Declining Turkish-Iranian energy trade offers Washington an opportunity

Declining Turkish-Iranian energy trade offers Washington an opportunity
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Economic issues were high on the agenda for Iran’s Foreign Minister Mohammad-Javad Zarif, who traveled to Istanbul for two days earlier this June. Zarif’s visit to Turkey marks his second foreign trip since the onset of the coronavirus pandemic in Iran, and is a measure of the regime’s distressed financial situation due to U.S. sanctions.

But beneath a veneer of fraternal comments and anti-sanctions sentiment is a stark new reality for both Islamist governments. Turkey is no longer the market it once was for Iranian energy products.

Bluster notwithstanding, since the revocation of oil waivers by the Trump administration in May 2019, Ankara ceased its purchases of Iranian crude oil. It has spent the past two years picking up more American liquefied natural gas (LNG) and Azerbaijani gas than via pipeline from Iran. What’s more, Tehran’s overall trade statistics with Ankara have reportedly taken a downward turn, a phenomenon that has not gone unnoticed in Iran.

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This is a welcome development for Washington, whose maximum pressure campaign against Tehran has sought to restrict Iranian revenues in a bid to get the regime to negotiate a genuinely comprehensive accord. However, it is no time for a victory lap either.

Iran is looking to grow both its regional and non-oil trade to offset U.S. sanctions pressure. Trade with Turkey — while declining — still meets both criteria. From March 2018 to March 2019, Turkey was one of Iran’s major importers of petrochemicals, a non-oil commodity. Ankara is reportedly also the largest consumer of Iranian natural gas, and like other importers, shares a border with Iran. While U.S. sanctions restrict Iran’s sales of crude oil, they do not restrict natural gas purchases. Last year, Iranian natural gas accounted for just under one-fifth of Turkish gas imports.

Ankara’s gas trade with Tehran dates back to a $23 billion agreement that Turkey’s first Islamist prime minister — and current President Recep Tayyip Erdogan’s mentor — Necmettin Erbakan signed in August 1996 to purchase natural gas from Iran. The deal symbolized Ankara’s early pivot toward an eastward-looking and pro-Islamist foreign policy.

The fine print of the supply deal, which was to run for 25 years since gas started flowing in 2001, includes a “take or pay” clause, forcing Ankara to pay for a portion of the gas it fails to import. Iranian gas, for which the price is reportedly pegged to crude oil with a six-month delay, is more expensive than Russian and Azerbaijani gas, Turkey’s two other pipeline suppliers. By some estimates, this has grown Ankara’s natural gas expenditures by up to $800 million a year.

Since August 2018, Ankara has both increased its imports of LNG from the U.S. and started to wean itself off expensive Iranian gas. According to a Turkish energy consultant quoted by The Wall Street Journal, currently for Turkey, “spot LNG is four times cheaper than gas from pipeline imports.”

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Other energy analysts have noted that during the first quarter of 2020, Turkey imported only two billion cubic meters of Iranian natural gas, shaving-off a reported 15 percent when compared to the first quarter of 2019. Meanwhile, an attack by militants from the outlawed Kurdistan Workers’ Party (PKK) damaged the natural gas pipeline between Iran and Turkey on March 31, halting its gas flow.

While the pipeline has been attacked before, the underlying dynamics between Turkey and Iran are now different. Industry sources quoted by S&P Global Platts claim that Turkey has been taking its time to repair the pipeline. Ankara even denied Tehran’s offer to help repair it — as part of “an apparent attempt both to curry favor with Washington and to pressure Tehran to reduce its prices.”

Iran now claims that the pipeline is being repaired and that exports will resume by the end of the month. But it also still seeks payment for the period of interrupted supply.

This squabble offers Washington an opportunity.

By moving to sanction Iranian natural gas, Washington can further wrestle Turkey away from Iran, as well ratchet up pressure on Tehran by penalizing entities that engage in the sale, supply, transfer, or even storage of this commodity. This can be done through executive order, or by working with Congress to amend older legislation or to pass new, more narrowly tailored measures.

To be clear, Washington will have to help other importers of Iranian gas find domestic or foreign alternatives that are affordable and reliable, all the while keeping an eye on turbulent market dynamics.

While Turkey and Iran have been able to “compartmentalize” politics and economics in their kaleidoscopic relationship, it has always been a question how long this firewall would hold.  Waning Turkish energy imports, coupled with potential U.S. natural gas sanctions offers an opportunity to find out.

Aykan Erdemir is the senior director of the Foundation for the Defense of Democracies' Turkey Program and a former member of the Turkish Parliament. Behnam Ben Taleblu is a senior fellow at FDD, where he contributes to FDD’s Iran program and covers Iranian political and security issues. Both contribute to FDD’s Center on Economic and Financial Power (CEFP).