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The threat of Western sanctions has tripped up the recent uptick in Turkish-Russian economic cooperation, with two private Turkish banks halting the use of the Russian payment system Mir and three public banks under pressure to follow suit.
News of the two banks’ move added to turbulence at the Istanbul stock exchange, where an unprecedented rally in banking shares was followed by an equally head-spinning plunge last week, opening a new front of trouble for the struggling Turkish economy.
Wary of a fresh currency shock ahead of elections next year, President Recep Tayyip Erdogan has pinned hope on his Russian counterpart, Vladimir Putin, to help ease Turkey’s foreign exchange shortfall, marked by a gaping current account deficit and hefty foreign debt liabilities in the short term. Russia has agreed to partial Turkish gas payments in rubles and wired billions of dollars to Turkey as part of a nuclear power plant project. In turn, it has gained an economic lifeline thanks to Ankara’s refusal to join Western sanctions over Russia’s invasion of Ukraine. With thousands of Russians flocking to Turkey and Turkish exports to Russia booming, the United States and the European Union have grown concerned that Turkey might be opening room for Russia to evade sanctions.
Following a US Treasury warning against moves facilitating the expansion of the Mir payment system, Isbank — Turkey’s largest private lender by assets — said on Sept. 19 it had suspended Mir transactions and was assessing the statement of the US Treasury’s Office of Foreign Assets Control (OFAC). Later in the day, the Emirati-owned Denizbank said it too had halted services.
The three other Turkish banks processing Mir transactions — Ziraat, Halk and Vakif — are all publicly owned and part of the portfolio of Turkey’s sovereign wealth fund, which is chaired by Erdogan. Thus, how those banks will proceed depends on Erdogan. Any decision to carry on despite the US warnings would mean taking big risks, as the banks are tightly integrated with Western financial networks and could hardly afford sanctions.
Turkish banks began accepting Mir payments in 2019. Ziraat said at the time the move would help boost “value added for Turkey especially in the tourism sector” by facilitating the payments of Russian tourists and bearing positively on Turkish businesses operating in the fields of travel, transport and accommodation.
In August, Turkey’s leading business group TUSIAD said it had received a letter from US Deputy Treasury Secretary Wally Adeyemo warning of sanction risks if companies establish ties with sanctioned Russian entities and individuals. Turkish officials confirmed later that two other major business groups, MUSIAD and TOBB, had received similar letters.