* Iraq a major trade partner, oil supplier to Turkey
* Turkey faces security threat from two southern neighbours
* Immediate priority is release of 80 hostages
* Turkey could play role in any military intervention
By Nick Tattersall
ISTANBUL, June 13 The advance of Sunni militants
in Iraq leaves Turkey facing a widening Islamist insurgency in
two of its southern neighbours, endangering domestic security,
threatening important trade routes and forcing it again to
rethink Middle Eastern policies.
Militants from the Islamic State in Iraq and the Levant
(ISIL) overran the northern Iraqi city of Mosul, 110 km (68
miles) from the Turkish border, earlier this week and have since
thrust southwards towards Baghdad, seat of the Shi'ite
Muslim-led central government.
Their lightning ascendancy in Turkey's second biggest export
market and biggest oil supplier compounds the challenges
confronting Prime Minister Tayyip Erdogan, already contending
with a slowing economy and the spillover from Syria's civil war
where ISIL has also seized patches of border territory.
Although analysts believe any ISIL encroachment would be
quickly spotted by Turkish forces arrayed along the frontier,
financial markets have been unnerved. Turkey's lira currency
fell to its weakest point in six weeks against the dollar
on Friday, while stocks, bonds and the cost of
insuring Turkish debt against default have also been volatile.
Turkish officials, from the normally vocal Erdogan down,
have made little public comment on events in Iraq. Their top
priority, they say, is the delicate process of ensuring the
release of 80 Turks, including diplomats, special forces
soldiers and children, snatched by ISIL as it seized Mosul.
"We're closely monitoring this situation ... We've mobilized
all efforts to get our citizens back," Erdogan told a rally in
the Black Sea town of Rize on Friday, saying he had spoken with
Turkey's consul general in Mosul, who is among the hostages.
But the developments have reinforced a sense among his
critics that Turkey's Middle Eastern policy is in disarray.
"Foreign Minister Ahmet Davutoglu was claiming a few years
ago that a leaf could not move in the Middle East without
Turkey's consent," wrote Semih Idiz, a columnist at Hurriyet
Daily News who has covered Turkish foreign policy for 30 years.
"Today there are forest fires raging there and all Ankara
can do is look on."
Davutoglu, touted as a potential future prime minister if
Erdogan runs for the presidency as expected in an August
election, has seen his declared policy of "zero problems with
the neighbours" crumble over the past few years.
Turkey's assumption of the quick demise of Syrian President
Bashar al-Assad, a former ally, proved a costly miscalculation,
with Ankara underestimating the threat posed by fundamentalists
among the rebel ranks as it maintained an open border policy
which has allowed fighters and supplies to cross back and forth.
"The weapons in ISIL's hands are sent by Tayyip Erdogan,"
the leader of the main opposition CHP, Kemal Kilicdaroglu, was
quoted as saying by the Cumhuriyet newspaper on Friday.
The government has repeatedly denied arming Syria's rebels
or backing radical Islamists. "Did Turkey consciously send
people, weapons and financial aid to ISIL? No. We can say
definitely no to this and the whole world knows it," Deputy
Prime Minister Bulent Arinc told a news conference.
Iraq has risen to become Turkey's second biggest export
market after Germany in recent years. Ankara has sought to
diversify its trade away from a dependence on Europe, exporting
$12 billion of goods to Iraq last year.
Exports to Iraq, mostly to the autonomous Kurdish enclave in
the north of the country, have been growing in the double digits
since 2005, at times in excess of 30 percent. This has helped to
narrow a trade gap that is part of the reason for Turkey's huge
current account deficit, the Achilles heel of its economy.
But relations are tense with Prime Minister Nuri al-Maliki's
administration in Baghdad, not least because of Turkey's
thickening ties with the Kurdistan region, which is at odds with
the federal government over oil and land rights.
Diplomats say Ankara will need to intensify its efforts to
bring about a thaw in ties not only with Baghdad but also
Shi'ite Iran, which is equally perturbed by the ISIL advance.
Turkish businesses are heavily active in Iraq, which is home
to around 135,000 Turkish citizens, the vast majority of them in
Kurdistan, which curves around north and east of Mosul and, for
the moment, serves as a buffer between ISIL and Turkish soil.
"The mountainous area can be easily defended by the
peshmerga (Kurdish forces) and any large group of (ISIL)
militants would be easily spotted by the Turkish military, which
is deployed in large numbers alongside the border," said
Wolfango Piccoli of risk research firm Teneo Intelligence.
Turkey has warned its nationals to get out of Iraq and flag
carrier Turkish Airlines is scheduling additional
flights to Baghdad and Arbil, in Kurdistan, to help them do so.
Ankara has the second largest armed forces in the NATO
military alliance after the United States but is seen as highly
unlikely to undertake any form of military action other than as
part of an international coalition.
U.S. President Barack Obama threatened military strikes
against ISIL on Thursday; the United States has a major air base
at Incirlik in southern Turkey.
"In the medium-term I do not see any other option than an
international intervention in Iraq, which would need to be on
the request of the central government in Baghdad," said Sinan
Ulgen, head of the Edam think-tank in Istanbul.
"Turkey would also be involved, as a country that has been
exposed to all the security spillovers, but Turkey cannot lead.
Iraq would not want Turkey to lead because of the strained
relationship between the two governments," he told Reuters.
Justice Minister Bekir Bozdag said on Thursday the Turkish
government was not working on any new request for parliament to
authorise a cross-border operation beyond an existing mandate,
which expires in October, that enables Ankara to strike at bases
of Kurdish PKK rebels sheltering in the north of Iraq.
(Additional reporting by Humeyra Pamuk and Seda Sezer; Editing
by Mark Heinrich)