Introduction

Iran and Turkey are two large Middle Eastern neighboring countries with populations of around 65.4 million and 71 million, and GDPs in purchasing power parity of over $599 billion and $640 billion, respectively. [1] [See Annex]

While both countries are Muslim, Turkey has had a long tradition of a secular and democratic political system and, since the end of the World War II, has maintained a close relationship with the United States as well as membership in NATO. The changes that took place in Turkey in recent years under the AKP government have not affected its economic policies, which remained free market oriented.

By contrast, Iran is a theocratic state with aspirations of regional hegemony, an active supporter of terrorism, and a declared enemy of the U.S.. While rich in oil and natural gas, Iran has suffered from high inflation, most recently measured at over 19% per annum; a high rate of unemployment, particularly among the age group of 20-24 - 49.5% in 2005 [2] ; and economic mismanagement.

Operating under U.N. sanctions because of its nuclear program, Iran has sought to circumvent the effects of the sanctions and break its isolation by offering lucrative incentives through a steady supply of oil and gas. Turkey needs Iranian natural gas, which serves as the glue that ties them together. But the countries also have their differences.

Turkey cannot be oblivious to Iran becoming a nuclear country that threatens to upset the regional balance of power. Writing from Istanbul, Karl Vick of The Washington Post quotes Ozdem Sanberk, former Turkish Ambassador to the U.S., as saying: "Iran with nuclear production will be the dominant power. There will be an asymmetrical relationship." Sanberk argues that Turkey had no choice but to pursue a nuclear program of its own under the nuclear Non-Proliferation Treaty: "If we want to leave an independent country to our future generations," he asserted, "we do not have the luxury to delay." [3]

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The Kurdish Conundrum

Iran and Turkey also share a common problem with their Kurdish minorities, although this constitutes more of a problem for Turkey than for Iran. However, given its good relations with both the central government of Iraq and the regional government of Kurdistan, Iran has been reluctant to support Turkish incursion into the Iraqi Kurdish territory, and certainly it would not lend its support publicly. The Iranian ambivalence on the issue was expressed by Mohammad Shari'ati, whom Al-Jazeera TV characterizes as an "Iranian expert." Despite Iranian reservations about the Turkish incursion into Kurdish territory, Shari'ati told Al-Jazeera, the incursion would not harm Iran, which considers the PKK a terrorist organization, but at the same time Iran does not publicly support a Turkish military strike against Kurdistan. [4] Of course, the real reason may be entirely of an economic nature. Tension anywhere in the Middle East gives a boost to oil prices, and Iran, as the second largest exporter of oil among OPEC members, stands to benefit from such consequences of the Turkish incursions.

Iran and Turkey also compete economically in Iraqi Kurdistan, where the number of Turkish companies operating in the region far exceeds the 220 or so Iranian companies doing so. Moreover, Turkey provides Kurdistan with electricity and maintains active border trade estimated in the hundreds of millions of dollars. The recent Turkish threats to invade the Iraqi Kurdistan region were blunted by pressures from the Turkish companies that are doing business in the area, including investment in Kurdistan oil resources, in addition to the undertaking of major construction works and housing projects.

Economic Cooperation Organization

Early cooperation between Iran and Turkey was rooted in the Economic Cooperation Organization (ECO) - an intergovernmental regional organization established in 1985 by Iran, Pakistan and Turkey for the purpose of promoting economic, technical and cultural cooperation among the member states. It was the successor organization of what was the Regional Cooperation for Development (RCD), founded in 1962, which ended its activities in 1979 with the advent of Khomeini in Iran. In the fall of 1992, the ECO expanded to include seven new members, Afghanistan and six former republics of the Soviet Union: Azerbaijan, Kazakhstan, Kyrgyzstan (now known as Kyrgyz Republic), Tajikistan, Turkmenistan and Uzbekistan. Trade among the ECO member states constitutes only five or six percent of their total trade - a very small percentage indeed.

