A Russian proposal intercepted ahead of the meeting suggests Russia hopes Turkey will agree to new channels to avoid these restrictions on its banking, energy and industrial sectors.
The proposal, shared by Ukraine’s intelligence agency with the Washington Post this week, calls on Erdogan’s government to allow Russia to buy stakes in Turkey’s oil refineries, oil terminals and reservoirs – a move economists say could help to disguise the origin of its exports thereafter The European Union’s oil embargo comes into full force next year. Russia also requires that several state-owned Turkish 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 from free trade zones in Turkey.
There is no indication that Turkey would support these deals as they would expose the country’s own banks and companies to the risk of secondary sanctions and deny them access to western markets. Neither the Turkish government nor Kremlin spokesman Dmitry Peskov responded to requests for comment. The Kremlin previously described the Putin-Erdogan meeting as focused on military-technical cooperation.
Western government officials, 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 at ways to circumvent the war-related sanctions and their mounting economic damage. Russian officials are traveling the world trying to find people who would be willing to do business with their financial institutions, they say, noting that Turkey is among a group of jurisdictions being targeted for its lax enforcement stance.
The Russians face Soviet-style bottlenecks in the face of sanctions
With Russia cut off from much of the world economy, such overtures are a sign of growing concern from the regime, these Western officials and economists say. Putin has ridiculed Western sanctions as a failure — a steady stream of proceeds from energy sales has bolstered the Russian ruble and the country’s financial system — and the International Monetary Fund now forecasts Russia’s economy will shrink just 6 percent this year.
But economists say headlines are masking a collapse of much of Russia’s manufacturing, and have labeled the banking sector a “zombie system” that bans hard-currency deposit withdrawals. Although Russia has tried to divert trade flows through countries like India and China, the Western-imposed import ban on high-tech components has brought some industries to a standstill.
“The situation will be grimmer next year,” said Sergei Guriev, a professor at France’s Sciences Po and former chief economist at the European Bank for Reconstruction and Development. “No one knows what will happen once the European oil embargo takes hold. We are breaking new ground.”
New figures released last week by Russia’s state statistics agency Rosstat show how hard some sectors have been hit. Auto 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-on-year and washing machines fell nearly 59 percent.
“It’s clear things are getting harder and harder,” said Maxim Mironov, professor of finance at IE Business School in Madrid. This week’s announcement that one of state-owned AvtoVAZ’s key auto plants would be shedding its workforce signals a lack of other options for the company – and the government, he noted. “Cuts are starting and it could lead to social tensions.”
Other high-tech sectors such as pharmaceutical production are also beginning to falter. A survey by the Central Bank of Russia last month found that 40 percent of pharmaceutical manufacturers had failed to find substitutes for imported ingredients and equipment. “Russia has tried to bring pharmaceutical production to the country, but it has clearly not been successful,” said Elina Ribakova, deputy chief economist at the Washington-based Institute of International Finance. “Sometimes the overall data doesn’t cover all the nuances,” she said, as aluminum producers face shortages of essential chemicals.
Sergei Aleksashenko, a former central bank deputy chairman now in exile in the United States, said Russia urgently needs to find alternative financial channels for its banks. “It’s a question of money,” he said, noting that Iran had previously managed to circumvent Western sanctions with the help of Russia and Turkey. “If you’re paying a lot, there are some banks that are willing to take the risk.”
Historic sanctions against Russia had their roots in Zelenskyy’s emotional appeal
The Putin regime had previously hoped to circumvent the 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 retribution. However, Chinese banks have refused to play this role due to the risk of secondary sanctions. And despite the country’s increasing imports of Russian oil and gas, it cannot meet 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 forgo 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 an adequate channel for Russia to mitigate 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 has had a significant influence in the past, showing its displeasure by cutting off the flow of tourists to Turkey or banning the import of Turkish agricultural products. Turkey, for its part, has fundamentally ditched its longstanding refusal to join sanctions against countries like Russia and Iran. Since the start of the Ukrainian war It has positioned itself as an intermediary between Moscow and Kyiv – a role that seemed to be paying off last month when Turkey and the United Nations negotiated an agreement to resume grain shipments from blocked Ukrainian ports.
Erdogan wants Putin’s approval of 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 branches had completely reorganized deliveries through new hubs in Turkey, Israel, China and Azerbaijan. Latest trade data from the Turkish Statistical Institute, Ankara’s statistical office, also known as Turkstat, shows that monthly Turkish exports to Russia rose by about $400 million between February and June.
Consumer goods aside, however, sanctions experts and Western officials doubt Turkey could become a hub for essential equipment shipments without risking crippling secondary sanctions. Those officials said the country must make a choice now, knowing that any deal it does with Russia risks casting a shadow on its economy and financial sector and will make it harder to do business with the rest of the world world to do.