U.S. Sanctions Turkey’s Arms Industry, Spares Banks, Economy

The U.S. imposed sanctions on Turkey’s defense industry over the purchase of Russian S-400 missiles, a move that’s set to put more strain on a key NATO ally’s military but spares its economy from any punitive action.

The sanctions effectively cut off Turkey’s top defense procurement agency from U.S. financial institutions, military hardware and technology. Although the Turkish defense industry as a whole wasn’t targeted, Monday’s punitive action could endanger Turkey’s military clout in its region, after it has built up its army as a member of the North Atlantic Treaty Organization for more than half a century.

“The United States made clear to Turkey at the highest levels and on numerous occasions that its purchase of the S-400 system would endanger the security of U.S. military technology,” Secretary of State Michael Pompeo said in a statement.

U.S. Sanctions Turkey’s Arms Industry, Spares Banks, Economy

Turkey argues neither U.S. military installations nor NATO systems would be put at risk.

“As a strong NATO member with the second largest army in the alliance, Turkey expected and would have preferred to develop its air defense system with NATO allies but they failed to understand and respond to Turkey’s pressing national security concerns,” presidential spokesman Ibrahim Kalin told Bloomberg in a written statement.

Investors found some solace in the fact that Turkey’s economy and financial industry have been spared. The lira erased Monday’s losses after the sanctions were announced. The currency was trading 0.3% stronger at 7.8338 per dollar as of 1:07 p.m. in Istanbul on Tuesday. Stocks also rose, with benchmark Borsa Istanbul 100 Index rising as much as 0.5%.

Military Exports Banned

The sanctions saga goes back to Turkey’s 2017 decision to buy an air-defense system from Russia over what it said was U.S. unwillingness to sell equivalent systems on acceptable terms. That decision and the system’s delivery last year prompted bipartisan demands in Congress for restrictive measures long resisted by U.S. President Donald Trump.

The sanctions also target individuals including Ismail Demir, the head of the Turkish defense procurement body, known as SSB. The agency is barred from receiving loans from US. financial institutions. The U.S. will also oppose any credit extension to the body from international financial institutions and ban the U.S. Export-Import Bank’s assistance for exports to SSB.

The financial clauses -- all announced under the Countering America’s Adversaries Through Sanctions Act, known as CAATSA -- won’t have an immediate impact on the Turkish procurement agency, which doesn’t have contractual relationship with the affected financial institutions.

Export Bans

On the other hand, new export licenses to transfer American goods or technology SSB are banned.

On average, around $2 billion worth of defense contracts involving U.S. companies go through the agency each year. A significant portion of that trade will continue as the sanctions don’t apply retroactively. But new licenses or extensions to existing ones after expiry won’t be allowed.

U.S. Sanctions Turkey’s Arms Industry, Spares Banks, Economy

Congress is also pushing for more restrictive language in legislation that, if approved, would make it extremely difficult for Turkey to ask for waivers unless it physically gets rid of the Russian missiles.

The Turkish agency’s arms procurement from suppliers outside the U.S. also stands to be affected, according to Aaron Stein, the director of the Middle East program at the Foreign Policy Research Institute in Washington.

“One weird outcome is that, in the short term, Turkey may be more dependent on the U.S. for things,” Stein said on Twitter after the sanctions were announced.

Turkey’s Choice

The penalties follow more than a year of calls by lawmakers for sanctions and recommendations from the departments of State and Treasury in the summer of 2019, after Turkey went ahead with the purchase of the missile defense system, to impose sanctions immediately.

The sanctions were legally required once Turkey started receiving the S-400, as it did in mid-2019. After Trump balked, Congress inserted language ordering the sanctions be imposed into a defense policy bill that passed last week.

Turkey has for years tried to appeal to Trump, saying its past requests for U.S.-made Patriot systems were rebuffed -- an allegation that’s disputed by many American officials.

“The conditions which compelled Turkey to acquire S-400 systems are well known,” Turkey’s Foreign Ministry said. “President Trump himself has admitted on many instances that Turkey’s acquisition was justified.”

©2020 Bloomberg L.P.

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