The Role of Economy in Iran-Turkey Relations

Friday, December 19, 2014

Fahimeh Ghorbani

Political relations between Iran and Turkey have continued steadily since the 1979 Islamic Revolution despite the existence of structural differences between them. A close look at the ties between the two neighbors shows that economy as one of factors has played an important and fundamental role in facilitating the expansion and continuation of their relations. It is worth mentioning though that their bilateral interests in maintaining regional stability and their commitment to containing and controlling Kurdish separatist movements in the Middle East, i.e. their security cooperation, are two other important factors contributing in the consolidation of their political relations. However, what I will be discussing here today is the contribution that economy has made to the two countries’ relations.

Since the sixteenth century, a number of important factors have constituted the differences between Iran and Turkey. The most prominent of which are: the geographical location of the two countries, minority issue, religious sectarian division, distinct political models of Turkey and Iran, border disputes and regional rivalries. Despite the differences, the two sides have common interests that have served to facilitate their political relations, and prevent their rivalries from further intensifying. Among those common interests, we should point to increasing and expanding economic relations. For instance, escalations of tensions between Tehran and Ankara, caused by deep differences over the Syrian crisis, have failed to strain or sever their relations. The reason for that should be sought in the basics of Iran and Turkey’s political relations, one of which economy.

How the economic factor has facilitated the continuation of Iran-Turkey relations should be discussed at two major and minor levels. At the minor level, the nature and approaches of the two countries' foreign policy and the role of economy in it should be examined. And at the macro level, the economic interdependence of Iran and Turkey in the areas of energy, transit, cross-border trade, economic crises, and commercial ties, has to be discussed.

About Turkey’s foreign policy, the fact is that Turkish foreign policy is strongly influenced by its economic considerations. For example, from the very beginning of the foundation of the Turkish Republic, its leaders have always looked at industrialization, modernization and development as strategic goals. In this framework, they have taken two directions in their foreign policy: The first westernization in accordance with the teachings of Mustafa Kemal Ataturk, the founder of the republic who believed that Turkey has to follow the path of Europe as the most developed bloc in the world. And the other, a tendency to refrain from tensions and disputes in foreign policy, because, in their opinion, tensions and disputes, would hamper Turkey’s development and progress.   

Of course we shouldn’t lose sight of the two strategies of “import substitution” and “export promotion” in Turkey’s economic development in the past century. A successful export promotion strategy entails a peaceful foreign policy and expansion of regional and international relations and cooperation. Turkish authorities employed the export promotion strategy at two junctures in the past three decades. The first time it was initiated in the 1980s during the premiership of Halil Turgut Özal which gradually transformed Turkey from being a security state into a trading state. As a result of that, trade and investment development takes center-stage in Turkish foreign policy. And for the second time, the strategy was adopted by the Justice and Development (AK) party, when it came to power in 2002 and is still in place.

When it comes to Iran’s foreign policy and the role of economy in it, Iran’s regionalism approach needs to be considered. When the Iran-Iraq war ended in 1988, regional cooperation became a priority in Tehran’s foreign policy. Iran’s insistence on regionalism was to some extent a result of measures taken by Western countries to impose sanctions on Tehran and to isolate it internationally. Therefore, one of the main reasons why Iranian leaders adopted the regionalism approach was that, according to their calculations, trade and energy cooperation based on interdependence with close neighbors, especially a powerful neighbor such as Turkey, would be safest way for Iran to ward off the impact of Western sanctions. And this practical approach has turned Turkey into an important trade partner for Iran.

Additionally, the role of economy in the two countries’ relations can be explained at a macro level and based on the neoliberal school in international relations. From that standpoint, countries that engage in intensive trade relations have strong incentives to avoid confrontation. Trade increases the costs of conflict, disincentivizing trade partners to escalate disagreements. In line with that [in line with that], now Iran and Turkey have interdependence economic relations in the five areas of energy, transit, border trade, economic crises and commercial ties. We should consider that the most important factor in the interdependence economic relations between Iran and Turkey is energy. Iran is at the top on the list of countries selling oil to Turkey. For example, in the first quarter of 2011 only, Iran was the leading exporter of crude oil to Turkey, with a 30 percent share of Turkey’s total oil imports. Also, Iran is the third largest provider of Turkey’s natural gas, after Russia and Iraq. Energy trade between Iran and Turkey serves the interests of both states. That means Turkey is facing an increasing local demand for energy, and Iran considers Turkey as a developing foreign market for energy. In addition to that, Turkey is a transit route for energy to European customers. Actually, Turkey is a crucial transit route for Iranian imports from Europe.

