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Same-Day Analysis

Egypt decides not to renew transit-trade agreement with Turkey, raising cargo disruption risks for Turkey's export industry

Published: 18 March 2015

The Egyptian government's decision not to renew a three-year transit-trade agreement with Turkey is the latest episode of an ongoing political feud between the two countries.



IHS perspective

 

Significance

Signed in 2012, the agreement allowed Turkish trucking companies to circumvent the dangerous routes of Syria and Iraq to reach export destinations in the Persian Gulf.

Implications

The expiry of the agreement puts Turkish exporters and transportation companies in a difficult position, facing a choice between paying prohibitive transit fees for the Suez Canal, or pursuing unreliable routes through Iran.

Outlook

The cut-off is highly likely to undermine the burgeoning trucking industry in south and southeast Turkey. Coupled with dampened demand from Gulf customers stemming from the oil price drop, Egypt's decision is also likely to have a negative impact on Turkey's export performance overall, increasing pressure on its large current-account deficit.

Deteriorating relations

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Generic representations of export routes only – please contact analyst for granular risk evaluation for specific roads, ports and waterborne routes.

The Egyptian government has decided not to renew a three-year transit-trade agreement with Turkey, due to expire on 22 April 2015. The agreement – established in 2012 with the ousted Morsi government – allowed Turkish cargo trucks to arrive at the Egyptian towns of Alexandria and Port Said via ro-ro (roll-on/roll-off) ships and transit over land through to Egyptian ports in the Red Sea. From there, they would be carried, again via ro-ro, to the ports of Aqaba in Jordan and Duba in Saudi Arabia. This provided Turkish trucking companies an alternative to their original route through Syria to reach export destinations in the Persian Gulf, allowing them to circumvent the violence and disruption risks emerging from the ongoing civil war.

The "ro-ro line", frequented by an average of 10,000 Turkish trucks per year, raised transportation costs by around USD2,000 per truck, and increased travel time from approximately 10 to 30 days compared to the Syrian route. The line also faced sporadic interruptions; transit was interrupted for a whole month in June 2014 when the Egyptian ro-ro company transferring the Turkish trucks to and from Saudi Arabia ceased operations, leaving around 400 Turkish vehicles stranded on the two sides of the Red Sea.

Egypt's decision is the latest episode of an ongoing political feud between the two countries, which began with the Turkish government's vocal opposition to the coup d'état that toppled the Muslim Brotherhood government in July 2013. Cairo has criticised Turkey for what it calls "interference in Egypt's internal affairs", and since November 2013, diplomatic relations between the former allies are downgraded, with their respective ambassadors having been declared personae non gratae.

Lack of alternatives


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The ro-ro line became an indispensable export route following the Islamic State's capture of Mosul and Tuz Khurma in 2014, which jeopardised the conventional route for reaching export destinations further south in Iraq. On 10 June 2014, Islamic State militants kidnapped 31 Turkish truck drivers in Qayyarah, near Mosul, in apparent retribution for the transportation companies' refusal to pay extortion money.

In an interview on 5 March, Çetin Nuhoglu, chairman of Turkey's International Carriers' Association (Uluslararasi Nakliyeciler Dernegi: UND), stated that no viable alternative to the ro-ro line exists, and that Turkey stands to lose around USD500 million in exports with the cutoff. The waterborne route through the Suez Canal would increase transportation costs to unsustainable levels, given transit fees. Israel's Haifa port, for its part, is a non-starter, as goods transported along this route can only reach as far as Jordan, given a Saudi prohibition of shipments through Israel.

The only realistic fallback is a potential ro-ro route through Iran. However, an IHS source in the UND confirms that this route is equally problematic. Until 2015, in addition to a customary transit fee, the Iranian government levied a prohibitive "fuel surcharge" on Turkish trucks transiting through its territory, citing the subsidised retail price of gasoline (petrol) in Iran. A further factor raising transportation costs was the alleged prioritisation of Iranian trucks at the main Gürbulak-Bazargan border crossing between the two neighbours, at times resulting in 20-km queues of Turkish trucks. Although a bilateral customs agreement, signed on 15 January, aims to eliminate such discriminatory practices, implementation is likely to be slow. Furthermore, the policy of "sealing" fuel tank caps on Turkish trucks to prevent them from supplying subsidised gasoline in Iran has continued, contributing to lengthy queues at Gürbulak.

Ailing exports


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In the past decade, Turkey's exports to the Middle East and North Africa (MENA) region played an increasingly important role in driving the country's economic growth, with the MENA share in Turkey's total export portfolio more than doubling between 2004 and 2012. Iraq remains Turkey's second largest export market behind Germany. However, partly as a result of a series of political upheavals, exports to the region have been in overall decline since 2012. The graphs below identify a causal relationship between political events in the region and fluctuations in Turkey's exports to the respective countries; bearing in mind the wide variety of factors that undoubtedly contributed to the various drop-offs along the time series, not least in terms of movements in the TRY/USD exchange rate.

Outlook and implications

Unless the agreement is renewed, the immediate impact of the cut-off will be to undermine the burgeoning trucking sector in south and southeast Turkey, concentrated in the provinces of Mersin, Hatay, Gaziantep, Sanliurfa and Mardin. More important yet are the wider economic implications. By reinforcing the downward trend in Turkey's exports to the region, not extending the treaty is likely to have a negative impact on an already weak growth rate, as well as tempering the improvement, since early 2014, of a chronically large current-account deficit. This is all the more likely given dampened demand from Gulf Arab consumers due to the global oil price drop, and the current economic underperformance of the EU, which is likely to constrain an ensuing scramble for alternative export destinations. Furthermore, Egypt's decision roughly coincides with a move by Libya's Tobruk-based government to expel Turkish contractors operating in its territories; yet another politically rooted feud that contributes to an emerging trend of regional economic isolation for Turkey.

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