How U.S. sanctions over a Russian weapon could rattle Turkey

[May 30, 2019]  By Jonathan Spicer

ISTANBUL (Reuters) - Turkey is on the cusp of facing U.S. sanctions over its decision to buy a Russian S-400 missile defense system, leaving its already soft currency and economy vulnerable and raising questions over its position within NATO and the region.

If no solution is found in coming weeks and U.S.-Turkish tensions continue to worsen, tit-for-tat sanctions could hit trade between the allies and prolong a recession in Turkey that has already tested President Tayyip Erdogan's grip on power.

Turkey also risks being rapidly cut out of the production and use of American F-35 fighter jets, which could mark a step toward a re-evaluation of its 67-year membership in the North Atlantic Treaty Organization.

"It's very complex to resolve because both U.S. and Turkish officials see this as a reflection of a larger geo-political balancing," said Galip Dalay, visiting scholar at the University of Oxford's politics and international relations department.

"Sanctions would have a very consequential effect on Turkey, but probably not mark a breaking point in its U.S. relationship," he said.

Ankara and Washington have squabbled for months over the Turkish plan to buy the S-400s, which the United States says is incompatible with the Western alliance's defense network and poses a threat to the F-35s that Turkey also plans to buy.

Turkey says defending its territory poses no threat to allies, and stresses it has met all NATO obligations.

Both sides are entrenched even while they have repeated a desire to avoid so-called CAATSA sanctions, which by U.S. law would be triggered when the Russian anti-aircraft weapon arrives on Turkish soil, possibly as soon as July.

An agreement to delay shipment of the S-400s could still open the door to U.S. President Donald Trump convincing Erdogan to turn his back on what the Turkish leader has repeatedly called a "done deal" with Russia.

The pair agreed on Wednesday to meet on the sidelines of a G-20 conference on June 28-29.

Yet Ankara's ties with Moscow have been strengthening, and Turkey's defense minister said last week Turkish military personnel were in Russia for S-400 training. In response, the United States is considering halting the training of Turkish pilots on F-35 stealth fighters in Arizona.

The showdown comes as the Russia-backed Syrian army escalates an assault on some Turkish-backed rebels near Turkey's border. More broadly in the Middle East, the United States is ramping up pressure on Turkey and other nations to isolate Iran including blocking all Iranian oil exports.

"If the U.S. sanctions are bad, Turkey could reconsider its decision to comply with U.S. sanctions on Iran," said Dalay.

'PATH TO ESCALATION'

Washington wants Ankara to buy its alternative Patriot surface-to-air missile batteries and has made an offer that expires on June 4, according to a person familiar with the matter.

People walk past Russian S-400 missile air defence systems before the military parade to commemorate the 75th anniversary of the battle of Stalingrad in World War Two, in the city of Volgograd, Russia February 2, 2018. REUTERS/Tatyana Maleyeva/File Photo

If Ankara accepts delivery of the S-400s as planned, the U.S. Congress has moved to block delivery of F-35s to Turkey and remove it from the list of nations working together to build them.

The delivery would also force Trump to select five of 12 possible sanctions under the Countering America's Adversaries Through Sanctions Act, or CAATSA, which targets purchases of military equipment from NATO foe Russia.

The sanctions range from banning visas and denying access to the U.S.-based Export-Import Bank, to the harsher options of blocking any transactions with the U.S. financial system and denying export licenses.

Trump may initially choose milder options targeting individual Turks rather than the government, a decision that could buy time for more diplomacy even while it may prompt Congress to separately impose tougher sanctions.

"There is a U.S. reticence to completely block the military-industrial relationship with Turkey," said Sinan Ulgen, a former Turkish diplomat and a visiting scholar at Carnegie Europe in Brussels.

Yet U.S. sanctions of any sort would likely hammer the Turkish lira, which has shed 14% of its value against the dollar this year in part due to fraying U.S. ties.

Last year, a separate set of U.S. sanctions and tariffs over a jailed U.S. pastor helped set off a currency crisis that knocked 30% off the lira, tipped Turkey into recession and rattled emerging markets around the world.

Ratings agency Moody's said this month that Turkey's political risk is "high" and warned that the S-400s could trigger not only U.S. but also NATO sanctions.

Turkey has a track record of responding in kind to foreign sanctions and tariffs.

Ulgen said any sanctions dispute could escalate into tariffs that harm U.S.-based Lockheed Martin Corp's business with Turkish industrial companies, and even threaten future upgrades to Turkey's existing fleet of F-16 jets.

"Heavier sanctions could follow if the United States finds itself on a path to escalation with Turkey, beyond the usual rhetoric," he said.

(Reporting by Jonathan Spicer; Additional reporting by Humeyra Pamuk in Washington, Editing by William Maclean)

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