By Jon Hemming
ARBIL, Iraq (Reuters) - Upheaval in the Middle East and mutual economic interests are drawing together two unlikely partners; rising powerhouse Turkey and an entity whose name Turkish leaders hardly dare mention - Kurdistan, the semi-autonomous region of northern Iraq.
Ankara has developed solid political and trade ties with Iraq's Kurds, as its foreign policy of "zero problems with the neighbors" unravels due to the uprising in Syria, tensions with Baghdad and rivalry with Iran.
Iraqi Kurdish leaders also recognize that in an unstable region and with sectarian conflict threatening to upset the delicate political balance in Baghdad, their landlocked, oil producing territory needs an ally among its neighbors.
Turkey, with one of the fastest growing economies in the world, could be their best bet.
"We can call it a key relationship because Turkey has an important status because of its location and because of the role that it plays in the international community," said Falah Mustafa Bakir, the head of the Department of Foreign Relations of the Kurdistan Regional Government (KRG).
"Turkey is a major partner for Iraq as a whole, but also for the Kurdistan region in terms of commerce and trade," he told Reuters in a recent interview. "I am sure Turkey would have a good opportunity to be a major or main partner with the KRG, but also with Iraq."
But big issues remain, not least the presence in northern Iraq of the Kurdistan Workers Party (PKK), a militant group whose 27-year armed campaign for Kurdish self-rule in Turkey has claimed the lives of 40,000 rebels, soldiers and civilians.
Turkish leaders are also reluctant to see the emergence of a Kurdish state in northern Iraq, fearing this could rouse the already restless Kurds just across the border in Turkey.
In a landmark visit to the region last year, Turkish Prime Minister Tayyip Erdogan repeatedly referred to the "Kurdish administration," but never once used the word Kurdistan.
Victims of massacres and chemical weapons attacks, Iraq's Kurds rose up against Saddam Hussein during the 1991 Gulf War and broke free from Baghdad-rule. The 2003 U.S.-led invasion then toppled the dictator and led to a constitution that recognized the Kurds' hard-won de facto autonomy.
Once the poorest region of Iraq, Kurdistan is now its most prosperous, insulated from the insurgency and sectarian violence in the south by its mountains and stable government.
For now the region largely depends on receiving 17 percent of the national budget, but the regional government estimates there are about 45 billion barrels of oil reserves in the north, most of it as yet untapped.
Oil majors, analysts say, are expected to follow the lead of Exxon Mobil and sign exploration and production deals with the regional government. This should help to raise production, estimated to reach 175,000 barrels per day this year, to 1 million bpd by 2015.
Kurdish oil exports are pumped into the Iraqi national pipeline system, but relations between the Kurds and Baghdad have been dogged for years by rows over late payments for crude, the legality of the regional government's oil deals and disputed territory.
Add to that the traditional distrust of Baghdad following Saddam's atrocities, the present political infighting in the capital and risk of renewed sectarian violence, and the Kurds feel they are right to look after their own interests.
That means the regional government becoming less reliant on Baghdad.
One pipeline pumping about 60,000 bpd already feeds directly from Kurdistan's Tawke oilfield into the main pipeline to the Turkish port of Ceyhan, and more are due to follow.
"Turkey is our port to Europe and the West," said a regional government official who declined to be named. "It is a member of NATO, and one day could join the European Union. It is a much better option than Baghdad or Iran."
With an economy growing at 8 percent last year, Turkey is hungry for energy and values a fast-growing market on its doorstep where it can sell its manufactured goods.
From the construction firms putting up new five-star hotels to accommodate Western oil executives flocking to the region, to banks, retailers and restaurants, more than half the foreign companies in Iraqi Kurdistan are Turkish. About 80 percent of goods sold in the region are made in Turkey.
Iraq as a whole is now Turkey's second biggest export market after Germany, selling more than $8 billion of goods last year. But according to Turkish Economy Minister Zafer Caglayan, about 70 percent of Turkey's exports to Iraq are to the north.
If the Kurdistan region were a country it would still be Turkey's eighth biggest export market.
A war of words between Erdogan and Iraqi Prime Minister Nuri al-Maliki has also drawn Turkey closer to the Kurds. Erdogan has warned that Turkey would not remain silent if a sectarian conflict erupts in Iraq. Maliki has accused Erdogan of meddling.
Turkey has heavily courted the Kurds, along with Iraq's Sunni Arab parties in recent years, analysts said, but Maliki and Shi'ite parties remain allied to Iran.
Involving Turkey in the economy of Iraqi Kurdistan may not be enough to ensure Ankara's enduring support, particularly while its soldiers are being killed by PKK militants whose leaders are based in the mountains of northern Iraq.
"For 30 years, we have paid a very heavy price for the terror directed here because of the lack of authority in Iraq, especially northern Iraq," Erdogan told his parliamentary deputies on Tuesday. Turkey, the United States and the European Union all classify the PKK as a terrorist organization.
Turkey has staged 28 operations into northern Iraq in pursuit of the PKK in the last 20 years, Kurdish officials said, so it is in the regional government's interests to help solve the problem if it is to seek closer ties with Turkey.
The regional government, made up of pro-Western conservative parties led by landowners, has little natural sympathy with the PKK, a group with Marxist roots.
But a military move against the Turkish Kurd militants by the regional government's forces would be extremely unpopular with Iraqi Kurds, and in any case when the two sides have clashed in the past the PKK have generally come out on top.
While Erdogan has granted some Kurdish language and cultural rights in Turkey to try to de-link the "Kurdish problem" from the "terrorism problem," secret peace talks between the Turkish state and the PKK broke down last year, Turkish media said.
Masoud Barzani, the regional president, and the government are working behind the scenes to bring the two sides back to negotiations, said a second official who declined to be named.
"I think violence only brings catastrophe," Barzani said when asked about efforts to mediate between Turkey and the PKK.
"I cannot call it a mediating role, but both sides know our view very clearly ... We only see a peaceful solution to this and the moment there is a need to follow a peaceful approach then we are ready to do whatever we can," he said in a recent interview.
"Turkey is the key alliance for us, politically and economically," said the second government official. "It is a strategic alliance for us, mutually beneficial for both sides."
(editing by David Stamp)