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October 08, 2012, Monday

The risk Syria poses to the Turkish economy

Day by day the sounds of war drums are growing louder. The risk of an armed conflict with Syria has never been as high as it is today. I hope the escalation we are witnessing now will be under control before it triggers a full-scale war between Turkey and Syria. Nevertheless, I am afraid that even in the case of a controlled crisis, the Syrian conflict could intensify the climate of suspicion, if not hostility, between Ankara, on the one side, and Bagdad and Tehran on the other. Such tensions could result in significant damage to Turkish exports, in a moment when we crucially need them.

By the end of the 2000s, Turkish exporters were successful in diversifying their markets. Turkish exports climbed from $107 billion in 2007 to $135 billion in 2011. In this time the share of exports to the Middle East and North Africa nearly doubled in size, from 16 to 23 percent. Turkish exports to Syria, Iraq and Iran benefited especially during the impressive four-year boom, from $5 billion to $13 billion.

The civil war that is devastating Syria has already adversely affected our exports to the country. Exports to our southern neighbor reached a peak in 2010 at $1.8 billion. Exports to Syria had already declined to $1.6 billion last year with the start of armed clashes. But in the first eight months of this year, exports dropped dramatically to only $360 million, compared to $1.16 million during the same period in 2011. Exports to Syria have always been a small share of total Turkish exports, barely 1.5 percent at their peak. However, the situation is quite different regarding exports to Iraq and Iran, whose share of Turkish exports together was 15 percent during the first eight months of 2012. This figure is not negligible -- a slight decrease in those exports could jeopardize the ongoing process to balance the current account deficit and threaten to further lower the growth rate.    

So, the question is: could a prolonged or escalated conflict with Syria hurt Turkish exports to Iraq and Iran? In the case of Iran I am rather inclined to answer “No.” Western sanctions have already squeezed Iran into a corner, and its economic situation is worsening day by day. Turkey, despite its decreasing oil imports, continues to be a primary export market for Iranian natural gas. Iran also desperately needs Turkish goods to maintain a proper supply in its consumer markets. The Iranian government would think twice before using trade as leverage against Turkey.

In the case of Iraq, however, the risk of reprisal in the form of trade policies cannot be discounted. Unlike Iran, Turkish goods are not crucial to the Iraqi economy, except for in Iraqi Kurdistan. The total amount of exports to the latter region is not known, but regardless, the amount beyond those numbers is surely not negligible. It is worth remembering that if no harm comes to Turkey-Iraq trade, Turkish exports will likely reach $11 billion by the end of this year, a fact that would place Iraq as our number one trading partner, over Germany.

Might Mr. Maliki be tempted to start a trade war? My answer is “Yes, it's possible.” The relations between the two countries are already at a low point due to the protection Turkey provided to Iraqi Vice President Tariq al-Hashimi after a politicized trial in Iraq sentenced him to death. Moreover, Mr. Maliki has openly aligned himself with Iran on positions regarding the Syrian conflict. Though Iran would avoid damaging trade relations with Turkey directly, it can encourage Iraq to do so. The signals coming from Baghdad in recent weeks suggest this possibility is increasing.

In a time when Turkish exports to the European market are in free fall – down $4 billion in one year with a drop in share from 48 to 38 percent -- Turkey needs to continue increasing exports to its energy-rich neighbors. As long as the civil war in Syria continues, the risks of further adverse affects on Turkey will increase.  Damage to Turkey's exports may be one result, not to mention other costs like a rise in military expenditures.

Turkey has a vested interest in contributing to the resolution of Syria's civil war as soon as possible, and it seems that this will be carried out in close cooperation with Russia and Iran. Faced with the conflict in Syria, Turkey's Western allies have been revealed to be both important and reticent.

The latest comments by Turkish Foreign Minister Ahmet Davutoğlu indicate that the main difference between the Turkish position and Russian-Iranian position regards the design of Syria's transition period: Turkey insists on a transition without Bashar al-Assad, while Russia and Iran see him maintaining his position. I find the latter position unrealistic and hope that an agreement on common ground can be achieved in the near future. Russian President Vladimir Putin's visit to Ankara can be decisive in this regard.

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