Erdoğan’s Visit to Iran and 4th of October Economic Deliberations

ECONOMYCOMMENTARY 10.10.2017
Murat Aslan Vice President / Coordinator of Economy

Upon his return from the United States in September, President Erdoğan publicized his October 4th visit, along with a group of Turkish ministers and advisors, to Iran, which has been considered a significant event.

1. Introduction

Upon his return from the United States in September, President Erdoğan publicized his October 4th visit, along with a group of Turkish ministers and advisors, to Iran, which has been considered a significant event. In his visit to Tehran, Erdoğan met with President Rohani and the Religious Leader Ali Khamenei. The top item on the agenda was apparently the independence referendum carried out by the Iraqi Kurdistan Regional Government (IKGR) on September 25. However, in the briefings, there have been statements regarding important meetings and new deliberations in the economic realm.

Erdoğan stated that the target of a 30 billion dollar trade volume between the two countries was the main topic in the agenda of the fourth meeting of the Turkish-Iranian High-Level Cooperation Council. The performance of the trade volume, which reached over 21 billion dollars in 2012, played a significant role in setting the target of 30 billion dollars, however, the trade volume has since decreased despite an expected increase.

This study is a general evaluation of the deliberations reached on October 4th. In the second part of the study, a general background regarding Iranian foreign trade and Iran’s commercial relations with Turkey will be provided. Furthermore, in the third part, general assessments on the October 4th Deliberations will be given.

2. Iranian Foreign Trade with Numbers

Iranian imports and exports have experienced a dramatic decrease since 2011. This can be attributed to the sanctions put into action by the United Nations (UN) by citing Iranian nuclear activities as the reason. Even though the sanction decisions were imposed during the 2006-2007 term, the “serious” implementation of the sanctions occurred after 2010. As a result of “going down hard” on the issue by many countries principally led by the United States and EU members, Iranian foreign trade has steadily deteriorated since 2012.

Upon the signing of the agreement between Iran and the P5+1 in June 2015 that was put into action in January 2016, the UN imposed sanctions, due to Iran’s nuclear activities, were lifted. However, the serious decrease from the end of December 2015 on has prevented Iran to build up its export revenues. As one can see in the chart below (Chart-1), with oil price increases, Iran’s export revenue has reached up to 130 billion USD. As the export declined below 90 billion USD in 2012, it dropped to 41 billion USD.

Iranian import is tightly related to the foreign currency income of the country. Therefore as long as the oil prices remain low, there can not be any expectations regarding a serious increase in imports. Oil prices have been around 50 USD per barrel for the last two years. Even though the prices rose to 55 USD per barrel due to developments in Iraq, it is not likely that oil prices may rise above 100 USD per barrel in the long run, as this had happened at the end of the 2000s. Therefore there are no expectations towards a big leap in Iranian oil export revenues.

Despite the lifting of sanctions following the agreement signed with the P5+1 countries, Iran still faces obstacles. The United States, in particular, has not taken a step back from preventing Iran from taking part in the global financial system and it has not been flexible in its sanctions upon Iran. Considering that the world financial system is under heavy control of the US Department of Treasury, the current stance of the United States seems to keep putting Iran in a bind.

When Iranian exports are investigated on the basis of item distribution, it visibly appears that oil, oil by-products, and natural gas are essential. As it can be seen in Chart-2, oil, oil by-products, and natural gas have a 65% share in the overall export by 2016. The share of these items in the overall sum of exports, despite the fluctuations, varies between 60-65%. The chemical products, polymer principally, raw and processed minerals have a 13% share in the overall export revenues. Ironstone and processed steel are other items in Iranian export revenues. Their share in the overall export revenues varies between 3-5%. Agricultural products have a relatively low share that varies in between 1.5-2%.

The subitems of Iranian imports have a wide range and due to the large numbers of items imported, percental distribution of products or product groups cannot be determined as easily as the case in exports. The five most outstanding product groups by 2016 are as follows: (1) Private cars, and industrial products such as mechanical vehicle accessories, telephones, air pumps, etc. (13%); (2) Products like medical equipment and medicine (9%); (3) Agricultural products (6%) and (4) Gold (3%).

 

Chart 1: Iranian Imports Distribution on the Basis of Countries (%)

 

2013

2014

2015

2016

1. China

21.99

33.45

32.18

35.86

2. Turkey

6.57

5.34

6.61

10.75

3. S. Korea

7.02

5.73

6.78

8.04

4. Germany

3.91

4.43

4.21

6.55

5. India

8.51

6.05

5.64

5.22

6. Brazil

2.52

1.98

3.01

4.83

7. Russia

1.83

1.82

1.84

4.07

8. Italy

2.20

2.11

2.39

3.69

9. France

1.03

0.83

1.13

1.73

10. Holland

0.55

0.70

0.92

1.70

Overall Imports (Billion$)

63,8

72,8

55,4

46,2

 Source: Ministry of Finance

 

As of 2016, Turkey occupied the second position with a 10.8% share with respect to the countries where Iran imports products from (see: Chart-1). As one can see in Chart-2, in terms of Iranian trade, Turkey is the third biggest market for Iranian exports.

