Turkey walks economic tightrope between Iran and sanctions
Even as Turkey reduces its oil imports from Iran under pressure from the US and EU, the country is maintaining economic ties with its neighbour.
By Anna Wood for SES Türkiye in Istanbul -- 18/06/12
Just weeks before another set of US and EU-imposed economic sanctions on Iran's oil industry is to go into effect, Turkey sold record levels of gold to its nervous neighbour.
The Turkish Statistical Institute reported that in April Iran was Turkey's largest export market at $1.47 billion, $1.2 billion of which was gold. This represents an increase of more than four times the amount of gold sold by Turkey to Iran in the same period last year.
Economists see rising gold purchases over the past few months as an attempt by Iran to deflect some of the negative effects of sanctions that will become worse as conducting international trade becomes more difficult.
A ratcheting up of sanctions has forced Iran to move away from the dollar while the euro continues to be volatile. Economists believe that gold is seen as a dependable alternative as high inflation in Iran erodes savings and the Iranian currency loses value.
"Because of inevitable developments in Iran, the public's inclination towards precautionary savings and their simultaneous desire to have these savings in gold may have increased," Seyfettin Gursel, a professor of economics at Bahcesehir University, told SES Türkiye.
"From an economic perspective, this is a rational explanation," Gursel added. "We know that households in Turkey also hold great amounts of gold. There must be a large stock among jewelers, as well."
Djavad Salehi-Isfahani, an Iranian professor of economics at Virginia Tech and a non-resident senior fellow at the Brookings Institution, sees Iran's economic engagement with Turkey as a result of "unprecedented sanctions."
Iran "has been denied access to the global financial arrangements that have taken the world decades to construct, such as SWIFT," Salehi-Isfahani told SES Türkiye, referring to the Society for Worldwide Interbank Financial Telecommunication, the organisation that enables global financial institutions to make transactions in a secure, standardised environment.
"Iran now has to find creative ways to do without some of these facilities," Salehi-Isfahani explained. "So far, it has been turning to gold and local currencies of its trading partners as means of payments. Gold is also now its main instrument for keeping its international reserves."
What complicates these transactions from a political perspective is Turkey's desire to be exempt from Iran sanctions, engage in trade that will help Iran evade the effects of those sanctions, and all the while maintain important economic, military and political alliances with the United States and the EU.
Currently, Turkey seems to be managing this balancing act.
Last week, less than two weeks after the huge gold sales were reported, Turkey's demand for exemptions from the US-backed sanctions was finally met. The US granted Turkey a 180-day exemption from Iran oil sanctions as a result of a nearly 20% cut Turkey made in Iranian oil imports in April.
Sanctions would have affected not only Turkey's energy stability, but also numerous other Turkish industries linked to international markets.
Turkey's trade with Iran has been growing dramatically in recent years. According to data from the Turkish Exporters Assembly and the Turkish Statistical Institute, the total value of goods and services traded between the two countries in the first eight months of 2011 was $10.6 billion, and the Iranian ambassador to Turkey predicted that the value in 2012 could easily reach $15 billion.
Given this profit incentive, as well as Turkey's ongoing -- and increasingly unrealistic -- desire to maintain a "zero problems with neighbours" foreign policy strategy, Turkey is loath to participate in economic sanctions.
Salehi-Isfahani predicts that Turkey's economic ties with Iran could easily grow in the near future. Ultimately, he explained "Turkey remains one of Iran's best options for staying connected to the rest of the world."