Turkey-Israel rapprochement to bring economic benefits for both sides

Turkey-Israel rapprochement to bring economic benefits for both sides
Israeli forces stormed the Turkish ship Mavi Marmara, which was bringing humanitarian aid to Gaza, killing 10 passengers.
By Menekse Tokyay in Ankara June 29, 2016

The long-awaited deal between Turkey and Israel, announced on June 27, is expected to boost economic and trade ties between the two nations, repairing relations damaged in 2010 by the deadly Israeli raid on the Turkish aid flotilla led by the ship Mavi Marmara heading to Gaza to deliver humanitarian aid.

The compensation of some $20mn for the families of the 10 victims during the raid, the permission to Ankara to provide humanitarian aid to the besieged Gaza Strip through the Israeli port of Ashdod, and reciprocal reappointment of ambassadors are likely to create a positive atmosphere for the two countries. Both countries will also lift their mutual objections in international agreements, such as joint energy and defense investments.

Following talks with US Secretary of State John Kerry in Rome, Israeli Prime Minister Netanyahu said during the press briefing on June 27 that this deal will provide “immense implications for the Israeli economy”.

For Israel, one of the main lucrative opportunities of the reconciliation is to be able to export its billions of dollars of natural gas resources through pipelines via Turkey.

Energy cooperation between the two countries around the Eastern Mediterranean natural gas discoveries is likely to act as a game changer and may unlock the Turkish energy market to Israeli natural gas exports.

Dr Nimrod Goren, the Head of Mitvim – The Israeli Institute for Regional Foreign Policies – tells bne IntelliNews that “with the discovery of offshore natural gas reserves in Israel, there is potential to expand upon this economic cooperation”.

“The economic dimension has served as a motivating factor for both countries to reconcile their relations,” he adds.

For Turkey, deepening energy ties with Israel means paying less for the gas it normally imports from Russia, Iran or Algeria today, while Israel would find a major outlet for its energy exports with more lucrative prices than it would get from its contracts with Egypt.

Besides, Turkey has a huge potential for Israel with its use of about 50 billion cubic meters of natural gas each year, importing virtually all of it. Thus, diversifying supply is crucial.

During the press conference on June 27, Turkish Prime Minister Binali Yildirim said that the agreement between Turkey and Israel covers all areas, starting with the normalisation of political and diplomatic relations, but will also focus on economic and regional cooperation.

Cyprus question

According to Goren, the export of Israeli natural gas to Turkey is likely to take time. “Necessary infrastructure should be built. Political progress in the Cyprus peace process and in Turkey-Egypt ties will assist Israel and Turkey to make the most out of the natural gas reservoirs in the eastern Mediterranean,” he says.

For the gas bonanza to occur in the East Mediterranean, the resolution of the Cyprus issue should be addressed first, according to analysts, because large quantities of gas are located in the territorial waters of the divided Mediterranean island of Cyprus and some part of the pipeline from Israel has to pass through Cypriot territorial waters.

Trade is another aspect of the bilateral relations. Turkey is Israel’s 6th largest trading partner. Israel exports chemicals, pharmaceuticals and plastics to Turkey, and imports manufactured goods and food.

Despite the diplomatic and political stalemate in the relations since 2010, bilateral trade has increased over the years, and it now stands at around $5bn annually, roughly balanced. Between 2011-2015 when the diplomatic relations stood at their lowest level, Turkey’s exports to Israel increased by 13% to reach around $2.7bn.

Turkey’s giant energy companies are also in close cooperation with some Israeli energy companies. For instance, Zorlu Energy has a 25% stake in Israel’s Dorad Energy, which owns a power plant in Israel constructed with an investment of $1.2bn.

This is a clear indicator of how much both sides are interested in keeping their economic relations unaffected by the unstable political circumstances.

Naz Masraff, an analyst with the London-based Eurasia Group, said there is unlikely to be much economic upside from the Turkish-Israeli rapprochement given that trade and business relations were never really negatively impacted.

“That said, potential import of Eastern Mediterranean gas through Turkey in the longer-run would be significant, but this will depend on the resolution of the Cypriot dispute,” Masraff tells bne IntelliNews.

In the same line, Timothy Ash, head of CEEMEA strategy at Nomura International in London, said in an analyst note that the deal bodes well for a deal over the future of Cyprus. He argues the key to Turkey’s re-engagement is also the desire to improve energy security by diversifying away from Russia, and the potential of all that gas south of Cyprus. “Net-net positive for Turkey and Turkish assets,” he said.

Turkish businesspeople are also optimistic about the positive repercussions of the deal on many sectors of the economy.

In a written statement on June 27, Omer Cihad Vardan, the head of the International Economic Relations Board (DEİK), said “this deal will create substantial opportunities in guaranteeing energy security and supporting energy diversification in the region. Besides, we expect to see rising economic cooperation in energy, construction, infrastructure and tourism sectors in the near future.”