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Trump's Iran sanctions turn the screws on Turkey

Image credit: The White House (Creative Commons: Wikimedia)

In a surprise move, the Trump administration decided not to renew Turkey’s waiver on Iranian sanctions in a bid to drive Iranian oil exports into the ground. President Trump withdrew from Obama’s Iran Deal in May last year and reimposed economic sanctions on the nation in November 2018. The Trump administration chose to grant six-month waivers to eight countries that gave them time to find alternative oil sources. Italy, Greece, and Taiwan took advantage of this grace period and cut oil imports from Iran to zero. However, China, India, Japan, South Korea, and Turkey still rely on Iranian oil and, it seems, were expecting the exemptions to be renewed after making appeals to the US. The shock move to need renew Turkey’s waiver caused oil prices to rise and may just send its teetering Turkish economy over the edge.

With the exception of China, Turkey is the only country that has expressed a desire to keep buying large quantities of Iranian oil, as other significant buyers have appeared to bow to US pressure. Any country that continues to import oil from Iran is now subject to US sanctions. This leaves Turkey in a precarious position, having to balance the wishes of its NATO ally the United States with those of Iran - its regional partner - and its own economic interests.

Turkey is dependent on oil imports to meet its energy needs, with Iran supplying 47 per cent of its total oil needs until May 2018 and has since dropped to 12 per cent in the four months after Trump re-imposed sanctions in November. Over the previous year, Turkey has managed to lessen its heavy dependence on Iranian oil but may be unable to completely stop buying from Iran at least in the foreseeable future.

Turkish Foreign Minister Mevelut Cavusoglu appealed to the US to extend the waiver on buying Iranian oil because he said the country needed time reengineer its refineries so that they can process oil from countries other than Iran. As a result, Turkey will incur significant costs if it complies with US sanctions, particularly with the heightened price of oil.

For Turkey, this could not have come at a worse time. After entering a recession late last year, the Turkish lira crashed, which combined with its heavy dependence on energy imports, makes Turkey especially vulnerable to price shocks. Any further reduction in or cessation of oil imports from Iran would worsen Turkey’s current account deficit, causing the lira to drop further and inflation to increase in an already fragile economy.

The Trump administration has argued that the impact of its sanctions on Iran will be mitigated by its Gulf allies Saudi Arabia and the United Arab Emirates exporting more oil to meet potential shortages. However, Turkey’s relations with both Saudi Arabia and UAE have become increasingly tense in recent years. Turkey has often found itself aligned with Iran against the Gulf States in regional conflicts such the Syrian Civil War and the 2017 Qatar diplomatic crisis.

Jamal Khashoggi, a Saudi journalist, and dissident, was assassinated at the Saudi consulate in Istanbul on the 2nd of October 2018, marking a low point in Saudi-Turkish relations. It is therefore unlikely that Saudi Arabia or UAE will sell oil to Turkey at a price comparable to that which Turkey pays Iran. After all, it’s in Saudi Arabia, UAE, and other OPEC members’ interest to keep oil prices at their current high. What is more likely to occur is that that the Gulf States will use its increased leverage to extract political concessions.

Turkey has taken steps to avoid being put in this disadvantageous position. In addition to looking into increasing oil imports from Russia and Iraq, Turkey is also working with Iran on ways to bypass the sanctions. The United States can enforce its sanctions on Iran by threatening to exclude any country that violates them by excluding them from the US financial system and market. However, in the past Turkey has shown that it is willing and able to evade sanctions by engaging in a gold for oil scheme that resulted in over a billion dollars of oil being exported from Iran to Turkey. As this approach won’t work under Trump’s stricter sanctions, Turkey is seeking to set up a new trade mechanism with Iran to bypass the sanctions altogether. Based on the EU’s INSTEX system, this new mechanism will allow Turkey to keep buying Iranian oil without violating US sanctions.

Trump's decision to not extend the waivers on purchasing Iranian oil has put Turkey in hard position, ending up as collateral damage of the Trump administrations zero-tolerance strategy on Iran. The Turkish economy, already in a recession is likely to take a few more blows as oil prices continue to fluctuate due to production shocks in Venezuela and the Middle East. To secure its energy supply, Turkey will likely continue to lobby the US for a reprieve while simultaneously working with Iran to evade the sanctions, playing both sides while trying not to jeopardise relations with either. It’s a precarious line to walk.

Andrew Thomson is the International Trade and Economy Fellow for Young Australians in International Affairs.

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