The Putin-Erdogan meeting could deepen economic ties despite war sanctions

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Russia is turning to Turkey and other potential new trading partners as it tries to circumvent Western sanctions that are starting to bite its economy even deeper after the invasion of Ukraine.

Russian President Vladimir Putin will meet his Turkish counterpart, Recep Tayyip Erdogan, in Sochi on Friday, and the meeting – the second of the leaders in just over two weeks – is raising alarms that the Kremlin could strengthen economic ties with a NATO nation that did not join in imposing sanctions on Moscow.

A Russian proposal intercepted ahead of the meeting indicates that Russia hopes Turkey will accept new channels to help it avoid those restrictions on its banking, energy and industrial sectors.

The proposal, which was shared with the Washington Post by Ukrainian intelligence this week, calls on Erdogan’s government to allow Russia to buy stakes in Turkish oil refineries, oil terminals and fields, a move economists say could help hiding the origin of its exports after the EU oil embargo will come into full force next year. Russia is also demanding that several state-owned Turkish banks allow correspondent accounts for major Russian banks, which economists and sanctions experts say would be a flagrant violation of Western sanctions, and that Russian industrial producers can operate outside Free Economic Zones. in Turkey .

There is no indication that Turkey would support these deals as they would leave the country’s banks and companies at risk of secondary sanctions and cut off their access to Western markets. Kremlin spokesman Dmitry Peskov did not respond to requests for comment. The Kremlin previously described the Putin-Erdogan meeting as centered on military-technical cooperation.

A senior Turkish official, in response to questions about the Russian proposal, did not address its details, but said the country remains “committed to the independence and sovereignty of Ukraine”. He added that Turkey “in principle … joins exclusively the sanctions imposed by the United Nations”.

The official, who spoke on condition of anonymity to discuss a delicate diplomatic meeting, noted that Turkey is “the only NATO ally that both Ukraine and Russia speak to and trust. This is why no other country has been able to bring together the two foreign ministers or official delegations “.

Western government officials, also speaking on condition of anonymity due to the sensitivity of the situation, told the Post that they were unaware of the intercepted proposal but knew that Russia is looking for ways to circumvent war-related sanctions and their growing harm. economic. Russian officials are traveling the world trying to find people willing to do business with their financial institutions, they said, noting that Turkey is among a group of jurisdictions approached due to their low regard for enforcement.

Russians face the prospect of Soviet-style shortcomings as sanctions bite

With Russia cut off from much of the global economy, such openings are a sign of the regime’s growing concerns, say those Western officials and economists. Putin mocked the Western sanctions as a failure – a steady stream of revenue from energy sales has supported the Russian ruble and the country’s financial system – and the International Monetary Fund now predicts that the Russian economy will only fall by 6%. ‘year.

But economists say the stock numbers hide a collapse in a broad swath of Russian manufacturing and call the banking sector a “zombie system,” with the withdrawal of hard currency deposits banned. Although Russia has tried to divert trade flows through countries such as India and China, the blockade imposed by the West on imports of high-tech components has brought some industries to a standstill.

“The situation will be darker next year,” said Sergei Guriev, professor at Sciences Po in France and former chief economist at the European Bank for Reconstruction and Development. “Nobody knows how things will work when the European oil embargo goes into effect. We are in uncharted territory.”

New data released last week by the Russian state statistics agency Rosstat shows how hard some sectors have been hit. Automobile production, the sector most dependent on foreign components, fell 89% in June year-on-year, while computer and semiconductor production fell 40% year-on-year and that of washing machines by nearly 59%.

“It is clear that things will get more and more difficult,” said Maxim Mironov, professor of finance at the IE Business School in Madrid. This week’s announcement that one of the state-owned AvtoVAZ’s major auto plants would reduce its workforce signals the lack of other options for the company and the government, he noted. “The cuts are starting and could lead to social tensions.”

Other high-tech sectors such as pharmaceutical manufacturing are also floundering. A Russian Central Bank survey last month found that 40% of pharmaceutical manufacturers failed to find substitutes for imported ingredients and equipment. “Russia has tried to bring pharmaceutical production to the ground, but it has clearly not been successful,” said Elina Ribakova, deputy chief economist at the Washington-based Institute of International Finance. “Sometimes the overall figures don’t cover all the nuances,” she said, with aluminum producers facing bottlenecks on vital chemical supplies.

Sergei Aleksashenko, a former vice president of the central bank now in exile in the United States, said it was imperative that Russia find alternative financial channels for its banks. “It’s a question of money,” he said, noting that Iran, with the help of Russia and Turkey, had already managed to circumvent Western sanctions. “If you pay a lot, there will be some banks ready to take the risk.”

The historic sanctions on Russia were rooted in Zelensky’s emotional appeal

Putin’s regime had previously hoped to circumvent current sanctions by creating alternative payment systems through Chinese banks, according to a well-connected. Russian state official, speaking on condition of anonymity for fear of retaliation. Yet Chinese banks have hesitated to take on that role due to the risk of secondary sanctions. And despite the country’s increasing imports of Russian oil and gas, it cannot replace all the necessary Russian equipment.

A study by Shanghai’s Fudan University Green Finance & Development Center concluded that fears of sanctions prompted China to abandon new investments in Russia this year as part of its Belt and Road initiative. Western officials said it had become clear that China was not an adequate channel for Russia to mitigate the impact of sanctions, forcing the Kremlin to desperately seek out other partners.

In Erdogan’s complicated relationship with Putin – marked by periods of conflict and cooperation – Russia has had considerable influence in the past and has shown its displeasure by interrupting the flow of tourists to Turkey or by banning the import of Turkish agricultural products. Since the beginning of the war in Ukraine, Turkey has positioned itself as a mediator between Moscow and Kiev, a role that seemed to pay off last month when Turkey and the United Nations negotiated a deal to resume shipments of grain from blocked Ukrainian ports.

Erdogan wants Putin’s acquiescence for a planned Turkish military operation against Kurdish forces in northern Syria. Russia maintains troops in the area as part of its support for Syrian President Bashar al-Assad.

According to two Moscow businessmen, retail supply chains are already being rebuilt in Russia with help from Turkey. The owner of a major retail chain said its stores have completely reorganized supplies through new hubs in Turkey, Israel, China and Azerbaijan. Recent trade data from the Turkish Statistical Institute, Ankara’s statistical office also known as Turkstat, shows that monthly Turkish exports to Russia increased by about $ 400 million between February and June.

But consumer goods aside, sanctions experts and Western officials doubt Turkey can become a hub for supplies of vital equipment without running the risk of crippling secondary sanctions. Those officials said the country must now make a choice, knowing that any deal it does with Russia risks throwing a cloth on its economy and financial sector and will make it more difficult to do business with the rest of the world.

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