US Tightens the Screws on Turkey Over Cooperation with Russia 

US Tightens the Screws on Turkey Over Cooperation with Russia 

By Conor Gallagher

Two of Turkey’s largest banks are no longer accepting Russia’s Mir payments system. The moves on September 19 come following threats from the US of secondary sanctions.

Turkey’s largest private lender IsBank and Denizbank, a Turkish unit of the United Arab Emirates’ NBD, were the banks who suspended services.

Visa and Mastercard suspended their Russian operations back in March, which means such cards issued by Russian banks will no longer work regardless of where they’re used – inside or outside of Russia. Any cards issued outside of Russia will no longer work within the country.

The European Union has also banned Russian banks from SWIFT, the system that enables financial transactions all around the world. Russia created the Mir payment system in 2014 out of fear that the US and Europe would one day enact these very sanctions.

Three state-owned Turkish banks are still processing payments using Mir. The list of other countries that accept Mir include Armenia, Belarus, Cuba, Kazakhstan, Kyrgyzstan,  South Korea, Tajikistan, and Vietnam. 

It does not appear the US has directly threatened any of the other nations to stop using Mir, but making an example of out of Turkey seems to be having its desired effect. Kazakhstan’s largest bank cut Mir on September 21. Vietnam’s BIDV Bank did as well. On September 23 Uzbekistan’s UZCARD system suspended processing of Mir, and some Armenian banks also blocked the Russian cards. US officials expect more banks around the world to follow suit. 

Russia’s Central Bank said last week that foreign banks were reluctant to join the Mir system out of fears of secondary sanctions. Other countries that are considering adopting Mir include Angola, Egypt, India, Iran, Myanmar, and Sri Lanka. The Mir card’s issuing company estimates that more than half of Russia’s population has such a card.

Back in August the US Treasury Department sent a letter to the Turkish Industry and Business Association warning of the risk of sanctions if companies establish relations with sanctioned Russian entities and individuals. U.S. Treasury Deputy Secretary Wally Adeyemo wrote:

Turkish banks cannot expect to establish corresponding relationships with sanctioned Russian banks and retain their corresponding relationships with major global banks as well as access to the U.S. dollar and other major currencies.

At the time Turkish Finance Minister Nureddin Nebati called the letter “meaningless,” but apparently the private banks felt otherwise.

Earlier in September the US sanctioned the chief executive of the Bank of Russia’s National Card Payment System, which runs Mir. NSPK, the company which issues Mir and Mir are not themselves sanctioned, and analysts said this implied that existing, limited agreements with NSPK – such as those allowing Russian tourists to pay their hotel bills abroad – were not likely to violate U.S. sanctions.

If that’s the case, the US is singling out Turkey to apply pressure on Ankara in other areas and/or because Washington believes Russia is seeking to connect its domestic payments system to Turkey to help evade sanctions.

It might not be the first time Turkish banks helped a country bypass US sanctions. In 2019 state-owned Halkbank was charged in a Manhattan court for allegedly participating in a multibillion dollar scheme to help Iran evade sanctions. The case is on hold while Halkbank appeals to the US Supreme Court.

It remains to be seen if the government-owned banks in Turkey ban Mir as well, but even the partial suspension could be a blow to the Turkish economy desperately in need of the money.

Any business Turkey can get is vital for its battered economy, which has an inflation rate of more than 80 percent. The country’s central bank just delivered another surprise rate cut on September 22, which sent the lira to an all-time low. The tanking economy is a major headache for Turkish President Recep Tayyip Erdogan, but he remains committed to lowering borrowing costs in an effort to stoke exports and investment.

The nosedive in the value of the lira has made the country a cheaper holiday destination. Home purchases by Russians are also climbing in Turkey with Russians buying a fifth of the nearly 25,000 homes sold to foreigners from April to July.

Turkey, as the only member of NATO not to apply sanctions on Russia, has been seeing a major uptick in Russian tourism. The Turkish Ministry of Culture and Tourism said that from January to July tourism numbers were up 128 percent compared to the year prior. Russians played a large role in the jump as  2.2 million Russian tourists (an increase of 600,000) entered the country in the first seven months of 2022.

