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 evade Western sanctions that are beginning to bite even deeper into its economy after the invasion of Ukraine.

Russian President Vladimir Putin is set to meet his Turkish counterpart, Recep Tayyip Erdogan, in Sochi on Friday, and the meeting — the leaders’ second in just over two weeks — raises alarms that the Kremlin might cut economic ties with a NATO country. that did not cooperate in imposing sanctions on Moscow.

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

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

There is no indication that Turkey would support these schemes, as they would leave the country’s own banks and companies at risk of secondary sanctions and cut off their access to Western markets. Kremlin spokesman Dmitry Peskov did not respond to requests for comment. The Kremlin previously described the Putin-Erdogan meeting as aimed at military-technical cooperation.

A senior Turkish official declined to go into details in response to questions about the Russian proposal, but said the country “remains committed to Ukraine’s independence and sovereignty”. He added that Turkey “on principle … only joins the sanctions imposed by the United Nations.”

Speaking on condition of anonymity to discuss a sensitive diplomatic meeting, the official noted that Turkey is “the only NATO ally with whom both Ukraine and Russia speak and trust. That is why no other country has managed to bring together the two foreign ministers or official delegations.”

Western government officials, also on condition of anonymity due to the sensitivity of the situation, told The Post they were not aware of the intercepted proposal but knew that Russia is looking for ways to circumvent the war-related sanctions and their growing economic damage. Russian officials travel the world to find people willing to do business with their financial institutions, they said.

Russians face the prospect of Soviet-style shortages as sanctions bite

With Russia cut off from much of the global economy, such overtures are a sign of the regime’s mounting concerns, Western officials and economists say. Putin has ridiculed Western sanctions as a failure — a steady stream of revenue from energy sales has bolstered Russia’s ruble and the country’s financial system — and the International Monetary Fund is now forecasting the Russian economy will grow by just 6 percent this year. valleys.

But economists say the headlines are masking a collapse of much of Russia’s industry and calling the banking sector a “zombie system,” banning hard currency deposits. While Russia has attempted to divert trade flows through countries such as India and China, the Western-imposed lockdown on imports of high-tech components has brought a number of industries to a standstill.

“Next year, the situation will be darker,” said Sergei Guriev, a professor at the French Sciences Po and former chief economist at the European Bank for Reconstruction and Development. “Nobody knows how it will work when the European oil embargo comes into effect. We are in uncharted territory.”

New figures released last week by Rosstat, the Russian statistics agency, show how hard some sectors have been hit. Automotive production, the industry most dependent on foreign components, fell 89 percent year-on-year in June, while computer and semiconductor production fell 40 percent year over year and washing machine production fell nearly 59 percent.

“Obviously it’s getting harder and harder,” said Maxim Mironov, professor of finance at the 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 — and the government, he noted. “There are cutbacks and that can lead to social tensions.”

Other high-tech sectors, such as pharmaceutical production, are also struggling. A survey by the Central Bank of Russia last month found that 40 percent of pharmaceutical manufacturers had failed to find replacements for imports of ingredients and equipment. “Russia has tried to land pharmaceutical production, but it has clearly failed,” said Elina Ribakova, deputy chief economist at the Institute of International Finance in Washington. “Sometimes the general data doesn’t cover all the nuances,” she said, as aluminum producers face bottlenecks in critical chemical supplies.

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

Historic sanctions against Russia had their roots in an emotional appeal from Zelensky

The Putin regime had previously hoped to circumvent current sanctions by creating alternative payment systems through Chinese banks, according to a well-connected Russian state official, speaking on condition of anonymity for fear of retaliation. Still, Chinese banks are hesitant to take on that role because of the risk of secondary sanctions. And despite the country’s increasing imports of Russian oil and gas, it cannot replace all Russian equipment needs.

A study by the Green Finance & Development Center at Fudan University in Shanghai concluded that China has halted its investment in Russia under its Belt and Road initiative this year due to its fear of sanctions. Western officials said it had become clear that China was not an appropriate channel for Russia to soften 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 historically had significant influence and expressed 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 Kiev — a role that appeared to pay off last month when Turkey and the United Nations reached an agreement to resume grain shipments from blocked Ukrainian ports.

Erdogan wants Putin to agree to 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 in Russia are already being rebuilt with Turkey’s help. The owner of a major retail chain said his stores 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 Turksstat, shows that monthly Turkish exports to Russia increased by about $400 million between February and June.

But beyond consumer goods, sanctions experts and Western officials doubt Turkey can become a hub for much-needed equipment without risking crippling secondary sanctions. Those officials said the country must now make a choice, knowing that any company that does it with Russia risks clouding its economy and financial sector and making it harder to do business with the rest of the world.

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