Turkey Gets Its Russian Missiles. Here's How the U.S. May React
Turkey Gets Its Russian Missiles. Here's How the U.S. May React
(Bloomberg) -- Turkey finally began receiving parts of a Russian-made S-400 missile defense system on Friday. Now the Middle East’s largest economy is almost certain to be subject to punitive actions by the U.S., with economic sanctions among the possibilities.
The Pentagon has long promised to cut off Turkey from buying -- and helping to build -- Lockheed Martin Corp.’s F-35 fighter jets. But that’s not all.
By law, President Donald Trump needs to pick at least five out of 12 different sanctions under the Countering America’s Adversaries Through Sanctions Act, or CAATSA, once the delivery of Russian missiles to Turkey is certified. The scope is wide: the U.S. can choose from relatively milder options such as ending Export-Import Bank assistance for exports, to much harsher ones like ending access to the U.S. financial system for sanctioned entities.
The Trump administration is still weighing options on how severely to punish Turkey -- and when, according to a person familiar with the deliberations who asked not to be identified discussing the sensitive situation. One concern is that the administration is wary of announcing sanctions too close to the anniversary of the July 15, 2016 coup attempt that Erdogan has blamed on an ally-turned-enemy who’s in exile in the U.S.
Market reaction on Friday supports the argument that investors in Turkish assets have already priced in some of the risks associated with the arrival of the missiles, which the U.S. says were designed by Russia to shoot down planes like the F-35.
But there’s another possibility. After meeting with President Recep Tayyip Erdogan on the sidelines of the G-20 summit last month, Trump blamed problems between the countries on President Barack Obama’s administration -- for failing to reach a deal to sell the U.S.-made Patriot missile defense -- suggesting that he might spare Turkey the worst of sanctions.
Here is a look at what can happen, when and what’s at stake for Turkey’s economy.
Sanctions Menu
The 12 categories under CAATSA include prohibitions on property transactions, restrictions on debt and equity investments benefiting sanctioned parties and severing access to the U.S. financial system. Trump can also ask American representatives on international financial institutions, such as the International Monetary Fund, to oppose any loans to sanctioned entities, and he can prohibit American banks from extending them loans exceeding $10 million.
The act also allows for sanctions on persons that engage in covered transactions as well as on the principal executive officer or officers of the sanctioned person, according to a sanctions list on the U.S. Department of State website.
The idea with the most support for now is to target several companies in Turkey’s key defense sector. Such sanctions could make it almost impossible for those companies to buy American components or sell their products in the U.S.
The U.S. National Security Council will determine whether Turkey has violated the act by taking delivery of the air-defense parts. If so, the Treasury will review possible sanctions and the impact, and recommend a specific course suitable to the president, who then needs to sign an executive order, according to Steven Cook, a senior fellow for Middle East and Africa studies at the Council on Foreign Relations.
Any of those sanctions would come on top of the months-old U.S. pledge to cut off sales of the F-35. The Pentagon argues that the Russian system could help Moscow gather critical intelligence on the stealth capabilities of the next-generation fighter plane. The U.S. has already said that it was winding down Turkey’s participation in the F-35 program, where Turkish manufacturers were helping build parts of the jet as part of the plane’s international sales program.
X Factor
The personal rapport between Erdogan and Trump makes the U.S. president one big X factor. Officials in Ankara are now counting largely on that chemistry to escape harsh sanctions, hoping that Trump can waive the sanctions -- or at least delay them for some time.
That may not be very easy. Although there’s always a debate between the executive and legislative branches as to how much sway each would have, CAATSA is fairly prescriptive in terms of what constitutes a violation and how it should be sanctioned, according to Juan Zarate, a former Treasury Department and White House official who co-founded the Financial Integrity Network advisory firm.
‘Not Welcome’
The legislation, for instance, leaves wiggle room to go easy on countries that depend on significant Russian military hardware but are trying to wean themselves off -- a clause that doesn’t necessarily apply to Turkey’s case.
“Here, it’s different because Turkey is taking a new and initial step -- one that, as has been communicated, is not a welcome one to U.S. and NATO partners,” Zarate said before the delivery of the missile parts.
If Trump tries to waive CAATSA sanctions on Turkey on national-security grounds, Congress may well override his action with a resolution of disapproval as provided in the law.
“President Tayyip Erdogan’s belief that his U.S. counterpart will shield Turkey from CAATSA sanctions is essentially flawed,” according to Wolfango Piccoli, co-president at Teneo Intelligence. “This is because CAATSA leaves no real legal latitude to the U.S. president to find a way around the imposition of sanctions.”
In an early signal, the bipartisan leadership of the Senate Armed Services and Foreign Relations Committees said in a joint statement Friday, “We urge President Trump to fully implement sanctions as required by law.”
What About the Lira?
The lira’s reaction on the first day of delivery has been somewhat muted. It fell by as much as 1.8% on the news but that’s not extraordinary for the Turkish currency, which weakened more just earlier in the week.
That’s because the plan has been telegraphed well by Turkey, Julian Rimmer, a trader at Investec Bank Plc in London, said.
“The U.S. reaction is also well-flagged. Sanctions are unavoidable,” Rimmer said. “It is merely a question of how punitive they are and when they are implemented. Only then will we know whether this is seriously detrimental to the investment case for Turkish assets.”
But even very mild sanctions targeting two cabinet ministers triggered last year’s meltdown in Turkish markets, pushing the economy into its first recession in a decade. Anything more substantial can cripple the economy that’s facing a double recession, eating into Erdogan’s support base that’s already showing signs of erosion.
--With assistance from Selcan Hacaoglu.
To contact the reporters on this story: Onur Ant in Istanbul at oant@bloomberg.net;Cagan Koc in Istanbul at ckoc2@bloomberg.net;Nick Wadhams in Washington at nwadhams@bloomberg.net
To contact the editors responsible for this story: Onur Ant at oant@bloomberg.net, ;Alaa Shahine at asalha@bloomberg.net, Larry Liebert, Bill Faries
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