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Turkey is profiting from sanctions aimed at reducing trade with Iran by trading gold for Iranian natural gas and oil. The deal is a political risk and has raised eyebrows in Washington and Europe.
Turkish foreign trade has taken a risky turn: in the first nine months of this year, Turkey exported gold to the tune of $6.4 billion (4.9 billion euros) to neighboring Iran - compared to gold worth $54 million in 2011. Turkey's Deputy Prime Minister Ali Babacan said the steep rise in gold exports to Iran were due to that country's fondness for the precious metal.
However, there's more to it. Turkey receives about half of its oil exports and a fifth of its natural gas imports from Iran. But as US and European banking sanctions ban payments in US dollars or euros, Iran is paid in Turkish lira. The lira is of limited value on international markets - so Iran uses the lira to buy gold in Turkey.
Turkey would rightly say what they're doing is legal, says Michael Rubin. "They are abiding by the letter of the sanctions, they are simply not abiding by the spirit of the sanctions," the Mideast expert and scholar at the Washington-based American Enterprise Institute told Deutsche Welle.
Couriers carry gold
The story first broke in the Turkish and US press in July. But Turkey managed to conceal the fact that they were swapping gas for gold, Olaf Böhnke, head of the Berlin office of the European Council on Foreign Relations, told DW.
At that time, Turkish officials denied the trade was going on or that it was about skirting Iranian sanctions. Meanwhile, the Turkish energy minister has acknowledged that "yes, we're doing this and we're doing this to help Iran avoid sanctions," says US expert Rubin.
Turkey's Babacan said he has no idea how the Iranians physically transport the precious metal to Teheran. Turkish foreign trade statistics suggest part of the gold may reach Iran via the United Arab Emirates. Couriers could carry gold bars in their flight luggage, at a legal limit of 50 kilos of gold per person.
Europe's largest gold producer
In September 2012, Turkey's exports to the UAE skyrocketed by 452.3 percent over September 2011 - and more than 80 percent of the exports were gold. Observers assume the gold bars were then transferred from Dubai to Teheran.
Turkey's gold exports have become so substantial that they lowered the country's eternally high foreign trade deficit this year by more than 20 percent. The ruling AK party made the excavation of gold a strategic economic growth factor; laws were changed, new gold mines in Asia Minor tapped. Production has risen more than tenfold since 2001, making Turkey the largest gold producer in Europe.
Iranian businessmen have also discovered Turkey as a loophole in the economic dilemma. They increasingly safeguard their assets from the impact of the sanctions and dramatic depreciation by investing in the neighboring country.
Last year, Iranians founded 590 companies in Turkey - 41 percent more than in 2010, according to Turkey's Union of Chambers and Commodities Exchanges (TOBB). With a total of 2,140 businesses, Iranians have become the most important foreign investors in Turkey.
Turkey, in turn, has an eye on boosting exports to Iran. At a meeting with Iran's Vice President Ali Saidlu last month, Turkey's Development Minister Cevdet Yilmaz said Ankara plans to increase the volume of trade from currently about $20 billion per year to $30 billion.
Caught in the middle
Just a few months ago, Ankara gave in to US pressure and agreed to decrease energy imports from Iran. Babacan's recent frank remarks about the gold for gas deal show, however, that Turkey is confident it has not breached international sanctions against Iran.
Turkey is trapped between its political and economic agenda, says Böhnke. Its economic pursuit aside, Turkey cannot dismiss the interests of its western partners and the dispute with Iran over Teheran's nuclear program. "I can't see that Turkey will risk any kind of confrontation, neither with the US nor with the EU," he says.
Raised eyebrows in Washington
The issue is more than likely to be on the agenda at the NATO Foreign Ministers meeting this week in Brussels; "maybe not officially, but definitely in the informal parts. They all have an interest to find a solution to this," Böhnke says.
The US has already indicated it plans to widen trade sanctions against Iran, including the Turkish-Iranian "gold for gas" trade. "Congress is going to plug the hole," Michael Rubin says, in the face of "an overconfident Turkey that wants to show its independence by bucking unity with the west." The big question is,whether it will create a diplomatic spat when Congress moves to tighten the sanctions to prevent this sort of gold for oil trade, Rubin says.
It seems the potential for further tension between Ankara and Washington looms on the horizon, as long as the fundamental constellation of Iranian and Turkish interests remains untouched: Turkey needs Iranian oil and gas, and Iran urgently needs cash or gold to avert economic collapse.