Golden days of the Turkey-Iran trade may be gone

November 30, 2012

Global Investing has discussed in the past what a golden opportunity the Iranian crisis has proved for Turkey. Between January and July 2012 it ratcheted up gold exports to Iran ten-fold compared to 2011 as inflation-hit Iranians clamoured for the precious metal. Since August exports appear to have been routed via the UAE, possibly to circumvent U.S. sanctions on trade with Teheran.

The trade has been a handy little earner. Evidence of that has shown up in Turkey’s data all year as its massive current account deficit has steadily shrunk. On Friday, official data showed the Turkish trade gap falling by a third in October from year-ago levels. And yes, precious metal exports (read gold) came in at $1.5 billion compared to $322.4 million last October. In short, a jump of 370 percent.

But the days of the lucrative trade may be numbered, according to Morgan Stanley analyst Tevfik Aksoy. Aksoy notes that the gold exports can at least partly be accounted for by the considerable amounts of lira deposits that Iran held in Turkish banks as payment for oil exports. (Yes, there’s an oil link to all this. Turkey buys oil from Iran but pays lira due to Western sanctions against paying Teheran hard currency. Iranian firms use liras to shop for Turkish gold. See here for detailed Reuters article). These deposits are being steadily converted into gold and repatriated, Aksoy says.

We tend to think that the majority (of Iranian funds) is gone and we should be seeing a rapid normalisation in Turkey’s external trade in gold soon.

He also notes a White House order at the end of July that expanded sanctions to include precious metals — a sign that the gold exports had grabbed U.S. notice. Canny Turkish gold traders probably responded by re-routing exports through the UAE and pushing gold exports to the emirates to over $2 billion in August.  Interestingly however, the figure in October has fallen to just over  $500 million. Aksoy predicts the number to decline further:

If we assume that the UAE also complies with the US-led sanctions at some point, this is unlikely to become a recurring trade pattern and Turkey’s gold exports should normalise,

Finally, Aksoy also plays down gold’s role in Turkey’s trade deficit improvement. He explains his view:

The nominal amount of (deficit) improvement has been around US$23 billion. In this context, we believe that Turkey’s total gold exports of $6.3 billion to Iran and $2.9 billion to the UAE can hardly be considered significant. After all, total gold exports year-to-date reached some $10.8 billion, which is merely 80% of one month’s worth of exports for Turkey. That is, we believe that the issue, from a macro perspective, is being exaggerated by some analysts and some market participants.

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