Since Russian President Vladimir Putin announced the partial mobilization of reservists on September 20, more than 30,000 people flew from Moscow to Turkey.

Economist Can Selcuki said tourism revenue is especially important this season as Erdogan is set to face his most difficult election next year since he became president in 2014.

“Given the macroeconomics in Turkey right now and the dire need for any kind of exchange currency in Turkey, I would say Russian tourists are very important,” said Selcuki.

If the remainder of Turkish banks suspend Mir, and the number of Russian tourists plummet, there is a chance that an increase in EU travelers will make up for it.

As Europeans deal with energy prices that are already through the roof and brace for a winter of even higher prices and shortages, they are booking winter stays in Turkey en masse. November bookings from the EU are already up more than 50 percent.

Turkey, which receives nearly half of its natural gas from Russia and a quarter of its oil, is not expecting any shortages this winter.

“I think Europe will experience serious problems this winter,” Erdogan said recently. “We do not have such a problem.”

But he might owe some favors in order to ensure that’s the case. Erdogan’s political opponents are suspicious that Russian President Vladimir Putin is helping Ankara with its foreign exchange shortfall in order to boost Erdogan before next year’s election in Turkey.

There’s the case of strange of unknown capital inflows into Turkey. Mustafa Sonmez writes in Al-Monitor that “such inflows — recorded under ‘net errors and omissions’ in the balance of payments — totaled more than $24 billion in the first seven months of the year, and financed 66% of the current account deficit in July.”

Still Turkey’s deficit was at $4 billion for July bringing it up to $36.6 billion for the year. And the foreign trade deficit was at $10.7 billion in July. The increasing import bill – especially energy – played a large role in the figure, and with Russia being the country’s top energy supplier any flexibility from Moscow could go a long way.

Economist Selva Baziki believes Turkey is likely to get ruble loans from Gazprom that it will use to pay for the gas while Moscow provides a guarantee for the loan.

Some observers also believe Russia might defer Turkey’s energy bills until after next year’s June elections.

The moves come as both Washington and Brussels are piling pressure on Turkish companies to limit trade with Russia.

On September 16 Turkey announced it would pay for a quarter of its Russian natural gas imports in rubles under a new set of deals designed to boost trade.

On the sidelines of the Shanghai Cooperation Organisation summit in Uzbekistan Putin said said Russian companies have “received signals they can export our products through Turkey. Turkey is a reliable partner in this regard and can ensure steady deliveries via its territory to the rest of the world.”

Turkish exports to Russia between May and July grew by nearly 50% compared to 2021. There have been whispers about Russian industrial producers being allowed to operate out of newly established free trade zones in the Black Sea region of Turkey.

Aside from the US, Turkey is really the only NATO member to pursue independent foreign policy – largely due to its indispensable position controlling the Dardanelles Strait and access to the Black Sea from the Mediterranean. That independence has been on full display since the start of the Ukraine War as Erdogan has made it clear he will work with the US when he sees fit, and the same applies for Russia.

Turkey’s failure to toe the NATO company line is driving Washington and Brussels up the wall. The threat of secondary sanctions on Turkish banks is the latest in a series of back and forth in recent years between Ankara and Washington over extradition of Gulenists, purchase of Russian weapons, suspension of F-16 sales (which now might be back on), Finland and Sweden joining NATO, and Kurdish policy in Syria.

The US is also putting pressure on Turkey in Greece and Cyprus.

Ankara, knowing how valuable it is to each side, is using the opportunity to push ahead with its own projects, such as aiding in Azerbaijani attacks against Armenia in order to create a direct link to Baku and realize its long held Pan-Turkic dream.

Erdogan’s skillful playing of both sides has its limits though. He recently expressed his desire for Turkey to join the Russian and Chinese-led Shanghai Cooperation Organization. But Moscow quickly put the kibosh on those talks saying that it won’t happen as long as Turkey is a member of NATO.

Print Friendly, PDF & Email