 

Chart 2: Iranian Export Distribution on the Basis of Countries (%)

 

2013

2014

2015

2016

China

37.33

40.39

38.89

32.46

India

14.75

16.51

15.10

17.92

Turkey

15.27

14.44

14.79

10.20

S. Korea

8.18

6.72

5.73

10.07

Japan

10.19

9.07

7.89

7.23

France

0.11

0.12

0.18

3.33

Italy

0.27

0.86

1.26

2.52

Spain

0.17

0.25

0.47

2.17

Greece

0.07

0.01

0.03

1.79

Taiwan

1.67

0.60

0.82

1.60

Overall Exports (Billion$)

68,0

68,1

41,2

46,1

 Source: Ministry of Finance

 

3. The Development of Trade Between Turkey and Iran

3.A. Bilateral Trade by Years

The course of foreign trade between Turkey and Iran in due course can be followed in the chart below (Chart-3). The main tendencies between 1998-2017 indicate an increase in trade. The bilateral trade that rose up to 22 billion dollars in 2012 stagnated at the level of 10 billion USD in the last few years. The record number of trade in 2012 needs to be emphasized due to the fact that it had heavily been because of the direct and indirect consequences of embargos imposed on Iran. The 2012 scores point out to an incidental situation that Iran has been through rather than a structural tendency.

Even though the bilateral trade has had fluctuations in the last 20 years, when the post-2002 period is examined precariously, there is a visibly increasing trend in the volume of foreign trade.

 

Chart-3: Turkish-Iranian Foreign Trade (Billion USD)

Years

Export

(A)

Import

(B)

Total Sum

(A+B)

Years

Export

(A)

Import

(B)

Total Sum

(A+B)

2017 (*)

2.09

5.15

7.24

2007

1.44

6.61

8.05

2016

4.97

4.69

9.66

2006

1.07

5.63

6.70

2015

3.66

6.09

9.75

2005

0.91

3.47

4.38

2014

3.89

9.83

13.72

2004

0.81

1.96

2.77

2013

4.19

10.38

14.57

2003

0.53

1.86

2.39

2012

9.92

11.96

21.88

2002

0.33

0.92

1.25

2011

3.59

12.46

16.05

2001

0.36

0.84

1.20

2010

3.04

7.65

10.69

2000

0.24

0.82

1.06

2009

2.02

3.41

5.43

1999

0.16

0.64

0.80

2008

2.03

8.19

10.22

1998

0,19

0,43

0,62

 (*) First eight months

 Source: Ministry of Finance

 

3.B. Steps towards Improving Bilateral Trade

In the last 20 years, a number of important agreements were signed for improving the trade between Turkey and Iran. The Agreement for the Promotion and Preservation of Mutual Investments signed in 2005, the Agreement for the Prevention of Double Taxation signed in 2006, and the Preferential Trade Agreement signed in 2015 are the three most important. The Preferential Trade Agreement has greater importance amongst the others. With this agreement, a 30% discount in the customs for the trade of 265 products was reached. [1] 140 of these products are being imported to Turkey from Iran and 125 of them are being imported to Iran from Turkey. Negotiations are still underway for improving its extent. 

Besides the official agreements, it should be noted that the President of the Republic of Turkey, Recep Tayyip Erdoğan, and the President of the Islamic Republic of Iran, Hassan Rouhani, on several occasions, have declared for their willingness to reach beyond 30 billion dollars in bilateral trade. [2]

3.C. Deliberations Reached on October 4th

During Recep Tayyip Erdoğan’s visit to Tehran on October 4, 2017, he stated that some concrete steps should be made for the improvement of economic relations between the two countries. In the high-level meetings, important topics have been discussed and agreements were signed between the two countries.

One of the first steps in this regard is at the border gates. There are three border gates on the Turkish-Iranian border: Gürbulak, Esendere, and Kapıköy. According to the statements of President Rohani, two of these border gates would be opened the following day and the remaining one on a 24 hours basis after the necessary improvements were made and the roads are to be maintained. In this regard, a memorandum of understanding was signed between the Iranian Ministry of Finance and Economic Affairs and the Turkish Ministry of Customs and Trade. Both countries stated their agreement on removing the barriers to commercial transportation and customs in addition to keeping the borders open.

The second most important economic topic was about the usage of national currencies in trade. The same topic has previously been on the agenda with Azerbaijan, Russia, and Iran but no steps forward could be taken in the process from either side. President Erdoğan has stated that in order to save bilateral economic ties from the rate pressures, they have decided to carry out bilateral trade with local currencies. While a memorandum of understanding was signed between the Turkish and Iranian Central Banks, the final agreement is to be concluded the next week, as it was stated. In the agreement, the increase in the number of branches of the banks due to the usage of local currencies and the mutual efforts of the Central Banks for improving the financial sector also took place. However, the double rate system in Iran is an apparent hurdle before trading in local currencies. As it is known, due to the exchange regime in Iran, there are two rates: official and market rates. Therefore there are obscurities on which rate is to be used in the money exchange and how the rate is to be fixed in the case of changes.

Another topic on the agenda is the improvement and the preservation of mutual investment. The Iranian need for investment in several areas has often been voiced by the Iranian ministers. The increase in direct foreign investment following the nuclear agreement is way behind the level that Iranian financial elites desire. One of the reasons for that is the hardships of making investments in Iran quite contrary to the case in Turkey. According to the “Doing Business” research conducted by the World Bank, Iran is 120th among 190 countries with regard to the ease of doing business. In this regard, the hardships that Turkish investors face in Iran should be diminished. President Rohani has stated that Iran is to provide facilities and support for infrastructure and transportation investors.

Another important issue is natural gas. One of the outstanding fields that Iran needs investments in is natural resources. The emphasis of Hassan Rohani on the further natural gas needs of Turkey and on its willingness to invest in this very domain that Iran needs, in addition to Recep Tayyip Erdoğan’s stress on intensifying the cooperation in the energy sector, point out to potential improvements in investments and financial relations between the two countries.


[1] For the details of the agreement see (in Turkish):  

http://www.resmigazete.gov.tr/eskiler/2014/11/20141104-2-1.pdf

[2] For example: Third Turkish-Iranian High Level Cooperation Council Session held on April 15, 2016; Organisation of Islamic Cooperation 13th Islamic Summit on April 20, 2016. 

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