Furthermore, the growth of economic relations in border regions between the two countries should also be considered. In 2009, Iran eased its customs regulations in East Azarbaijan province to facilitate trade with the neighboring Van province in Turkey. In the same year, the two countries also agreed to establish a joint industrial zone in Iran near Makou (is located in 25 miles from the Turkish border). And by March 2012, Turkish firms accounted for half of all foreign investors in Tabriz’s Foreign Investment Zone.

Another factor that’s lead to an expansion of bilateral relations is the “economic crisis and war” factor. For example, after Iran’s Islamic Revolution and during the eight-year war between Iran and Iraq, Iran was in a state of political and economic isolation and dealing with aftermath of the war. Therefore, Iran started cultivating closer relations with Turkey and import much-needed strategic goods from it. At the same time, doing trade with Iran was lucrative for Turkey; indeed, trade with Iran helped Turkey’s bankrupt economy get back on its feet, and somehow supported Prime Minister Turgut Özal’s liberal economic reforms in the early 1980s.

I’m also going to mention the issue of Western sanctions and their impact on the two countries’ relations in the contemporary era. Generally speaking, Iran provides Turkey with the energy it needs for economic development. Instead, Iran has been viewing Turkey as a country through which it can break the spell of western sanctions, especially since 2011 when financial sanctions caused a serious challenge to Iran’s banking. Since then Turkey has emerged as Iran’s economic lifeline. When the big banks in Europe, and Asia, especially the ones in Dubai refused to transfer money into and out of Iran, a number of Turkish financial institutes rushed to Iran’s rescue. For instance, Halkbank, 75% of which is owned by the Turkish government, started to pay the Indian oil company to buy its oil from Iran.

It has to be mentioned here that the U.S. government warned Turkish firms and financial institutions about the possibility of losing access to the American market if they continued to deal with Iran. Yet, the Turkish government has so far refused to implement any of the unilateral sanctions that the U.S. and the European Union have imposed on Iran. While expressing a willingness to cooperate with any sanctions endorsed by the United Nations, Turkey has moved forward with the expansion of economic ties with Iran in all domains that have not been targeted by UN sanctions. At the same time, the Turkish government has announced that Turkish firms that do business with the United States are free to make their own individual decisions with respect to dealing with Iran. It should also be mentioned that the sanctions have prompted Iran to shift its foreign investments from Dubai to Turkey, so much so that the number of Iranian firms in Turkey increased from 319 in 2002 to 2072 in 2011. Furthermore, the two countries have announced plans to increase the volume of their economic transactions to 30 billion dollars by 2015.

Therefore, the “economy factor” is one of the reasons that has facilitated the political relations between the two countries to continue since the Islamic Revolution in Iran. A case in point is Turkey’s support for Iran’s peaceful nuclear activities in 2007 (political cooperation). On the other hand, high-ranking diplomatic visits by the two countries’ political figures are an example of the continued political relations between the two neighbors. What’s important about those trips is that although they have been high-level political-diplomatic visits, bilateral economic cooperation and its expansion have always been high on their agenda, and has involved trade delegations from each country. A case in point is President Rohani’s two-day trip to Turkey on June 19 of this year. Accompanying Dr. Rouhani to Ankara were the Iranian Central Bank Manager and a number of private sector Chambers of Commerce representatives. At the same time as President Rouhani’s trip to Turkey, the two countries signed around 10 cooperation documents for investment in bilateral infrastructural projects such as transportation, transport and export of gas, industrial borderline regions, and commercial development.

Thus, economic relations, is among important factors that has prevented Iran and Turkey from cutting relations over occasional tensions like the Syrian crisis.

*Fahimeh Ghorbani is a Research Fellow at the Institute for Middle East Strategic Studies (IMESS) in Tehran.

Keywords: Iran, Turkey, Economy, Political Relations, Common Interests, Ghorbani

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