Turkey’s peace dividend

Recep Tayyip Erdogan, Turkey’s prime minister, has had a very good week. On March 21, the Kurdistan Workers’ Party (PKK) announced a ceasefire; the next day, Israel apologized for an attack on a Turkish-led peace flotilla in 2010. The possibility of a solution to its Kurdish insurgency holds out the possibility of real benefits for Turkey through increased trade with Iraq, improved security and political calm. There is a less immediate payoff from the Israeli apology but it is a favorable signal, nonetheless, from a region where there has been little good news of late.

Should Ankara negotiate a durable solution to the PKK insurgency, the country’s overall risk premium would decline considerably, improving the business environment. For the last three decades Turkey’s eastern and south-eastern regions have struggled to attract investment because of the annual violence and terror attacks on oil and gas pipeline infrastructure that also disrupted the country’s energy supplies. A sustained ceasefire would do much to assuage investor concerns.

By removing a sticking point in relations with the Kurdistan Regional Government (KRG), the ceasefire with the PKK would also allow for even tighter economic cooperation between Ankara and Irbil. Turkey already has substantial trading ties with Kurdish Iraq but Turkish businesses have not yet tapped into the region’s significant oil and gas opportunities. Turkey already imports a small, though symbolically important, amount of oil by truck from northern Iraq, and the two sides are allegedly in talks to establish greater energy links while sidestepping Baghdad’s involvement. Although Ankara is unlikely to approve the construction of oil and gas pipelines connecting Kurdish Iraq directly to Turkey in the near term, hydrocarbons trading may increase in the future.

In the meantime, closer ties with the KRG, much to the chagrin of the authorities in Baghdad, reduce opportunities for Turkish businesses in the remainder of Iraq. Turkey’s exports to Iraq increased around 1,200 per cent in the last decade and the country is set to become Turkey’s number one export destination in 2014. Nearly 80 per cent of Ankara’s exports, however, end up in the area controlled by the KRG, where Turkish companies are already very active in infrastructure and construction projects. Ankara’s deteriorating relations with Baghdad are disconcerting for Turkish exporters and contractors who will find it increasingly difficult to expand their operations into southern Iraq where there are many unexploited business opportunities.

The ceasefire also reduces the risk of spill-over from northern Syria as well as security threats from Iran. This is good news for investors looking at the region. Ankara has long been concerned about terror attacks originating from northern Syria, which is currently dominated by PKK-affiliated groups. Deteriorating relations with Iran have also worried Ankara because Iranian authorities have done little to crack down on PKK activity. Both risks are now reduced.

The Israeli apology has fewer business implications if only because, despite heightened political tension between the two countries, trade actually increased over the past three years. So an immediate jump in trade volume is unlikely. It also remains to be seen whether the US-brokered apology actually leads to a full normalization of relations.

It will be tough to reset the relationship completely. Erdogan is unlikely to change his anti-Israeli rhetoric overnight, given that it helps him domestically. The language he uses during a planned trip to Gaza in April will signal both the speed and extent of the rapprochement. The apology does, however, open up the option of exporting Israeli natural gas through an underwater pipeline to Turkey, though this remains a distant likelihood. Even though such an export route makes the most economic sense, Israeli authorities are likely loathe to rely so much on Turkey in coming years.

Naz Masraff is Europe analyst at Eurasia Group.