Putin-Erdogan meeting could deepen economic ties despite war sanctions

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Russia is turning to Turkey and other potential new trading partners as it tries to circumvent Western sanctions that are starting to hit its economy further after the 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 sounding alarm bells that the Kremlin could strengthen economic ties with a NATO nation. that has not joined the imposition of sanctions on Moscow.

A Russian proposal intercepted before the meeting indicates that Russia expects Turkey to agree to new channels to help it bypass those restrictions in its banking, energy and industrial sectors.

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

There is no indication that Turkey would support these deals, as they would leave the country’s own banks and businesses at risk of secondary sanctions and prevent them from accessing Western markets. Kremlin spokesman Dmitry Peskov did not respond to requests for comment. The Kremlin previously described the Putin-Erdogan meeting as focused on military-technical cooperation.

A senior Turkish official, responding to questions about the Russian proposal, did not address the details, but said the country remains “committed to Ukraine’s independence and sovereignty.” He added that Turkey “as a matter of principle…joins exclusively 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 that both Ukraine and Russia talk to and trust. That 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 because of the sensitivity of the situation, told The Post they were unaware of the intercepted proposal, but knew that Russia is seeking ways to circumvent war-related sanctions and its growing economic damage. Russian officials are traveling the world trying to find people who are willing to do business with their financial institutions, they said, noting that Turkey is among a group of jurisdictions it is approaching because of its lack of respect for the app.

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With Russia cut off from much of the global economy, such proposals are a sign of the regime’s growing concerns, those Western officials and economists say. Putin has mocked Western sanctions as a failure: a steady stream of revenue from energy sales has propped up the Russian ruble and the country’s financial system, and the International Monetary Fund now forecasts that Russia’s economy will fall by just 6 percent. cent this year.

But economists say the headline figures mask a collapse in much of Russia’s manufacturing industry and call the banking sector a “zombie system,” with the withdrawal of hard-currency deposits prohibited. Although Russia has tried to divert trade flows through countries such as India and China, the West’s blockade of imports of high-tech components has paralyzed some industries.

“The situation will be darker next year,” said Sergei Guriev, a professor at France’s Sciences Po and a 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 Russia’s state statistics agency, Rosstat, show how hard some sectors have been hit. Auto production, the industry that relies the most on foreign components, fell 89 percent year-on-year in June, while output of computers and semiconductors fell 40 percent year-on-year and that of washing machines fell nearly 59 percent.

“It is clear that things are going to get more and more difficult,” said Maxim Mironov, a finance professor at IE Business School in Madrid. This week’s announcement that one of the main auto plants of the state-owned AvtoVAZ would reduce its workforce it points to the lack of other options for the company and the government, he said. “The cuts are beginning and it could generate social tension.”

Other high-tech sectors, such as pharmaceutical manufacturing, are also floundering. A Russian Central Bank survey last month found that 40 percent of pharmaceutical producers had been unable to find replacements for imported ingredients and equipment. “Russia has been trying to produce pharmaceuticals on land, but has clearly not been successful,” said Elina Ribakova, deputy chief economist at the Washington-based Institute of International Finance. “Sometimes the big picture doesn’t cover all the nuances,” she said, and aluminum producers face bottlenecks in vital chemical supplies.

Sergei Aleksashenko, a former central bank deputy now in exile in the United States, said it is imperative that Russia find alternative financial channels for its banks. “It’s a question of money,” he said, noting that Iran, with the help of Russia and Turkey, had previously managed to get around Western sanctions. “If you pay a lot, there will be some banks willing to take the risk.”

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Previously, the Putin regime hoped to circumvent current sanctions by creating alternative payment systems through Chinese banks, according to a well-connected report. Russian state official, speaking on condition of anonymity for fear of reprisals. However, Chinese banks have refused to take on that 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 Shanghai Fudan University’s Center for Green Finance and Development found that fears of sanctions led China to abandon new investments in Russia this year as part of its Belt and Road initiative. Western officials said it had become clear that China was not a suitable channel for Russia to mitigate the impact of sanctions, forcing the Kremlin to desperately look for other partners.

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

Erdogan wants Putin’s acquiescence for a planned Turkish military operation against Kurdish forces in northern Syria. Russia maintains troops in the area 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 his outlets had completely reorganized supplies through 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 increased by about $400 million between February and June.

But consumer goods aside, sanctions experts and Western officials doubt Turkey can become a hub for the supply of vitally needed equipment without facing the risk of crippling secondary sanctions. Those officials said the country now has to make a decision, knowing that any business it does with Russia risks tarnishing its economy and financial sector and will make it more difficult to do business with the rest of the world.

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