ISIL is proving to be not just a political threat to Iraq, but an economic one too. Nevertheless, Iraq-Turkey trade and investment prospects will not suffer as ruinous a decline as some fear. This article is part of a GRI series on ISIL, Iraq, and the Middle East.
As the Islamic State of Iraq and the Levant (ISIL) and affiliated fighters make their surprisingly rapid advance toward Baghdad, not only are the political ramifications murky, but the economic consequences as well. And perhaps nowhere more than in economic relations between Iraq and Turkey.
Iraq is Ankara’s second largest export market – Turkey is also Iraq’s second largest supplier of imports – with at least $15 billion in trade between the two in 2013. Turkish exports, roughly $12 billion, are diverse, ranging from textiles, steel and machinery to construction and related contracting services. Those of Iraq, however, are almost wholly comprised of oil. In fact, Iraqi crude is the biggest foreign oil source for Turkey, comprising 32% of its imports in 2013, up from 19% only one year earlier.
In terms of investment, Turkey is the biggest non-energy player within Iraq, with $94 million total FDI in 2012. It also has in place more than $15 billion of total investments throughout the country, an amount that has grown at an average rate of 29% annually for the last decade.
Trade with Iraqi Kurdistan looks safe
These figures, however, belie the true bifurcation of Turkish goods, services and capital between the Kurdistan Regional Government (KRG) and the rest of Iraq, a dynamic that stands to grow even more striking as turmoil in the region continues.
Of the $12 billion in Turkish exports, more than $8 billion went to Iraqi Kurdistan. This was double the figure from 2009 and highlights how close Erbil and Ankara have become since the latter came close to invading the KRG in both 2003 and 2007. In fact, 80% of goods sold in the KRG are of Turkish origin.
A similar dynamic has played out in the investment realm, with Turkish investors much preferring stable and fast-growing economies like Erbil, Sulaymaniyah and Dohuk to more restive ones outside the KRG. Indeed, more than half of all foreign companies in the KRG are from Turkey. The 2010 construction of a Turkish consulate general in Erbil is testament to this. Turkish firms in the KRG are investing most heavily in real estate, oil production and banking.
All this makes a comprehensive analysis of ISIL’s effects on Iraq-Turkey business complex.
For one, despite a few recent skirmishes with Kurdish forces, ISIL’s expansion has stopped short of the KRG frontier. This is not by accident. The peshmerga, even given lingering internal divisions, is the strongest armed group in the country. As expected, preliminary communications from ISIL confirms its reluctance to engage them.
What this suggests is that Turkish-Iraqi Kurdistan trade and investment flows should not be overly affected by the ongoing instability. If anything, the KRG will build on its recent takeover of the contested city of Kirkuk (and its lucrative oil fields) and push forward with its long-awaited moves for additional autonomy from Baghdad. Last week’s formation of a unity government in Erbil after nine months of wrangling is likely to herald exactly that.
Ankara may benefit the most from such a development. Much to the ire of Iraqi President Nouri al-Maliki’s administration, the last two months have already seen Iraqi Kurdistan ship 2 million barrels of oil to international buyers via a newly constructed $350 million pipeline to Turkey’s Ceyhan port.
Baghdad has escalated the dispute and filed for arbitration, but do not be surprised if the KRG takes advantage of the Iraqi central government’s weakness and starts supplying energy-hungry Turkish consumers more consistently through the 300,000 barrel per day (bpd) conduit.
Temporarily freed from Baghdad’s reach, Kurdish officials should soon be able to ramp up their current 125,000 bpd petroleum production to 400,000 bpd, and Ankara looks well-placed to gobble up much of it.
Bagdad’s trade and oil sector will suffer the most
It is Baghdad’s trade and investment with Ankara that looks set to bear most of the damage. Turkey’s foreign ministry has warned hundreds of its investors to leave much of non-KRG Iraq, and a number, including two major Turkish banks in Baghdad, have complied.
There are presently almost 3,000 trucks full of Turkish goods stuck in the northern parts of KRG, around Zakho and Dohuk, as the main routes to Baghdad and southern Iraq are too dangerous to travel. In addition, at least 31 Turkish truck drivers have been kidnapped by ISIL in the last two weeks. As a result, many are unwilling to make any further trips.
Iraq’s oil sector is likewise taking a hit. Iraqi forces have already lost Mosul and its outlying regions, which produce 200,000 bpd of petroleum. The Baiji refinery just south of it, with a capacity of 310,000 bpd of refined product, is currently contested. Part of Iraq’s oil distribution has also been compromised, with an integral 1.5 million bpd capacity pipeline from Kirkuk to Ceyhan immobilized for three months due to constant ISIL assaults.
Little wonder then that predictions of Ankara’s nearly $4 billion in exports to Baghdad decreasing by 75% might not be too far off.
It is worth noting that Turkish Prime Minister Recep Tayyip Erdogan’s recent overtures to Tehran may have been no coincidence. Iranian President Hassan Rouhani and his sizable coterie of ministers and business delegates arrived in Ankara just as Mosul fell to ISIL. Yet, the Islamist group’s takeover of large swathes of Iraq’s Anbar and Nineveh provinces in the months before most likely served as a signal to Turkey’s leadership that hedging its economic bets might be opportune.
However, Turkey will by no means sit back and allow ISIL and its allied arm groups to maintain their extraordinary spread from Raqqa to Baquba, even if the status quo ends up not affecting its economic circumstances as much as feared.
If there was any doubt in previous months, Ankara’s alliance with ISIL ended on June 10 with ISIL’s kidnapping of the lorry drivers, as well as the abduction of 49 embassy staff, special forces and family members from Turkey’s consulate in Erbil the next morning. Fifteen more Turks, this time construction workers operating outside Kirkuk, are feared kidnapped.
Hence, one would expect Ankara to immediately clamp down on its “two-way jihadist highway” with ISIL to the extent possible in view of the group’s near 100 Turkish hostages. This, coupled with nascent divisions within the insurgents, may very well serve to significantly reduce the scope of the ISIL threat in the medium to long term.
The net result? The flow of Turkish goods, services and capital to non-KRG Iraq will continue taking a hit in the weeks and possibly months to come. But economic relations with Iraqi Kurdistan, a relative haven, should ultimately move in the opposite direction.
