Deal with Iran boosts Turkey’s hopes of trading in national currency

Turkey has long sought to increase the use of its national currency in trade with Russia, China and Iran, but due to significant trade imbalances with the others, only Iran appears to offer a viable prospect.

al-monitor A money changer counts Turkish lira bills at a currency exchange office, Istanbul, Turkey, Aug. 21, 2015. Photo by REUTERS/Murad Sezer.

Oct 18, 2017

The trade deal that Turkey reached with Iran earlier this month offers the best chance yet to boost the use of the Turkish lira in foreign trade, an objective that Ankara has long pursued. The trade balance between the two neighbors paves the way for the use of the Turkish lira and the Iranian rial in commercial exchanges. Last year, Turkey’s exports to Iran amounted to $4.9 billion, while imports were worth $4.6 billion.

Following President Recep Tayyip Erdogan’s Oct. 4 visit to Tehran, the central banks of the two countries signed a swap agreement, which amounts to a mutual commitment on exchanging national currencies.

The recent political rapprochement between Turkey and Iran, especially on Syria and Iraq, is an important element encouraging trade. This has boosted optimism that export and import figures will be rising fast in the coming period. During his visit to Tehran, Erdogan set the target at $30 billion in annual bilateral trade. The two sides aim to enhance cooperation in every realm, from energy and tourism to road transport and defense industry.

Iranian President Hassan Rouhani stressed the two countries would be using their national currencies in banking and trade to boost economic ties. He noted they had also agreed to begin talks on increasing Turkey’s natural gas imports from Iran. The payment for the gas is expected to be in Turkish liras.

According to Seyed Mohammed Hossein Adeli, the Iranian secretary-general of the Gas Exporting Countries Forum, the Turkish-Iranian decision to trade in national currencies is feasible, particularly in energy trade, and could encourage others to follow suit.

To reduce its dependence on foreign exchange, Ankara has sought to increase the use of the Turkish lira on various fronts, from foreign trade to public tenders. Economic ties with Iran have now offered a strong ground for advancing this policy. Besides trade, the two neighbors are likely to use the lira and the rial in tourism as well.

Yet the prospects are not that rosy when it comes to two other major target countries — Russia and China — because of Turkey’s gaping deficits in its trade with the two economic giants.

In 2016, Turkish exports to Russia were worth $1.7 billion, while its imports hit $15.1 billion. The Turkish lira and the Russian ruble are convertible currencies, but because they are not used widely in international trade, they are not reserve currencies like the dollar and the euro. The international trading of nonreserve currencies is typically marked by significant exchange differences; hence, no one wants to accumulate nonreserve currencies and incur losses. This explains also Russia’s reluctance to trade in national currencies with Turkey.

In 2009, following then-President Abdullah Gul’s trip to Moscow, the Turkish media had trumpeted the prospect of using the lira and the ruble in bilateral trade. Eight years on, there is little progress to report.

The issue, however, has remained on the agenda. Speaking after a visit to Russia in August 2016, Erdogan said, “If we trade in rubles and Turkish liras with Russia, this would bring the price of the dollar down [and] we would get rid of the dollar pressure.” In December, Prime Minister Binali Yildirim’s trip to Moscow was preceded by reports that the visit would mark “the first concrete step” toward using national currencies in bilateral trade, but 10 months later, the issue remains an unrealized project.

In remarks to Al-Monitor, Yaman Toruner, a former governor of Turkey’s central bank, explained why Ankara’s proposal was not feasible in Turkish-Russian trade. “If we are going to pay Russia in rubles, we need to find rubles from somewhere. Then, Russia may accept rubles but it may reject Turkish liras because it may not be able to use them afterward,” Toruner said.

Pointing to the big imbalance in bilateral trade, he added, “Russia is selling us oil and buying tomatoes. Let’s say it has to receive $1 billion for the oil and pay $300 million for the tomatoes. There is a difference of $700 million. If Russia converts the Turkish liras to dollars according to its international value, we will be incurring losses because the difference between the buying and selling value of the Turkish lira on the international market is very big.”

When it comes to China, the trade imbalance is even bigger. Last year, Turkey’s exports to China were worth $2.3 billion, white its imports stood at a staggering $25.4 billion.

Still, Didem Engin, the former deputy chair of the Turkey-China Business Council and now a lawmaker for the main opposition Republican People's Party, believes that trade in national currencies could be increased with China, but sees little gain for Turkey.

Stressing that international acceptance of the Chinese yuan was greater compared to the Russian ruble, the Iranian rial and the Turkish lira, Engin said, “China has a state policy to increase the use of the yuan in international trade and financing; hence many countries have begun to trade in yuan. At the end of 2015, the International Monetary Fund decided to designate the yuan as a reserve currency, and the decision took effect in October 2016. Using national currencies in trade between Turkey and China would strengthen the yuan as a reserve currency, but the benefits for Turkey would be limited because of the huge trade imbalance in favor of China.”

Last year, the Turkish and Chinese central banks concluded their first currency swap, boosting hopes of increasing the use of national currencies in trade.

According to Turkey’s semi-official Anatolia news agency, Turkish exports using Turkish lira increased 118% in the first seven months of 2017, amounting to nearly $9 billion. Imports paid in Turkish liras, meanwhile, were 31% in the same period, amounting to $10.3 billion. According to the Turkish Exporters Assembly, the number of countries and regions where Turkish exporters have traded in Turkish liras has reached 182.

The figures speak of progress, but the lira remains very far from what is required to become a reserve currency. To gain a global standing, the lira needs to increase its weight in Turkey’s own trade. The data for the first seven months of the year, however, indicates that trade in Turkish liras accounted for only 10% of exports and 8% of imports.

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