Western countries are increasingly concerned that Turkey is undermining their economic war against Russia by playing the role of sanction breaker. While Western countries are deploying far-reaching sanctions to bring the Russian economy to its knees, Turkish President Erdogan is working to deepen economic relations with Russia. This comes as the call for Russian President Putin, who is diligently looking for ways to ease the pressure of sanctions.
Friday’s bilateral summit in the Russian resort of Sochi is the latest source of Western concern. There, Erdogan and Putin made agreements to strengthen their economic ties, especially in the field of energy. Turkey will pay for Russian gas in rubles as part of its gradual transition to using each other’s national currencies in mutual trade. And five Turkish banks are going to use the Russian payment system Mir so that Russians in Turkey can still pay with a card – Visa and Mastercard have suspended their services in Russia.
In this way, Erdogan is trying to limit the impact of the war in Ukraine on the Turkish economy. Russia is an important trading partner of Turkey and the main supplier of oil and gas. Because the energy price has risen so much as a result of the war, the deficit on the balance of payments (ratio between imports and exports) is increasing sharply. But the Turkish central bank does not have enough dollar reserves to continue to pay for energy imports. It is therefore convenient that Turkey can pay for part of its energy in rubles.
Tourism
The Russian Mir payment system is a lifeline for Turkish tourism, which is in danger of being badly hit by the war in Ukraine. Russians formed the largest group of foreign tourists last year, followed by Ukrainians. Because of the war, many will not go on holiday in Turkey this year. And if the Russians don’t come, the industry risks losing about $7 billion in revenue. To ensure that this important source of foreign currency does not dry up, Turkey is arranging for Russian tourists to continue to pay with a card.
The Turkish position is closely followed by Western countries. When it comes to complying with sanctions, Turkey has a bad reputation. Turkish banks and companies have helped Iran and Venezuela evade sanctions in the past. Like other NATO members, Turkey has admittedly condemned Russia’s invasion of Ukraine and sent Kiev drones and weapons. But Turkey has not joined the US and European sanctions against Russia. That would cause too much damage to the Turkish economy.
Western diplomats worry that Turkey will become a haven for Russian money and a platform for trade with Russia. The number of Russians buying real estate or setting up a business in Turkey has increased sharply in recent months. The Italian newspaper Corriere della sera reported a mysterious increase in Italian exports to Turkey (87 percent year-on-year), and at the same time a strong increase in Turkish exports to Russia of $400 million per month. The newspaper concludes from this that many Italian exporters continue to trade with Russia via Turkey.
It even appears that Russia is calling on Turkey to try to circumvent Western sanctions. Ukraine’s intelligence agency recently intercepted a Russian government document proposing Turkish-Russian cooperation, including ways Turkish banks can help Russia get out of the sanctions. The Washington Post was the first to post last week about the document, which Ukrainian intelligence has shared with several NATO countries. It is unclear whether the Russian proposals were discussed in Sochi and how Erdogan reacted to them.
No hatch
The US government has repeatedly threatened to impose “secondary sanctions” on countries that help Russia evade sanctions. US Treasury Secretary Wally Adeyemo was in Istanbul in June to warn Turkish officials and bankers not to become a conduit for illegal Russian money. Turkish government officials applaud the influx of Russian money – as long as it is legal.
Turkish banks are proceeding cautiously, especially private ones. Russians in Turkey have great difficulty doing banking. Turkish banks thoroughly screen new Russian customers to avoid problems with the American justice system. This caution is prompted by the experience of the Turkish state bank Halkbank. He was convicted in 2019 by a New York judge for the so-called gold-for-oil plot, with which the bank helped Iran evade US sanctions.
There are no such examples yet. However, Russian banks on the US sanctions list recently transferred billions of dollars to a Turkish-based subsidiary of the state-owned company Rosatom. The transaction was intended to complete the construction of a nuclear power plant on Turkey’s Mediterranean coast. In addition, Western diplomats fear that the Russian payment system Mir could be used to circumvent the sanctions. Turkish banks could be the target of secondary sanctions if they start using Mir, some analysts think.