Turkey complies with US sanctions to avert risks

Turkey had begun reducing oil imports from Iran in recent months and looked to hedge against higher oil costs by buying more heavily from neighbouring Iraq.
Sunday 02/06/2019
Few options. A drilling vessel sails in the Bosporus in Istanbul.(Reuters)
Few options. A drilling vessel sails in the Bosporus in Istanbul.(Reuters)

DUBAI - Turkish ports have stopped receiving tankers holding Iranian oil as Ankara reluctantly complied with US sanctions targeting Iranian oil exports.

The development came as Washington ended a 6-month reprieve for eight countries, including Turkey, by not renewing sanctions waivers that allowed them to buy Iranian oil without risk of sanctions.

Turkey has been the most vocal of Iran’s oil customers in scrutinising US moves that aim to restrict Iran’s oil income. At the same time, Ankara was unwilling to take on the economic risks that continued oil trade with Iran could bring.

Turkey has been experiencing deep strains in relations with the United States over its role in the conflict in Syria. As Ankara reset ties with Moscow and engaged Tehran to reshape its Syria policy, Turkey’s disagreements with the United States became more apparent.

US-backed Kurdish militias in Syria lie at the heart of the disconnect between Turkish and US approaches. Mistrust between the NATO allies hit low levels over Ankara’s purchase of the Russian S-400 missile defence system, which the United States is opposed to. Washington threatened to block deliveries of F-35 joint strike fighter aircraft to Turkey in response.

Turkey has also been battling a growing economic crisis at home as its credit-fuelled growth falters. The past year has seen the Turkish lira lose nearly half its value against the US dollar and Turkey’s current account deficit spiral to $27 billion.

With inflation at around 20%, Turkey’s central bank is unable to bring down interest rates even as unemployment grows.

It is in that political and economic backdrop that Turkish President Recep Tayyip Erdogan’s ruling Justice and Development Party (AKP), Turkey’s dominant political force for almost the last two decades, suffered upsets in recent mayoral and municipal elections.

The AKP’s record of delivering strong, sustained economic growth suffered in recent years, changing the domestic political landscape and results at the ballot box. Turkey’s markets are edgy as Istanbul heads for a controversial election rerun in which an opposition candidate had originally been named the victor.

Emphasising the importance of Istanbul in 2017, Erdogan ominously warned supporters: “If we stumble in Istanbul, we will lose our footing in Turkey.” The AKP stumbling with Istanbul’s electorate is linked to the poorer economic performance it has overseen in recent years.

US sanctions targeting Iranian oil came at a bad time for Turkey, which has been heavily reliant on oil imports from Iran. Before the United States unilaterally withdrew from the Iran nuclear agreement and reimposed economic sanctions against Iran, almost half of Turkey’s total oil imports were sourced from Iran.

Ankara has now been forced to choose between diversifying its oil supply from Iran and incurring higher costs or continuing to buy Iranian oil and risk facing US sanctions, which would be more costly and complex to manage. American sanctions would jeopardise efforts by Ankara to achieve an economic turnaround with various stimulus and support packages.

Turkey had begun reducing oil imports from Iran in recent months and looked to hedge against higher oil costs by buying more heavily from neighbouring Iraq. By March, Turkey’s oil imports from Iran had fallen substantially and accounted for 12% of its total imports.

Iraq has displaced Iran as Turkey’s largest oil supplier. Oil from Iraq accounts for close to one-third of Turkey’s import requirements, followed by Russia, now accounting for one-fifth. Kazakhstan is in third place with a fast-growing market share.

Turkish Foreign Minister Mevlut Cavusoglu has said US moves to end sanctions waivers would have a negative effect on regional stability and reiterated that Turkey would resist external moves to impose conditions on how it conducts relations with its neighbours.

Turkey intends to develop alternative mechanisms to continue trading with Iran and pledged its commitment to tripling bilateral trade with Iran from its current level of around $10 billion a year.

Given the limited scope and success of Europe’s Instex system to bypass US sanctions, however, it is unclear what chances of success Turkey could have with initiatives of its own or how long those could take to realise. The central banks of Turkey and Iran had reached an agreement to trade in local currencies in October 2017 but, with both the Turkish lira and Iranian rial unstable, they offer limited appeal.

In the current geopolitical scenario and as Turkey introduces a second major financing package this year for key industry, its policy focus is likely to remain on engineering an economic recovery at home rather than on investing heavily into trade development with Iran.