Halt of Mir use deals blow to rising Putin-Erdogan cooperation

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.  

The risk of sanctions is expected to curb other economic activities as trade between Turkey and Russia comes under growing scrutiny. EU officials are reportedly concerned about the surge in Turkey’s trade with Russia and its potential to help Moscow substitute European imports and exports. According to some observers, Russian business people have come to use Turkey as a base for operations in Western countries, bringing in goods, especially from Europe, and then exporting them to Russia.

The specter of Western sanctions is only adding to Turkey’s economic volatilities, as evidenced by how the two banks’ exit from the Mir payment system fanned jitters rattling the Istanbul bourse since last week.

Intensive buying of cheap banking shares by certain groups had led the banking index to spike 164% over two months. Driving the rally were the extraordinary profits that banks have been making as a result of Ankara’s controversial policy to keep interest rates low despite inflation soaring to 80%. 

As the rise of banking shares invigorated the stock market in general, Treasury and Finance Minister Nureddin Nebati encouraged citizens to invest in stocks. Shares continued to rise as small investors joined the buying spree. 

But a sell-off of Akbank shares on Sept. 13 triggered an abrupt reversal, with banking shares dropping nearly 40% in five days. The groups that had led the surge failed to manage the rout and struggled to meet margin calls, which occur when investors are required to add equity at times of sizable market moves. 

To calm the havoc, public lender Halkbank had to buy back shares at inflated prices earlier this week — a move that amounts to weakening the bank’s equities and indirectly foisting the bill on taxpayers.