Recent Development

As part of its effort to break away from its economic isolation, Iran has found in the present Islamic-oriented Turkish government a soul mate for economic collaboration. In the words of Iranian Parliament Speaker Gholam-Ali Haddad-Adel, Iran and Turkey are "two powerful countries in the region and in the Islamic world," and, as such, they have "a common responsibility about the fate of all Muslims, especially in Palestine, Afghanistan and Iraq." Murat Mercan, AKP MP and foreign relations committee chairman in the Turkish parliament, responded that "cooperation between Iran and Turkey on developments in Iraq would help regional peace and security." The Iranian news agency Fars, which recorded the exchange, added that "Iran-Turkey relations have significantly improved during the AKP rule." [5]

Iranian Foreign Minister Manouchehr Mottaki added his own superlatives to the burgeoning relations between the two countries. "The current level of economic cooperation between Tehran and Ankara," said Mottaki, "is unexampled [unprecedented] in the history of the countries' relations." He added that the extended cooperation in the oil and gas industry "can serve as a model for expansion of relations in other fields." [6]

The Nabucco Gas Pipeline

Iran has enormous reserves of natural gas, estimated to be second only to Russia's. Turkey can provide the gateway to Europe for Iranian gas, and the Nabucco pipeline is the means. To cement their mutuality of interests in this project, the two countries signed a memorandum of understanding (MoU) on July 14, 2007 related to gas and oil transit and joint energy investments.

The pipeline is designed to be 3,500 kilometers (2,200 miles) long, to transport up to 40 billion cubic meters (1.4 trillion cubic feet) of gas annually. The estimated cost of construction is €5 billion, to be borne in equal shares by a consortium of five countries -Austria's OMV AG, Hungary's MOL, Romania's Transgas, Bulgaria's Bulgargaz and Turkey's BOTAS (Turkey's petroleum pipeline corporation). Turkey is pivotal because the pipeline must traverse its territory. Turkey will be a beneficiary in four ways: first, it will secure a supply of natural gas; second, it will collect transit fees; third, it will bargain for preferential prices for the Iranian gas; and fourth, as a leading conduit of gas to Europe, it will enhance its eventual integration into the European Union by earning points for diversifying routes and supplies away from Russia.

Analysts have estimated that consumption of gas by Europe will reach 700 billion cubic meters in 2015 (24,720 billion cubic feet), rising from 502 billion cubic meters (17,728 cubic feet) in 2005, while the ratio of imports will increase from the current level of 60 percent to 75 percent. [7]

For this reason, Russian views the Nabucco project suspiciously, and has announced its own subterranean pipeline that will transport Russian natural gas under the Black Sea, and which will be able to carry 20 billion cubic meters of Russian natural gas to Europe.

U.S. Reservations

The U.S. expressed reservations about the MoU between Turkey and Iran covering this project. On the website of the U.S. Embassy in Turkey, U.S. Ambassador to Turkey Ross Wilson commented: "… [A] memorandum of understanding could seriously set back the work that Turkey and the United States have been doing for a decade to develop the Caspian Basin gas resources as well as a pipeline infrastructure to bring those resources to Turkey and to international markets. By continuing to support projects like the trans-Caspian gas pipeline, Turkey's regional leadership will help diversify its and other European countries' energy supplies, make Turkey a key gas transit country, and strengthen the developing economies of Turkey's neighbors. A major increase of Iranian gas exports to Turkey and beyond may hinder the development of gas resources in Azerbaijan, Kazakhstan, and western Turkmenistan that might come to Turkey." [8]

These reservations were also made by Nicholas Burns, Assistant Secretary of State, during a visit to Ankara. He said that it was not logical to announce long-term deals for oil and gas with Tehran while Iran is proceeding with its nuclear program. He said the U.S. had made sacrifices by not trading with Iran and the other nations should follow suit. [9] Under current U.S. sanctions on Iran, companies may not invest more than $20 million in Iran's oil and gas projects.

