Putin-Erdogan meeting could deepen economic ties despite war sanctions

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Russia is looking to Turkey and other potential new trading partners as it attempts to circumvent Western sanctions that are starting to bite even deeper into its economy following its invasion of Ukraine.

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

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

The proposal, which was shared with the Washington Post this week by Ukrainian intelligence, calls on Erdogan’s government to allow Russia to buy stakes in Turkish oil refineries, oil terminals and reservoirs – a move which economists say could help conceal the origin of its exports after the European Union’s oil embargo comes into full force next year. Russia is also demanding that several Turkish state-owned banks allow correspondent accounts for Russia’s largest banks, which economists and sanctions experts say would be a clear violation of Western sanctions, and that industrial producers Russians are allowed to operate outside the free economic zones in Turkey. .

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

A senior Turkish official, in response to questions about the Russian proposal, did not go into details but said the country remained “committed to the independence and sovereignty of Ukraine”. He added that Turkey “as a matter of principle… adheres exclusively to the sanctions imposed by the United Nations”.

The official, who spoke on condition of anonymity to discuss a sensitive diplomatic meeting, noted that Turkey is “the only NATO ally with which Ukraine and Russia speak and in whom they have 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 they were unaware of the intercepted proposal but knew Russia was looking for ways around it. war-related sanctions and their growing economic damage. Russian officials are scouring the world to try to find people who would be willing to do business with their financial institutions, they said, noting that Turkey is among a group of jurisdictions approached because of their laxity on data protection. ‘application.

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With Russia cut off from much of the global economy, such overtures are a sign of the regime’s growing concerns, these Western officials and economists say. Putin has called Western sanctions a failure – a steady stream of revenue from energy sales has bolstered the Russian ruble and the country’s financial system – and the International Monetary Fund now predicts Russia’s economy will fall by just 6 % This year.

But economists say the headlines are masking a collapse across a wide swath of Russia’s manufacturing industry and calling the banking sector a “zombie system”, with the withdrawal of hard-currency deposits banned. Although Russia has sought to divert trade flows to countries like India and China, the West’s blockade on imports of high-tech components has crippled some industries.

“The situation will be bleaker next year,” said Sergei Guriev, a professor at Sciences Po in France and former chief economist at the European Bank for Reconstruction and Development. “No one knows how things will work out when the European oil embargo comes into force. We are in uncharted territory.”

New figures released last week by the Russian statistics agency Rosstat show how badly certain sectors have been hit. Automobile production, the industry most dependent on foreign components, fell 89% in June year on year, while production of computers and semiconductors fell 40% year on year and that of wash by almost 59%.

β€œIt is clear that things are going to get more and more difficult,” said Maxim Mironov, professor of finance at IE Business School in Madrid. The announcement this week that one of the main car factories of the state-owned AvtoVAZ would reduce its workforce signals a lack of other options for the company β€” and the government, he noted. “Budget cuts are starting and this could lead to social tensions.”

Other high-tech sectors such as pharmaceutical production are also floundering. A survey by Russia’s Central Bank last month found that 40% of pharmaceutical producers had failed to replace imports of ingredients and equipment. “Russia has tried to outsource pharmaceutical production, but it clearly hasn’t succeeded,” said Elina Ribakova, deputy chief economist at the Washington-based Institute of International Finance. “Sometimes the aggregate data doesn’t cover all the nuances,” she said, as aluminum producers face bottlenecks on vital chemical supplies.

Sergei Aleksashenko, a former Central Bank vice president currently in exile in the United States, said it was imperative for Russia to find alternative financial channels for its banks. “It’s a matter of money,” he said, pointing out that Iran, with the help of Russia and Turkey, had previously managed to circumvent Western sanctions. “If you pay dearly, there will be banks willing to take the risk.”

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Putin’s regime previously hoped to circumvent current sanctions by creating alternative payment systems through Chinese banks, according to a well-connected source. Russian state official, speaking on condition of anonymity for fear of reprisals. Yet Chinese banks have been reluctant to take on this role due to the risk of secondary sanctions. And despite the country’s growing imports of Russian oil and gas, it cannot replace all of Russia’s equipment needs.

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

In Erdogan’s complicated relationship with Putin – marked by periods of conflict and cooperation – Russia had significant leverage in the past and showed its displeasure by cutting off the flow of tourists to Turkey or banning the import of Turkish agricultural products. Since the start of the Ukrainian war, Turkey has positioned itself as a mediator between Moscow and Kyiv – a role that appeared to bear fruit last month when Turkey and the United Nations brokered a deal to resume shipments of grain from blocked Ukrainian ports.

Erdogan wants Putin’s acquiescence to a planned Turkish military operation against Kurdish forces in northern Syria. Russia maintains troops in the region 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 the help of Turkey. The owner of a major retail chain said its outlets had completely revamped supply via 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 jumped by around $400 million between February and June.

But consumer goods aside, sanctions experts and Western officials doubt that Turkey can become a hub for the supply of vital equipment without facing the risk of crippling secondary sanctions. These officials said the country now had to make a choice, knowing that any business activity with Russia risked clouding its economy and financial sector and making it more difficult to do business with the rest of the world.

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