Smarter US sanctions seen driving down Turkey-Russia trade

Smarter US sanctions seen driving down Turkey-Russia trade
US sanctions enforcers want more compliance, less defiance. /, cc-by-sa 4.0
By bne IntelliNews April 7, 2024

Turkey’s exports to Russia fell 33.7% y/y in the first quarter, according to preliminary Turkish trade ministry data, with smarter targeting of sanctions and secondary sanctions by the US seemingly taking a heavy toll.

Turkey-Russia trade leapt after the Russian invasion of Ukraine in February 2022, with Ankara opting to maintain neutrality in the conflict between Moscow and Kyiv and thus not imposing sanctions of its own. Though Turkey’s Erdogan administration claimed to be at least adhering to Western sanctions, the US and EU grew increasingly dismayed as evidence mounted that there were accelerating flows of “dual-use” goods—which can be used by Russia’s defence industry—arriving in Russia via Turkey, a Nato member.

Since the end of last year, Washington has refined its targeting of sanctions in relation to financial institutions and companies that are facilitating and sustaining trade with Russia. A particular concern is products such as industrial machinery and spare parts that can help equip Vladimir Putin’s war machine.

Machinery exporters, who gained most from Turkey’s surging shipments to Russia in 2023, could see sales there fall by $1bn this year due to “ambiguous” and “rapidly expanding” sanctions lists, together with a crackdown on items deemed to have potential military uses, Kutlu Karavelioglu, chairman of the 22,000-member Turkish Machinery Exporters’ Association, was cited as saying by Bloomberg on April 5.

A billion dollars represented around a third of last year’s sales to Russia, he reportedly added, noting that machine tools, pumps and electric motors have seen some of the biggest drops so far in Turkey’s dwindling trade with Russian market.

“It doesn’t seem possible for any serious corporate machinery manufacturer to sustain its previous interest in Russia in the face of increasing pressure on the banking system and supply chains,” Karavelioglu was also reported as saying.

The blow to trade with Russia will not go down well with Turkish officials struggling to correct imbalances in Turkey’s crisis-stricken economy, partly with efforts to drive down the chronic current account deficit.

Like Turkey, China has also lately intensified due diligence on bank clients’ connections to Russia. A big concern is a US threat made in December to hit financial institutions enabling sanctions-busting trade with secondary sanctions.

Highlighting the growing sanctions crackdown on exports and re-exports to Russia of components like machine parts, chips and circuit boards, Tan Albayrak, a sanctions and export controls lawyer at Reed Smith, told Bloomberg. “Most of these items have both civilian and military applications. They can be used in a washing machine – or a battle tank.”

Amid various reports indicating the sanctions regime applied to Turkey-Russia trade has been tightened to clear impact, Turkish media outlet Ekonomim reported in early March that shipping companies were the latest to feel the effects of “the West’s very tight blockade against the Turkish banking system”. 

Also in early March, mid-sized Turkish oil trans-shipment terminal Dortyol—at the centre of controversy in January when US senators claimed that “masked Russian oil” supplied via the facility even ended up in US warships after being processed at a Greek refinery—announced it would no longer accept Russian imports.

In late February, the US Treasury Department pointed to data showing how the Biden administration’s threat to hit foreign financial institutions with secondary sanctions had significantly impacted financial flows between Russia and countries including Turkey, the United Arab Emirates and Kazakhstan.