For its part, Turkey has basically rejected all U.S. objections about its expanding economic relations with Iran. Turkish Prime Minister Recep Tayyip Erdogan said, "No country has the right to ask Ankara to relinquish its relations with countries that supply it with energy." [10] Most recently, Ahmet Davutoglu, a senior adviser to Erdogan, confirmed to CNN-Turk TV Turkey's commitment to going ahead with its energy agreements with Iran. [11]

Investment in the Development of a Gas Field

In mid-July of last year, Turkey and Iran signed an agreement for the development, beginning in 2008, of South Pars offshore gas field at a cost of $3.5 billion, possibly by developing a joint venture with a European Union member state already operating in Iran. [12] This agreement is another building block in Turkey's effort to play a leading role in supplying Europe with natural gas. As part of its drive to become a gateway for gas to Europe, Turkey has also offered to transport Russian gas, but apparently Russia did not welcome the Turkish initiative, nor did the United States, for different reasons. [13] But the project is also significant for Iran as a source of supply to meet its own needs. Although Iran is enormously rich with natural gas, it has been importing more gas since 2002 than it has been exporting, due to a lack of production capacity. [14]

The Expansion of Trade

The value of the bilateral trade between the two countries stood at about $6.7 billion in 2006, and was expected to grow to $8 billion in 2007. [15] Their trade is comprised of Iranian natural gas to Turkey and Turkish manufactured goods to Iran. There is also Iranian tourism to Turkey, which was valued by Iranian Trade Minister Masoud Mir-Kazemi at $3 billion. However, there is no independent source to confirm that figure. On the contrary, during his visit to the Chamber of Commerce, Industries and Mines in Tehran in late December 2007, Turkish Foreign Minister Ismail Cem estimated the revenues from Iranian tourism in Turkey in 2006 at $200 million, and called for increasing the trade between the two countries from $1 billion to $1.8 billion. [16] (Our assumption is that he was referring to the volume of Turkish exports to Iran.) This assumption is supported by a complaint made by Turkish Trade Minister Kursad Tuzman that Iran ought to remove trade barriers that hinder Turkish export to the Islamic Republic. [17]

Iran exports 27 million cubic meters of gas to Turkey daily, which represents about one third of total Turkish imports of natural gas. [18] In addition, Iran supplies Turkey with 70 megawatts of electricity, which could be doubled upon the development of the power lines between the two countries. [19] The two countries are also agreed to construct three thermal power plants -two in Iran and one in Turkey - with a combined capacity of 2000 megawatts, as well as several hydroelectric plants with a total capacity of 10,000 megawatts. Under the deal, transmission lines between Iran and Turkey will be upgraded and expanded within a year. The thermal power plants are scheduled for completion within three years. [20]

Iran and Turkey also created, in March 2007, what the Iranian minister of agriculture referred to as "a strategic committee" on agricultural cooperation. There is no information on the nature of this committee. Nine months later, in December 2007, the Turkish and Iranian ministers of agriculture met in Tehran, after which the Iranian minister of agriculture declared: "We have reached a vast agreement and hope that by implementing [it] the non-oil exchange level [will] increase noticeably."

Conclusion

There is an evident increase in the level of collaboration on economic and trade matters between Turkey and Iran due to the sanctions on Iran, which are undoubtedly effecting its economy, as evidenced by the lack of investment in Iranian vast oil and gas reserves, Iran has a habit of exaggerating its energy deals with the rest of the world, and the deal with Turkey is not an exception. Turkey needs natural gas but its sources are not limited to Iran, and hence its dependency on Iran is far less significant than Iran's dependency on Turkey as a gateway for its future gas exports to Europe. As a member of NATO, and desirous of joining the European Union, Turkey must take extra care to avoid being seen as a bedfellow of the Islamic Republic of Iran.

*Dr. Nimrod Raphaeli is the Editor of www.memrieconomicblog.org

ANNEX

Table: Comparative Data on Iran and Turkey (2005)

Source: Economic Cooperation Organization