Unrest in Iraq impacts Turkish businesses

Originally appeared on Bosphorus Consulting on 18 August 2014

Turkey’s trade with its second largest export market, Iraq, has dropped by 30% since the recent unrest in the country, and this drop is expected to continue (The Wall Street Journal). Trade at the main border crossing in northern Iraq has reportedly dwindled, and trade via different routes is seen as impractical, adding weeks of transport time and likely resulting in the loss of goods to spoilage. There are concerns that this drop in trade will worsen Turkey’s current account deficit, arguably the country’s biggest economic weakness, amid doubts that the drop in trade with Iraq will be mirrored by a rise in exports to Europe (Reuters). If the conflict were to be prolonged, it could cause serious damage to Turkish growth, Alpona Banerji, a senior analyst at Moody’s Investor Services, recently stated (Bloomberg).

It is not only simply lost trade with Iraq that is a problem for Turkey. The disruption of supply routes affects Turkey’s trade not only with Iraq but also with the Gulf region as transportation costs are increased as longer, costlier routes must be used instead. Upward pressure on oil prices needs to be monitored closely. Price increases in oil could raise the running costs of business in many sectors of the Turkish economy, damaging competitiveness.
Turkish-Iraqi trade was a “win-win situation” and both countries are dependent on the other. Iraq is vital as an export market for Turkey and equally depends on Turkey for crucial supplies and reconstruction efforts. Of Turkey’s 11.9 billion USD exports to Iraq, around 5 billion was from Turkey’s heavily indebted construction sector. Moreover, Iraq is key to Turkey’s transport sector as the majority of goods going to Iraq from all around the world pass through Turkish land routes, utilizing the services of Turkish transport and logistics companies. Added to this, according to DEİK, the Turkish-Iraqi Business Council, although Germany beats Iraq into first place as an export market for Turkey, Iraq is more important since it is the most important for SMEs (small and medium sized business). DEİK notes that Iraq ranks first as an export market for 24 of Turkey’s 81 provinces.

This said, while unrest in Iraq is certainly disruptive for Turkey, growing cooperation with Iraqi Kurdistan, the recipient of 20% of Turkey’s exports to Iraq, is one example of new opportunities that emerge from fast-moving situations. Moreover, with events changing at a rapid pace, Turkish businesses must act proactively to show that they are in control and aware of developments in order to adequately reassure international investors and analysts who may be potentially panicked by conflict situations.

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