Political turmoil has an acute effect on Turkey’s economic relations in the Middle East. Our southern borders being as they are, we in Turkey are learning more about this than we would like. While the Syrian crisis will have an impact on the Turkish economy, Iraq will have an even greater effect.
First, Iraq is energy-rich, while Turkey is energy-poor.
Second, Iraq is an important customer for Turkish industrial exports, but there are others in the region who could take Turkey’s place. This has all become relevant as relations with Baghdad have taken a nosedive over Turkey’s ambitions to reach an energy deal with the Kurdistan Regional Government. Only recently, the jet of Turkey’s Energy Minister Taner Yildiz was refused a landing permit at Erbil’s airport. There are several reasons for concern here.
“Iraq is Turkey’s route to the Middle East,” as I was once told. I now see the wisdom behind those words. The first American intervention closed the region for Turkey during the 1990s. The second one has reopened it to us. Throughout the 1980s, Iraq was either the second or third-largest destination for Turkish exports. It became Turkey’s second-largest trading partner after Germany toward the end of the decade. Then came the first American intervention, pushing Iraq to a negligible 25th place in Turkish exports. As of 2012, Iraq is once again Turkey’s third most important export market. So far, so good.
Today, Turkey’s access to Iraq’s markets is once again in jeopardy. The last time it was the American intervention; this time it is the tension between Erbil and Baghdad and the growing Turkish interest for Kurdish gas and oil.
The stakes are high. Kurdish gas might be too costly if it comes at the loss of Iraq’s market for Turkish products. Syria’s crisis does not have the potential to cause economic damage, as does a collapse in Turkey’s economic ties with Iraq.
Turkish exports to Syria are only about 5% of our exports to Iraq. Unlike Syria, the sheer size of our exports to Iraq makes it important for Turkey’s industry. In the first 10 months of 2012, Turkish exports to Iraq counted for around 7% of the total. In 2003, when I first visited Iraq with a business delegation right after the invasion, exports to Iraq were only 1.4% of the total. It has increased from millions to billions of dollars.
Who could fill the void left by Turkish products? Considering that Iraqi markets demand low-end products, Iran has a good chance. Iranian and Turkish industries are competing for roughly the same class of products.
Now, why would a political problem between Ankara and Baghdad have economic repercussions? Because we are in the Middle East. There is a fundamental difference between Turkey’s exports to the West and its exports to the East. To the West, we have the European Union, a market economy. Its rules are set out on paper and our markets will trade regardless of the heat between our capitals. To the East, we have non-market countries as our customers. If our capitals are on bad terms, the problem spills over to the markets. This is the case across the Middle East, with the notable exception of Israel and Turkey. This was how I understand the “zero-problems” policy. Capitals should have "zero problems" and let businesses take the long view and increase our connectivity with our region.
But maintaining good relations with capitals is difficult when the central authority is split between two cities. It seems that Ankara has to choose between Erbil and Baghdad.
Iraq is no Syria for Turkey, and Kurdish gas may come too costly. This looks especially bad for 2013, I have to say.