On Sept. 14, 2023, the U.S. government designated five Turkish companies for breaching U.S. sanctions against Russia. The designations should not have been a surprise, as Washington had been warning the Turkish government and businesses for months that the U.S. was tracking illicit shipments of U.S. goods and other sanctions evasion efforts by Turkish companies, calling on Ankara to halt the activity. Washington had sought to work with its NATO partner, as it had worked with other partnered countries, quietly and behind the scenes. However, despite Ankara’s reassurances that the government would not permit sanctions to be circumvented in Turkey, the response on the ground fell short of U.S. expectations.
The Biden administration has worked hard to reset the bilateral relationship with Turkey, seeking to build a positive agenda after years of disagreements between the two countries over Syria policy, Turkish banks circumvention of U.S. sanctions on Iran, the sale of F-16s, and most recently, Ankara’s blocking of Finland and Sweden’s accession to NATO. Washington’s decision to take unilateral action reflects a shifting of scales, a prioritization for compliance on Ukraine policy as an intrinsic part of the bilateral relationship. In short, Ankara will no longer be given a compliance pass.
Turkish companies operating in Russia and/or selling goods and services to Russian companies face increased risks of U.S. enforcement actions if those activities fall within the scope of current U.S. sanctions on Russia. Furthermore, it is likely that the U.S. will continue to expand the scope and scale of sanctions on Russia while Moscow persists in its war on Ukraine. Companies will have little to no time to unwind business relationships and risk steep financial losses.
Escalating U.S. Warnings Since the Russian Full Invasion of Ukraine
From the start of Russia’s February 2022 invasion of Ukraine, Ankara sought to balance its relationship with Russia and the West, keeping its airspace open and welcoming the inflow of Russian businessmen, oligarchs included, and their money. Within a few months, the U.S. and NATO partners were expressing concerns that Russian oligarchs were sheltering their riches in Turkey and setting up shop there to evade U.S. sanctions. In 2022, Turkey more than doubled its trade with Russia compared to the year before, providing Russia’s economy with a lifeline. Particularly concerning, Turkish electronic exports to Russia increased by about 85% from March 2022 to March 2023.
Over the past 19 months, senior U.S. officials repeatedly discussed U.S. concerns with Turkish officials. In August 2022, the U.S. Treasury took the unusual step of issuing warning letters to U.S. and Turkish trade organizations, warning that Turkish companies were at risk of being sanctioned if they did business with sanctioned Russian individuals and entities. In February 2023, a top Treasury official met with Turkish government officials and banks to warn about the risks of dual-use exports and the flow of Russian dark money through their banks, urging more cooperation. In March 2023, the U.S. went further, publishing a compliance note on U.S. intent to crack down on third-party intermediaries used to evade Russian-related sanctions and export controls. Turkey was called out by name as a common transshipment point used to illegally redirect restricted items to Russia or Belarus.
In March 2023, Ankara responded by issuing to companies operating in Turkey a list of banned foreign goods and advised them not to transship them to Russia. However, the demand was not enforced, and illicit shipments continued.
On April 12, 2023, the U.S. went from warning to action, designating two Turkey-based trading companies as intermediaries for the shipment or transshipment of U.S. and European-origin electronic equipment. The U.S. also designated two Turkey-based shipping companies for providing material support to a previously sanctioned Russian shipping company. At the time, while calling the action a shot across the bow, a U.S. official publicly characterized the companies as “primarily” Russian-owned or Russian-linked, thus framing the action as collateral, not a case of the U.S. focusing on partnered countries.
Despite the enforcement action, there was no substantive shift towards increased cooperation from Ankara to curtail sanctions evasion. Western media reported on Turkish shipping companies joining the “ghost fleet” shipping Russian oil and servicing sanctioned Russian ships calling at Turkish ports, carrying cargos of weapons and components, dual-use goods and restricted technology.
On Sept. 14, 2023, the U.S. government imposed sanctions one five Turkey-based entities and a Turkish national for facilitating sanctions evasion by Russian companies. One of these companies allegedly shipped components used in producing UAVs and Kalibr cruise missiles used against Ukraine and two others, electronic components, sensors and measuring tools. Two are shipping companies, designated for providing repair services to previously sanctioned Russian maritime companies.
Risks to Turkish Companies and the Sanctions Landscape Going Forward
Turkish companies operating in Russia and/or selling goods and services to Russian companies face increased risks of U.S. enforcement actions if those activities fall within the scope of current U.S. sanctions on Russia. Turkish companies with American owners, directors or employees have additional compliance requirements if the companies do any business with Russia or Russian companies.
The sanctions environment is fluid. In the coming months, assuming there is no breakthrough on the battleground in Ukraine or change of policy by the Kremlin, the U.S. will seek to impose additional sanctions against Russia, targeting sectors that are expanding manufacturing capacity, importing substitution production capabilities and exporting infrastructure. Turkish companies operating in construction, engineering and design, machinery and tooling may be caught in future sanctions packages.
Notably, the Sept. 14 sanctions also targeted individuals and entities involved in the development of energy projects and associated infrastructure so as to curtail Russia’s future energy revenue. These sanctions were focused on the development of new capacity for LNG to export through the Arctic to Europe. However, as the U.S. seeks additional means to cut off new revenue flows to the Russian war chest, other energy export expansion plans may fall under Washington’s scope of review for potential sanctions.
Ankara and Moscow’s discussions to create a gas hub in Turkey may be one of them. Moscow seeks as an opportunity to replace lost sales through Nord Stream 2 to Europe. Russian President Vladimir Putin proposed the gas hub in October 2022 in a meeting with Turkish President Recep Tayyip Erdogan, with Turkey supplying Russian gas to other countries. Should Ankara and Moscow reach an agreement, additional pipeline infrastructure will be needed as existing Turkstream and TANAP pipelines are at capacity. Russian gas could be mixed with Azari natural gas, making it more difficult to sanction. Ankara’s interest is domestic, improving energy security while expanding revenue by increasing gas exports. Currently, negotiations with Russia are bogged down with disagreements over control. As with the September sanctions on Russian LNG export expansion, the U.S. could seek to shut down the project by designating involved Turkish engineering and design firms and construction and project management companies.
More broadly, U.S.-Turkish trading relations could see a downturn if the bilateral relationship sours over Russian sanctions. The new U.S.-Turkey Strategic Mechanism, announced in April 2022, is vulnerable to political pressure and will take significant political capital for it to realize potential. On the positive front, there has been a steady rise in bilateral trade volume and renewed commitment to advance economic partnership to capitalize on opportunities, bolster resilient supply chains and enhance cooperation in areas of science and technology. There has even been progress on Turkey’s request to modernize its F-16 fleet.