Turkey’s Closer Payment Ties With Russia Run Risks Of Sanctions

August 9, 2022
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A Kremlin spokesperson has said the West has no grounds to impose secondary sanctions on Turkey, as the country moves closer to new ties with Russia on energy, trade and payments.

A Kremlin spokesperson has said the West has no grounds to impose secondary sanctions on Turkey, as the country moves closer to new ties with Russia on energy, trade and payments.

As quoted by Russian news agency TASS, Dmitry Peskov said Russia’s partnership with Turkey “cannot and should not be a trigger for any secondary sanctions" when asked about the West’s response.

He added: “But the United States, EU countries and Brussels may be expected to continue pursuing their policy of putting unprecedented pressure on any countries reluctant to follow their mainstream.”

Peskov made the comments following an August 5 meeting between President Putin and President Erdogan in Sochi, where the two leaders discussed a gradual transition to payments in national currencies for bilateral trade.

According to Russia’s Deputy Prime Minister Alexander Novak, the two countries agreed that Turkey will start to pay for imports of Russian gas in roubles, as quoted by Interfax news agency.

"This is a new stage indeed, which opens up new opportunities, including for the development of our monetary and financial relations,” said Novak.

The two sides also discussed cooperation in the financial and banking sector, including an expansion of Russia’s Mir payment system, which now counts five Turkish banks as of June this year.

"Our commercial companies and our citizens should have an opportunity to pay [in national currencies] during their tourist trips and in the process of trade turnover," said Novak.

"In fact, we were working today on achieving the goal set by the presidents to bring our trade turnover to $100bn and to simplify the procedures that enable our businesses to communicate.”

Around the same meeting, the Washington Post published a story about an “intercepted” briefing shared with its reporters by Ukrainian intelligence officials.

The briefing allegedly details a Russian proposal to buy stakes in Turkish oil refineries, terminals and reservoirs with the approval of the Erdogan government.

If successful, the move would cause difficulties for the EU’s embargo of Russian oil set to begin next year, as it could enable Russia to disguise the origin of such products before shipping them to Europe.

The Washington Post also said Russia has requested that several state-owned Turkish banks allow correspondent accounts for Russia’s largest banks, and that Russian industrial producers be allowed to operate out of free economic zones in Turkey.

Again, such relationships would put Turkey’s banks at risk of secondary sanctions that would isolate the Turkish economy from the rest of Europe.

However, although Novak said that the two countries had reached agreements on banking and financial ties, he did not reveal the specifics of those agreements.

Nonetheless, six Western officials quoted anonymously by the FT said they are “closely monitoring” the partnership and would not rule out secondary sanctions against Turkey.

A senior Western official also suggested that EU countries could call on their companies and banks to pull out of Turkey if Erdogan chooses to implement Russia’s alleged proposals.

Wally Adeyemo, deputy secretary of the US Treasury, made similar comments when he met with Turkish officials in June, warning against the country’s banking sector being used as a conduit for Russian cash.

However, any direct sanctions imposed on Turkey would be highly unusual given its NATO membership, its $800bn economy and its role as a manufacturing hub for products destined for the West.

Turkey: opportunist or Russian ally?

The debate opens up another chapter in Turkey’s increasingly strained relations with the West, following its threat to veto the accession of Sweden and Finland to NATO.

It remains to be seen to what extent Turkey is willing to risk angering the West through closer ties with Russia, but the potential benefits it could reap are clear.

Robin Brooks, chief economist at the Institute of International Finance (IIF), has noted that Turkey’s exports to Russia, despite hitting an all-time high in June this year, are still small in absolute terms and “dwarfed” by its imports of Russian energy.

Since 2007, Turkey’s imports of Russian energy have generally been trending down, but then exploded higher following the COVID-19 pandemic and the invasion of Ukraine.

Ugras Ulku, a researcher at IIF, added that Turkey’s tourist arrivals and revenue are down significantly since the invasion of Ukraine, while its trade balance is down and its imports of energy and gold are up.

The Turkish lira also continues its descent against all major currencies, having lost almost 70 percent of its value against the US dollar since the beginning of 2020.

Combined with energy and food price inflation, Turkey is a country in need of a helping hand.

But like India and China since the invasion of Ukraine, it may try to limit its exposure to Russia to that of a buyer of discounted exports that are no longer headed for the West, to try to reduce the risk of secondary sanctions.

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