[NGW Magazine] US’ sanctions threaten Turkey

A major confrontation between Turkey and the US over plans to re-impose wide ranging sanctions against Iran caused the Turkish lira to fall by over a quarter against the dollar, threatening both the long-term health of the Turkish economy, and long term relations between the two Nato allies.

At the centre of the dispute is Ankara's refusal to bow to US pressure to cut or reduce the volume of crude oil and natural gas it imports from Iran, exacerbated by unfinished business from the previous sanctions regime finally lifted in 2016.

Then, Turkey's 25 year contract to import up to 9.6bn m³/yr of Iranian gas was exempted, and the country was obliged only to reduce its crude imports by 20%.

This time around however relations between the two countries are already strained, and a court case relating to the role of Turkey's state owned Halkbank in by-passing the previous sanctions regime still rumbles on.
No waivers or limited reduction deals have been offered, and Washington appears to be demanding that Turkey cut all energy imports from Iran.

As Iran supplies as much anything up to 70% of Turkey's monthly crude imports and around 17% of its annual gas imports, this would threaten to seriously disrupt Turkey's energy supply security. 

Increased tensions

Iran aside, Ankara and Washington have been at odds over a number of issues for some time, not least the continued detention and trial of a US pastor Andrew Brunson, accused of aiding terrorists, and whom Washington wants released.

However, with Brunson having been detained for 18 months, it has been the sanctions issue which has been driving recent events.

Relations deteriorated sharply only following the visit to Ankara July 20 by a delegation of US treasury officials led by the assistant secretary of the treasury for terrorist financing Marshall Billingslea. Returning to the US from India where they had apparently persuaded New Delhi to reduce its imports of Iranian crude, the delegation stopped off in Ankara with the same aim.

No statement was issued by either side but over the following week Turkey’s foreign minister Mevlut Cavusoglu repeated Ankara's position that it regarded Iran as a major trading partner, and would not be re-imposing the sanctions that were lifted in 2016. He pointed out that Turkey imported Iranian crude oil "under proper conditions." 

While international attention focused Washington's demand for the immediate release of Brunson, on pain of Turkey itself being hit by trade sanctions, Ankara signalled possible room for negotiation on the sanctions issue.

In an interview with a pro-government TV channel, newly appointed energy minister Fatih Donmez made no mention of Iranian crude, commenting only that Turkey’s imports of Iranian gas were vital for the country's energy security and explaining that Ankara could not leave its citizens "in the cold and without electricity."

Donmez expressed the hope that a Turkish delegation headed to Washington would be able to negotiate a deal that suited both countries.

The change of focus hinted strongly at a negotiating position which would allow for a reduction or possible halt to Iran crude imports but which would leave gas imports untouched.

But this compromise appears not to have impressed Washington, as no deal was reached.

Pressure on Ankara was subsequently ramped up, as US president Donald Trump tweeted the warning that countries that refused to comply with the Iran sanctions would lose their right to trade with the US, a threat that sent the already weakened lira into a tailspin.

Statements from both Trump and Turkey’s president Tayyip Recep Erdogan suggest neither is willing to be seen to back down and lose face.

However with Trump facing increased pressure thanks to the ongoing prosecution of his former associates, as well as international criticism of his treatment of Turkey, and the lira facing increased pressure thanks to Erdogan’s failed economic policies, both have for the time being backed off, easing tensions, albeit without suggesting a solution.

Impasse 

What happens now is unclear, as Ankara is in completely uncharted waters. It may be willing to agree to cut or even halt imports of Iranian crude, which would incur only minimal domestic political damage.

However, Washington however may not find it so easy to compromise on Turkey's gas imports given that under the previous round of sanctions, payments by Turkey's state gas importer Botas were channelled through state owned Halkbank, and used to buy gold bullion, which was shipped to Tehran.

A court case relating to the scam still rumbles on in New York.

The deputy CEO of Halkbank, Hakan Attila, received a surprisingly short sentence of 32 months for his role, while the alleged mastermind behind the scheme, the Iranian Turk Reza Zarrab cut a plea bargain in return for naming who it was in Ankara that approved the scheme. He remains in detention, un-sentenced; and the court has also yet to decide how much Halkbank should be fined.

Media reports have claimed that a deal brokered for the release of Attila in exchange for Brunson fell through after Ankara also demanded that only a token  fine be levied on Halkbank. 

With even that "hostage swap" failing, a broader deal covering the Halkbank fine, and the extent to which Ankara agrees to re-impose sanctions on Iran, appears far off.

With the Turkish lira and the economy itself already under extreme pressure Ankara has little room for manoeuvre. Refusing to accede to Washington's demands could see Halkbank hit by a large fine and possibly isolated from global banking system, along with wider sanctions imposed on other Turkish companies, and will certainly trigger a major economic crisis.

Agreeing to impose sanctions, and cutting imports of Iranian gas, will certainly leave Turkey short of gas heading into winter.

A planned third FSRU plant will not be ready in time and the existing two FSRU units and two on land LNG terminals, plus whatever extra volumes can be supplied by Russia and Azerbaijan, will not be able to compensate for the loss of Iran volumes which regularly reach close to 900mn m³ during the peak winter demand months of January and February.

Turkey does have an excess of generating capacity but water flows to the country's hydro dams this year have been lower than normal. Judging from what has happened in the past when gas supplies have failed to meet demand, grid operator TEIAS will have difficulty avoiding power cuts. 

With pressure continuing to mount on the Trump White House as the Mueller enquiry into possible Russian interference in the US presidential election inches forward, Ankara's best hope of avoiding a serious haircut – either on the economy as a whole, or just regarding winter power supplies – may be to spin out talks as long as possible, while hoping that the threat of action against Trump will be sufficient to distract attention from the outstanding dispute over Iran.