Isis advance reverses decade of growth in Middle East trade

The rise of jihadis in Iraq and Syria is disrupting trade routes across the Middle East and casting a shadow over economic prospects as trucks queue at borders, food and energy prices increase and exports falter.

The rapid advance of the Islamic State of Iraq and the Levant, known as Isis, in Iraq is causing economic difficulties for Turkey and Jordan, as well as in Iraq itself. It is also reversing a decade of growth in trade across the broader region.

Iraq has become Turkey’s second biggest export market after Germany, with $12bn of sales last year – although about 70 per cent of this was to the Kurdistan Regional Government in the country’s north.

Moody’s Investors Service, the rating agency, warned in a note this week that if the fighting in Iraq continues and spreads to the area governed by the KRG, “it would have a material effect . . . affecting almost 15 per cent of exports (3 per cent of gross domestic product) and would slow the country’s economic growth”.

Because of fighting in Iraq, and neighbouring Syria, where Isis also holds territory, many Turkish exports to the Gulf have been diverted to roll-on roll-off ferries from the Mediterranean port of Iskenderun and onward to Egypt or through the Suez Canal to Saudi Arabia. A few also disembark at the Israeli port of Haifa to access the Jordanian market, although this route gives only limited access to the Gulf, where imports passing through Israel are banned.

About 1,700 trucks a day were passing through Habur, Turkey’s main crossing into Iraqi Kurdistan, last week but beyond the boundaries of the KRG the country can be perilous: the Turkish foreign ministry and the country’s chambers of commerce are working together to evacuate Turkish executives and workers from areas of danger.

“There is no problem with our trade with Kurdistan but to get our trucks down to the rest of Iraqi territory will be very difficult,” says Serif Egeli, a Turkish businessman who has been travelling to Iraq for four decades.

Turkish trucks formed an 11km (7 mile) long, 880 vehicle, queue at a crossing on the border with Iran at Gurbulak, near the Turkish city of Agri, which is an alternative route to Baghdad and southern Iraq via Iran. However, it adds more than 1,000km to the journey and costs an extra $2,000 per truck, according to Turkey’s International Transporters’ Union, which represents drivers.

Mr Egeli adds that the broader crisis in Iraq will also damp demand for Turkish goods and services – particularly in building, an area where the country’s companies have specialised.

“As long as there is no government in Baghdad, it is very difficult to go on with projects and if there are no projects, you can’t sell much more than textiles and food,” he says.

Jordan also faces the economic consequences of Isis’s rise – particularly since the militant group advanced through Iraq’s Anbar province to within a few kilometres of its eastern frontier.

Amman, which buys some of its oil from Iraq at a discount, is bracing itself for higher energy prices.

“Individual businesses will hurt,” says Yusuf Mansur, head of Envision Consulting Group, a consultancy in the Jordanian capital. “It will come in the context of an increase in the price of electricity.”

Initial reports last week that Isis controlled the Iraqi side of Jordan’s main border post at Traibil were not confirmed: traffic appears to run in both directions and the Iraqi side of the border is reportedly in the hands of Sunni tribesmen. But in a sign of its concern, Jordan has deployed more security and military personnel to the area.

In Iraq itself, overland routes from the north are vital to keeping the economy going and the population fed. The country receives only 25 per cent of its imports via sea, according to the World Bank. Already, says Shanta Devarajan, the World Bank’s chief economist for the Middle East and north Africa, there are signs of rising food prices in Baghdad and that is likely to continue.

“What this is going to end up doing is creating an increase in food prices in Iraq, one way or another,” he says. “Either the food supply will be interrupted or it will have to be re-routed and transport costs will rise.”

Rising food prices are likely to push the vast number of Iraqis living just above the poverty line below it, Mr Devarajan says, adding to dissatisfaction with the Baghdad government. They are also likely to lead to a rise in the number of people relying on government food programmes, raising the fiscal cost for the Baghdad government.

The crisis also comes at a time when the region was already trying to find new ways to boost what was already subpar intra-regional trade.

The World Bank called, in a March report, for increased trade and investment within the region to help create a “new Levant”.

As Mr Devarajan points out: ”The trade within the region is not that great to begin with.” Only about 5 per cent of trade has been with other regional countries, he says.

There had been signs in the past decade that trade levels were increasing, particularly as Turkish businesses sought new trading ties with Arab neighbours.

From 2000 to 2002, trade between the seven territories in the region – Egypt, Turkey, Iraq, Jordan, Lebanon, Syria and the Palestinian Territories – averaged just $4.2bn annually, according to the World Bank. From 2008 to 2010, that trade soared to an annual average of $29.7bn.

The bank announced in December a $355m project to improve Iraq’s main transport corridors and facilitate trade.

But now, as Isis spreads across Syria and Iraq, with big economic consequences as well as great human cost, the trend is running in the other direction.