Until recently, Turkey appeared to be the player who had gained the most from the U.S.-led invasion of Iraq in 2003. By 2013, Turkey’s trade with Iraq amounted to $11.9 billion, making Iraq Turkey’s second largest trading partner. The first five months of 2014, exports to Iraq had already equaled to $5.4 billion, an increase of 11%. This relationship is not only significant because of exports, but when compared to trade with Germany, Turkey’s largest trading partner, with exports equal to $13.3 billion and imports equal to $24.1 billion, Turkey only imports $200 million from Iraq, thus tilting the balance in Turkey’s favor. More than 1,500 Turkish companies operate throughout Iraq and export a wide array of goods such as furniture, diapers, milk, pipes and doors.
This past June, the international media quickly turned its attention to the quick advance of ISIS in Northern Iraq. ISIS, now calling itself ‘The Islamic State,’ seized control of Mosul, Iraq’s second largest city, blocked the major route south, kidnaped Turkish truck drivers, overtook the Turkish Consulate in Mosul and captured the consulate staff, their family members and the security detachment. While ISIS advanced, it appeared that Baghdad was more concerned with political and sectarian wrangling over the leadership of the new government than stopping the Sunni Islamic extremists. Prime Minister Maliki’s consolidation of power and control over all the Iraqi security forces has exacerbated sectarian violence and, some say, paved the way for the Sunni minority to collaborate with ISIS as a means to countering his authoritarian rule.
The ISIS control over the major route going south to Baghdad and Basra has significantly reduced Turkish exports to central and southern Iraq. Turkish trade that passes through Iraq to the Gulf States has also been effected by the insecurity of the land routes. With transportation lines also severed in Syria, alternative routes through Iran or putting goods on sea freight carriers that would pass through the Suez Canal, have been discussed but these are not viable options, as they would increase the transportation costs and extend the time it would take to deliver goods. Truck owners now charge double to transport goods south of Mosul and are subject to ISIS transit fees. Costs to ship goods to Dubai via the Egyptian sea route are triple the cost of the old overland route through Iraq. Lower cost shipping via Roll On / Roll Off ferryboats on the Mediterranean route from Iskenderun, Turkey to Haifa, Israel and then by truck through Jordan is not an option since Saudi Arabia forbids entry of goods that have first entered Israel. Another possibility is crossing the Eastern border with Iran at Gürbulak, near the Turkish city of Ağrı, using an alternative Iranian route to Baghdad and southern Iraq. This route would add more than 1,000km to the journey and costs an extra $2,000 per truck. Furthermore, Turkish businessmen are concerned that it will not be feasible to guarantee on time delivery of goods due to political and war risks.
On 2 July 2014 the Turkish Exporters Assembly (TIM) reported that Iraq had dropped to Turkey’s third largest trading partner, falling behind Britain. Within a short time period, trade with Iraq had decreased 21%. Businesses which concentrate largely on trade with central and southern Iraq or which utilize the main trade route going from Mosul onto the Gulf States are already taking a huge financial hit, many having already prepared shipments which are now sitting idle. Some companies are already starting to question the socio-economic value of operating in Iraq. Therefore, in the short to mid-term, trade between Turkey and its southern neighbors does not look good due to persistent political violence and much higher transportation costs.
The one economic partnership that appears not to have been compromised by the current rise in violence and insecurity in Iraq is that between Ankara and Erbil. The majority of exports to Iraq, approximately 75%, are sent to the Kurdish held north, governed by the Kurdistan Regional Government (KRG). The widening of economic cooperation between Ankara and Erbil greatly strengthened bi-lateral relations, which once were virtually non-existent, between the two powers. The deepening of Ankara-Erbil relations has more often than not put Ankara and Baghdad at odds with each other as Baghdad and Erbil continue to disagree over sharing of oil revenues from oil fields located within the area governed by the KRG. In an attempt to punish the Iraqi Kurds for not bowing down to the Maliki government, Baghdad cut the KRG administration’s budget earlier this year, exacerbating tensions between Baghdad and Erbil. Ankara-Baghdad-Erbil need to decrease tensions and move past – although well founded – disagreements in order to provide a solid front towards ISIS. If not, ISIS could gain more ground in Iraq forcing further internal migration and disrupting economic activity.
In order to ensure long-term stability and development for its region, the KRG needs to implement a solid plan that goes beyond exporting oil. The KRG needs a strong and viable private sector, one which is notably absent. Currently the KRG imports approximately 80% of its goods, which creates too much dependency on its neighbors. The KRG spends a significant portion of its annual budget, some say almost 70%, on public sector salaries and pensions. This leaves little funding for sectors such as education, agriculture and training initiatives that could nurture and diversify a private sector. By equipping its population with the tools necessary to kick-start a private sector, the KRG would ensure it can afford to fuel a dynamic economy built on a diversified portfolio. If the current situation continues, where the public funds begin to fissile out and the KRG is unable to spark economic development, the shopping malls popping up around Erbil might begin to mirror those in Istanbul, and they might become more like in-door public parks rather than destinations for actual purchases to be made.
