In retaliation for Russian President Vladimir Putin’s unprovoked war on Ukraine, the United States, European Union, United Kingdom, Canada, Australia and Japan all adopted unprecedented sanctions against Russian state entities, financial institutions, the Kremlin elite and oligarchs who enable Putin’s unlawful actions. These sanctions require that all types of assets — bank accounts, real estate, aircraft and yachts — owned by sanctioned real and legal persons be seized. They also prohibit financial institutions and companies that operate in the strategic sectors of aviation, energy and the defense industry from dealing with persons so sanctioned. Finally, sanctioned individuals are banned from entering the countries that have adopted the sanctions. Moreover, Australia, Canada, the European Commission, Germany, Italy, France, Japan, the UK and the US have agreed to increased cooperation to target Russian assets, and to that end a Russian Elites, Proxies, and Oligarchs (REPO) multilateral task force has been launched.
On the other hand, NATO member Turkey has repeatedly declared that it would not join the sanctions against Russia, with Foreign Minister Mevlüt Çavuşoğlu saying, “Turkey has no intention of joining international sanctions against Russia over its war with Ukraine.”
Can Turkey be a refuge for Russian money?
Not surprisingly, Turkey is trying to act as a neutral player, respected and listened to by both sides of the conflict. “Presenting itself as a neutral actor or a fair mediator between two sides is Ankara’s usual playbook at the onset of almost every regional crisis over the past decade,” says Hasim Tekineş, a former Turkish diplomat. But when the crisis escalates, Turkish President Recep Tayyip Erdoğan bets on one side that he expects to gain the advantage, as he did in the crises in Syria, Libya and Qatar. If Putin’s war against Ukraine drags on, Erdoğan can be expected to abandon neutrality and choose one of the sides.
Ankara also has a history of making money by helping a country facing international sanctions evade those sanctions as it did in the US-Iran case. Between 2012 and 2016, Turkish state-owned Halkbank helped Iran evade US sanctions and secretly transferred $20 billion in restricted funds to the government of Iran.
There are some indications that Turkey has a similar plan in mind for Russia, too. Pro-Erdoğan columnist Abdulkadir Selvi wrote on March 8 that Erdoğan suggested to Putin during a phone call on March 6 the creation of a trilateral trade setup between Russia, Turkey and China to trade in gold, rubles, lira and yuan to bypass Western sanctions on Russia. In addition, it seems that the Russian oligarchs facing sanctions from the West see Turkey as a safe haven. For instance, Igor Sechin, a Russian billionaire and oligarch, reportedly told the captain of his now-seized superyacht to leave the French coast and sail to Turkey as quickly as possible after he was sanctioned by the European Union. Similarly, UK media reported that the $1 billion superyacht of another oligarch, Roman Abramovich, headed to Turkey to avoid being seized, and that it was spotted off the Turkish coast on Monday. His private jet was also spotted in İstanbul several times last month.
Although the US-EU-G7 bloc has not yet publicly asked Turkey to join the sanctions against Russia, the United States has firmly warned the countries that might help Russia avoid the sanctions against such a move. “We will not allow that to go forward and allow there to be a lifeline to Russia from these economic sanctions from any country, anywhere in the world,” said Jake Sullivan, the national security adviser to President Joe Biden. On the other hand, Ukraine publicly asked Turkey to suspend Mir, a Russian payments system for electronic fund transfers established in 2017 by the Central Bank of Russia that has been operational in Turkey since 2019.
Yet concerns about Turkey helping Russia evade the sanctions have begun to be raised. Conservative UK politician David Davis said: “It is reported that oligarch money is going to Israel, Turkey and the UAE. We need to make clear to all these countries that enabling oligarchs to avoid sanctions is not the action of an ally.” Speaking to Voice of America, Timothy Ash, an emerging-markets analyst with London-based Bluebay Asset Management, said concerns are growing that Turkey is helping Russians to circumvent the sanctions, adding: “There [has] been some focus on reflagging of Russian aircraft as Turkish aircraft. … [There has been] some media attention on a lot of Russians trying to set up new bank accounts in Turkey, presumably to try to get around some of the problems they are probably encountering. There has also been concern that Russian companies, entities trying to export or trade with Russia, are repackaging themselves as Turkish entities.”
Due diligence mechanisms of Turkey’s banking system are weak
In November 2021 the Financial Action Task Force, an intergovernmental policy developing and monitoring organization to combat money laundering, terrorism financing and the financing of proliferation of weapons of mass destruction, put Turkey on its grey list for Turkey’s non-compliance with several FATF recommendations. FATF President Marcus Pleyer said, “Turkey needs to show it is effectively tackling complex money laundering cases and show it is pursuing terrorist financing prosecutions…and prioritising cases of U.N.- designated terrorist organisations such as ISIL and al Qaeda.”
Turkey desperately needs foreign currency
In a bid to protect the Turkish lira, Turkey squandered its foreign currency reserves, as a result of which its central bank’s net international reserves hit their lowest level since 2002, standing at $8.63 billion in December 2021.
The Turkish government does not have the political determination to fight illicit money; on the contrary, it welcomes it regardless of source as Turkey needs $200 billion in 2022 to repay its foreign debt. Desperate to attract foreign currency and increase the amount of money in the Turkish financial system, Turkey’s Justice and Development Party (AKP) government enacted tax amnesty laws in 2008, 2013, 2016, 2018 and 2019. The deadline of the 2019 law has been extended several times, and it will be in effect until June 30, 2022. According to this law, similar to the previous ones, any previously undeclared money, gold, foreign currency, securities or other capital market instruments that are held abroad or in Turkey will be regarded as legitimate if they are brought to Turkey or if the tax authority is notified of their existence no later than June 30, 2022. The owners will not be required to provide any explanation regarding the source of the asset and will not be subjected to tax audit or any punishment with respect to the assets declared. This amnesty is so broad that no tax is payable for the assets brought from abroad, and money can even be brought in a suitcase.
Institutional weakness of regulatory bodies
In Turkey, the Banking Regulation and Supervision Agency (BDDK) and the Financial Crimes Investigation Board (MASAK) are primarily responsible for regulating and supervising financial institutions. MASAK is vested with the authority to fight money laundering. However, institutional capacity and the independence of these two bodies have been weakened in recent years due to the Turkish government’s distaste for bureaucracy. Minister of Finance Nurettin Nebati’s recent statement during a meeting with foreign investors leave no room for further explanation in this regard. He said: “The thing I dislike most is the difficulty for investors. It is the legislation and the bureaucracy that cause it. Let’s fight together. We will do away with the bureaucracy, we have the president behind us. … We will change the legislation. We are taking quick steps under the presidential system of governance.”
As a consequence of all this, by exploiting Turkey’s economic vulnerabilities and lax laws, Russian oligarchs can easily put their money into the Turkish financial system without paying any tax or facing any punishment by finding a Turkish enabler that can be any real and legal person based in Turkey. Turkey should be cautious, though, as the Iran sanction-busting case is still underway in US federal court.
* Ali Yıldız is a Brussels-based lawyer and founder of The Arrested Lawyers Initiative.