Because of oil-import dependency, Turkey’s economy is vulnerable to price rises while the lira could plunge further.

Ankara, Turkey – Washington’s unilateral decision to impose sanctions on Iran is set to hit Turkey next week, when an exemption on buying Iranian oil expires for the energy-hungry nation.

When US President Donald Trump reimposed sanctions on Iran last November – after backing out of an internationally brokered deal to curb Tehran’s nuclear programme – Turkey was among eight nations granted a six-month waiver on oil trading.

That waiver expires on May 2. Despite Turkey’s insistence that it needs to maintain oil imports from its neighbour, Washington has indicated no waiver extensions will be forthcoming.

“We have made it clear we would like to continue to buy Iranian oil,” Turkish presidential spokesman Ibrahim Kalin said last week. “People should not expect Turkey to turn its back on Iran just like that.”

Turkey’s hopes of extending the trade were dashed on Monday when Washington called for oil purchases to end on May 1.

US Secretary of State Mike Pompeo said oil supplies from Iran’s regional rivals Saudi Arabia and the United Arab Emirates would ensure global prices – currently at $75 a barrel – would remain stable.

“Turkey rejects unilateral sanctions and impositions on how we conduct relations with neighbours,” Turkish Foreign Minister Mevlut Cavusoglu tweeted in response, warning of the risks to regional peace and stability.

Turkey has grown closer to Iran in recent years as its energy demand has risen. Lacking significant hydrocarbon reserves, Turkey gets more than 90 percent of its energy needs from abroad, spending $43bn on energy imports last year.

In 2017, the last full year before the US pulled out of the nuclear deal, Iranian supplies accounted for 45 percent of Turkey’s crude oil imports.

Saudi, Syria, UAE

Ankara has also looked to Iran as relations with other regional powers such as Saudi Arabia and the UAE have soured, particularly following the murder of Saudi journalist Jamal Khashoggi in Istanbul last year.

In Syria, Ankara’s vocal opposition to Iran-backed President Bashar al-Assad has softened and, alongside Russia, Turkey and Iran produced the Astana initiative to steer Syria towards peace.

Because of its dependency on oil imports, Turkey’s economy, which entered a recession late last year, is particularly vulnerable to price increases while the lira, which has been steadily losing value for several years, could plunge further.

“Apart from Iraq, no other country relies so much on energy imports from Iran like Turkey,” said David Jalilvand, chief executive of the Berlin-based Middle East consultancy Orient Matters.

“An end or a significant reduction of oil imports from Iran would increase Turkey’s import bill substantially, resulting in further inflationary pressure on the Turkish economy.”

In May last year, Trump unilaterally decided to abandon the 2015 Joint Comprehensive Plan of Action (JCPOA) agreed between Iran, the US, Russia, China, Germany, France, Britain and the EU to relax sanctions in exchange for a nuclear-monitoring programme.

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This decision led to a return to a sanctions regime that imposes penalties on companies that trade with Iran. Washington aims to cut off Iran’s oil industry, its primary source of foreign currency, in a bid to curb what the US sees as Tehran’s policy of supporting “terrorism” and interfering in the region.

‘Zero-tolerance strategy’

Selim Sazak, an analyst and doctoral researcher at Brown University, said the US’s Iran policy had been taken over by a “pro-Israeli, pro-Gulf cadre” that has alienated US allies.

“No one wants this zero-tolerance strategy on Iran apart from the US and Israel but everyone needs to play along because this is the US,” he said. “I think there’s a lot of resentment over this in Ankara, Brussels and elsewhere.”

Facing the threat of multibillion-dollar fines and being excluded from the US financial system, many Turkish oil companies appear to have tempered their business with Iran in recent months.

Last February, 144,000 barrels of crude a day were sent from Iran to Turkey, compared with a daily average of 244,000 barrels in 2017, the Oxford Institute for Energy Studies reported last month.

Following a visit to Ankara last week, Iran’s Foreign Minister Mohammad Javad Zarif suggested setting up a financial mechanism with Turkey to circumvent US sanctions.

Jalilvand said Turkey and Iran could find ways around dollar trading through bartering or using local currencies or gold.

“Sharing a land border, Iran and Turkey could arrange payments physically, avoiding the international financial system,” he added.

“As much as this option exists, however, local companies will, nevertheless, tread carefully. Even if they are not using the international banking system to settle trade with Iran, they will continue to rely on it for other transactions.”

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Confronting the United States over Iran would be a risky strategy for Turkey, which is already embroiled in several disputes with Washington, such as the planned purchase of Russian missiles, although support from other Iranian clients facing renewed sanctions could bolster its case.

In a hint that China, Iran’s biggest oil customer, will not go along with the US plan, foreign ministry spokesman Geng Shuang said on Tuesday that “normal energy cooperation” with Iran “must be respected and protected”.

However, Ali Bakeer, an Ankara-based political analyst, suggested Chinese protests were bluster.

“We need to differentiate between official rhetoric and what they’re actually going to do,” he said. “China has a lot of interests with the US and they have no interest in violating sanctions.”

He added: “Turkey doesn’t have a lot of options. If Turkey defies Washington, it will be in a very critical position because, economically, it cannot handle sanctions. Privately, Turkey will try to negotiate and officially they will refuse to comply, but this is rhetoric.

“They will probably cut their imports if the US and other countries are able to offer alternatives.”

Higher costs

The targeting of Iranian oil comes at a time when the world market faces restrictions on supply, threatening significant price increases.

Fresh fighting in Libya could threaten supplies from a country that exports about one million barrels daily while production in Venezuela, which has the world’s largest proven reserves, has dropped significantly as it faces economic and political turmoil.

“It will be a challenge for Turkey to replace Iranian oil,” Jalilvand said. “In the short-term, Saudi Arabia and Russia and to a lesser degree Iraq have spare capacity and oil grades comparable to Iran’s.

“Importing from these countries, however, would incur higher costs for transportation and adaptation of Turkish refineries, as well as possibly also higher prices. Commercial merits aside, there is little political appetite in Turkey to substitute Iranian oil for barrels from Saudi Arabia.”