Iran and Turkey are holding a round of talks to boost commerce and cooperation in hi-tech sectors. The two countries have always had strong commercial ties even during the U.N. sanctions on Iran, and Iran sees Turkey as a window to the world amid political isolation.

Reinstated U.S. sanctions, which have crippled Iran’s economy and reduced its crude oil exports significantly, further increase the importance of Turkey for Tehran as it now has to rely on substantial natural gas income from Turkey.

Turkey and Iran share a 530 km border. Turkey almost exclusively relies on imported energy while decades-long sanctions have crippled Iran’s manufacturing industry. In November 2018, the U.S. unveiled the full extent of new sanctions on Tehran’s oil, shipping and banking industries after President Donald Trump exited Iran’s 2015 nuclear deal. One of the main goals of these sanctions is reducing the Islamic Republic’s energy exports to zero. Eight major trade partners of Iran were granted temporary waivers, including Turkey, for six months after the sanctions’ introduction.

Iran had hoped that its eastern trading partners would resist sanctions. However, in practice, almost all countries complied with U.S. orders. Turkey denounced the U.S. sanctions and declared that it would not abide by them. However, TUPRAS, the only Turkish refinery which used to buy Iranian crude oil, strictly complied.

Although sanctions-busting could be a profitable business for countries and particularly to individuals who are involved, the broad compliance with the U.S. sanctions is no surprise as there is also a high level of risk involved. Before the waivers ended in May, India, the second-largest export destination for Iranian products, exploited Iran’s troubles by paying in rupees into escrow accounts, with half of the sum designated to purchase Indian goods. However, given the risks of facing multi-billion-dollar fines or exclusion from the international financial system, no countries dared to continue crude oil trade with Iran and contented themselves with slamming the U.S. sanctions publicly.

A reason behind the broad compliance with U.S. sanctions is improved technology, which enables real-time tracking of Iran’s oil trade. Such satellite assisted tracking technology makes U.S. sanctions against Iran more effective than the previous ones and prevents Iran from employing evasion methods like changing shipping flags or turning off the radio signals of tankers. The United States has also blacklisted 50 Iranian banks and subsidiaries. The measures against the financial system are so all-encompassing that they would deter any trade with Iran.

Thus, many countries shifted to crude oil import origins other than Iran after May 2019. Turkey also steadily decreased the amount it imported by increasing the share of Russian and Iraqi oil and stopped buying from Iran as of this date. The sanctions hit the Iranian economy hard in many aspects, which also triggered widespread protests. The IMF estimates that Iran’s economy contracted by 9.5 percent in 2019, its worst performance since 1984.

On a regional basis, Iranian natural gas plays a crucial role in terms of energy security, particularly for Iraq and Turkey. Turkey is meeting more than 15 percent of its gas needs from Iran and it is impossible to substitute without significant losses and disruptions given the current pipeline capacities and the growing gas demand of the country.

Facing the same threats, Iraq has secured temporary waivers to import electricity and natural gas from Iran, which were extended by the United States up to now with three months periods. Regarding this waiver, Bagdad cannot pay the price of Iranian gas in U.S. dollars. However, the current exemption ends in February, and it is not yet clear whether the U.S. will extend it, given increased political and military tensions with Tehran. The United States also threatened Iraq with sanctions after Iraq’s parliament called on the Iraqi government to expel U.S. troops from the country.

Although Turkish and American delegations met to discuss the extent of the reimposed sanctions, it is unknown whether Turkey obtained a separate waiver from the Washington regarding how to pay for the natural gas. The U.S. only granted a waiver for the stake of Iran’s NICO in the Trans-Anatolian gas pipeline, which aims to pump gas from the Shah Deniz gas field through Turkey to Europe. On the other hand, the U.S. sanctions do not directly include natural gas trade, and it is not realistic to expect Turkey to cut natural gas imports from Iran. Against this backdrop, the United States seems to be ignoring this trade and related payments, probably via a verbal or tacit agreement.

Although Turkey and Turkish entities have been accused of sanctions evasion schemes plenty of times, such a move would not likely happen this time. In the past decade, the United States has accused Turkey of circumventing U.N. sanctions on Iran; Russia has accused it of marketing ISIS oil; the U.N. said Turkey violated a Libyan arms embargo and some Turkish companies were accused of evading sanctions on Venezuela. Turkey is now facing severe consequences regarding its central role in evading the U.N. sanctions on Iran. Halkbank, a Turkish state-run lender, could face hefty fines, and individuals who engaged in the evasion scheme could face penalties as did Hakan Atila, a former executive of Halkbank who was sentenced to a 32-month prison term in the United States in January last year.

Even without busting sanctions, Turkey became a more critical energy trade partner to Iran as it relied increasingly on natural gas exports to the country. In October, Reuters estimated that Iran exported only 260.000 barrels of oil per day compared with 2,3 million barrels at the beginning of 2018 and 1 million barrels in April. In the first ten months of 2019, Iran sold turkey 6 million sm3 of natural gas.

The natural gas trade with Turkey was already a profitable business for Iran before the sanctions, as the price was set based on crude oil prices, which led to a higher rate than contracts based on spot gas prices, which became popular due to a divergence between oil and gas prices. Turkey also used to pay for the gas in U.S. dollars. Recently Iran could sell its crude oil in national currencies, although we do not know the current state of payments after the U.S. sanctions.

If this trend continues, Turkey could be a significant energy export destination of Iran in 2020. However, the increased tensions between Iran, Iraq, and the United States could cause a setback in natural gas trade between Iran and Turkey, which may hit both countries financially.

Source » ahvalnews