for more gas, in order to replace some of its Russian gas imports, but the prohibitive tariffs Iran practices will likely prevent it from doing so unless the 1996 contract is renegotiated.

But politics has been the biggest barrier between the two regional giants. Shiite Iran and Sunni Turkey have sided with opposite factions in regional conflicts in recent years. In Yemen Turkey has supported Saudi Arabia's military operations to defend President Abd Rabbuh Mansur Hadi, while Iran backs the Shi'ite Houthi militia which seized the capital Sanaa in 2014.

Conversely in Syria, Iran backs the Bashar al Assad regime, while Turkey sheltered insurgents from the Free Syrian Army in the early days of the Syrian civil war, and is accused of having traded oil and weapons with the Islamic State (IS) militants, who now control much of Syria and Iraq. The fact that it opened its southern Ircilik airbase for Nato to conduct aerial bombings in Syria has also not gone down well in Tehran.

Turkish President Recep Tayyip Erdogan nevertheless expressed his wish to not allow "sectarianism" divide Iran and Turkey in a December 2015 interview, because "Islam must be our reference".  

Iran has also tried to build better relations. "That's what we tell our Turkish friends: ‘Be cautious! Do not bet on the loser,’" Iran's Deputy Foreign Minister Ibrahim Rahmanpour warned during a visit to Ankara on February 10, referring to Turkey's cosy relations with Saudi Arabia and Riyadh's claims that it could deploy ground troops to Syria via Turkey.

Rahmanpour also sought to allay fears that Iran would ever side with Ankara's archenemy the Kurdistan Workers' Party (PKK), fears that commentators like Israeli scholar Micha'el Tanchum have propagated. "Kurds are our historical friends. We want them to continue their existence in prosperity and happiness within the states they live in," the official said, conveniently glossing over Tehran's problems with its own Kurds.

The silver lining

The good news for Turkish manufacturers is that the disagreements over Syria are likely to remain contained. "Turkey is not interested in a military conflict with Iran over Syria," Bagci argues.

Nader Entessar, Professor of political science at the University of South Alabama, concurs: "I don't think that the divergent views on Syria will impact commercial ties in a major way in the short term. However, if Turkey continues to challenge Iran's national security interests by aligning itself with Iran's regional adversaries, trade could suffer in the long term," he wrote in an email to bne IntelliNews.

Turkish construction companies are now rushing to win contracts in Iran, where the market is expected to almost double in size this year compared to 2013.

Turkey is also hoping to attract more than 2mn tourists from Iran this year, to whom Ankara generously extends a no visa policy

Turkish exports of low-tech goods such as home automotive parts, chemicals, machinery, home appliances, furniture, clothing and textiles are bound to flourish, Bagci believes. Mehmet Buyukeksi, head of the Turkish exporters' Assembly (TIM), expects an 8% to 10% increase in exports in 2016 alone.

Turkish clothing brands like LC Waikiki, Defacto and Koton are already popular in the neighbouring country, and the lifting of sanctions has kicked off a race to the top of Iranian consumerism. Zeynep Aseri, business development manager at NAB Holding, a diversified Turkish group that owns LC Waikiki told bne IntelliNews that her company already operates 11 stores in Iran across its various brands, and that it would open four new stores in the next two months.

Pinar Karaaslan, managing partner at furniture company Mobi, has a similar story; Mobi opened a showroom in Tehran several years ago, and is eyeing a 20% increase in exports to Iran this year.

But while stories like these abound, the two countries remain very far away from reaching the target of $35bn in trade set in their PTA. Protectionist trade policies and a cooling in diplomatic relations will certainly not help further the case of Turkish exporters. Besides, Turkish manufacturers are not the only ones jostling to win the hearts and minds of Iranian consumers, so they will have to put up quite a fight to win the race to Tehran. 

This is the final part in our series on the regional implications of the opening up of Iran for business following the lifting of sanctions. Previous articles covered the impact on the Caucasus, Central Asia and Russia.