Donald Trump's sanctions and the coronavirus have dramatically shifted a commercial relationship between Turkey and Iran that was underpinned by visa-free travel and centuries of trade and cultural ties.
The land crossing between the two countries has long been vital for Iran's efforts to access foreign goods, particularly under sanctions that cut its economy off from much of the world. For decades, Turkey bought Iranian oil and gas, and Iran sent tourists and imported Turkish goods.
Then in 2018, Trump withdrew from the Obama-era nuclear deal, which was drafted to give economic relief to Iran in exchange for curbs on its enrichment programme. By the following year, Turkey said it had stopped buying crude from Iran, its largest supplier. Gas imports also plunged as Turkey took advantage of lower costs while seeking to reduce dependence on Iran and Russia.
Now, bilateral trade between the two neighbours has dwindled while the amount of Iranian capital tied up in Turkey has soared.
Since the collapse of the nuclear deal and the huge drop in Iran's oil exports – the country's single largest source of foreign currency – thousands of Iranians have transferred their assets into Turkish property. For the first time this year, after the coronavirus outbreak, Iranians overtook Iraqis as the top foreign buyers of homes in Turkey, holding the spot for eight consecutive months.
Iran-to-Turkey gas flows are down year-on-year after an explosion blamed on the Kurdistan Workers' Party took the pipeline offline for about three months. But even in August, the latest month for which data is available, flows were about 30% below the five-year average, according to Turkish energy regulator EPDK. Turkey's push for alternative supplies including a new LNG terminal, pipelines with Russia and Azerbaijan and its gas find in the Black Sea, could squeeze Iran's exports in upcoming contract renewal talks.
Iran usually runs a wide trade surplus with Turkey, but since Trump withdrew from the nuclear deal in 2018, volumes have shrunk and Iran is on track to post a deficit this year for the first time since 2016, according to data from the Turkish Ministry of Trade. Total trade declined 38% from 2016 to 2019. Iran's economy could grow 4.4% next year if US President-elect Joe Biden lifts sanctions that have contributed to a deep three-year recession, although the Covid-19 crisis could limit foreign investment, the Institute of International Finance (IIF) said.
The Iranian economy would remain fragile, though "not to the brink of collapse" if most of the sanctions remain in place, the IIF said.
Under such a "pessimistic" scenario, Iran would post 1.8% growth next year and its foreign reserves would steadily decrease from about $80 billion this year to $46.9 billion by the end of 2023.
Democrat Biden's victory in the November 3 US election has raised chances that the United States could re-join the nuclear deal Iran reached with world powers in 2015.
This is unlikely to happen overnight, however, and the prospects remain uncertain as the adversaries would both want additional commitments.
Iran's economy is expecting a 6.1% contraction in 2020. It would then grow by 6.9% in 2022 and 6% in 2023. IIF said that if oil exports increase, Iran could see its foreign reserves rise to $109.4 billion by the end of 2023.
Tehran has spoken optimistically about the return of foreign companies under a new US administration, but lack of financial transparency could still curb interest from firms who had made tentative moves to invest after the 2015 deal was struck.
Garbis Iradian, IIF's chief economist for the MENA region, told Reuters foreign direct investment inflows would increase progressively from this year's $890 million to over $6.4 billion in 2025.
Assuming most sanctions could be lifted by late next year, FDI is likely to remain below $2 billion in 2021, with most of the money coming from China, Iradian said, adding, "Moreover, the coronavirus pandemic will limit FDI inflows in 2021."
About 90% of Iran's official reserves are frozen abroad due to US sanctions.
Iran's rial currency has lost about 50% of its value against the US dollar in 2020, reflecting economic damage from sanctions and the coronavirus pandemic, although it strengthened in late October in anticipation Biden would unseat US President Donald Trump.
Iran has the highest Covid-19 death toll in the Middle East.
Trump abandoned the nuclear deal in 2018, and Tehran responded by scaling down its compliance.
Disclaimer: This article first appeared on bloomberg.com, and is published by special syndication arrangement.