How will Turkey trade with Iran with sanctions back and Halkbank on target?

Economic and foreign policy will be the two top priority areas that will require immediate attention.

The United States sanctions on Iran is one of the issues that relate to both areas.

U.S. President Donald Trump announced in May that the U.S. is withdrawing from the 2015 nuclear deal and moving to reimpose sanctions against Tehran.

An initial round of U.S. sanctions against Iran would come back into effect on Aug. 4, targeting the Iranian automotive sector as well as trade in gold and other key metals. On Nov. 4, further sanctions are expected to be imposed, targeting Iran’s energy sector and Iran’s central bank.

Meanwhile, the trade wars triggered by Trump, which could hurt the European Union’s trade, will have negative consequences on the Turkish economy. If trade wars were to lead to rising protectionism, eventually resulting in a global recession, Turkey will be hit much harder as it will be caught with a fragile economy.

In this framework, Turkey’s trade with its neighbor Iran, which also includes oil and gas, is of crucial importance.

Turkey has warned the U.S. the embargo imposed on Iran is a “mistake” and Washington “does not have the right” to force other countries to implement its unilateral decision, said Mevlüt Çavuşoğlu, the last foreign minister of the Turkish parliamentary system.

“The United States may make a decision, but it is not right to impose this decision on other countries. We will continue our principled attitude,” Çavuşoğlu told state-run Anadolu Agency on July 6.

Yet on July 7, State Department Director of Policy Planning Brian Hook said the Trump administration would not hesitate to punish foreign companies that do not comply with sanctions.

In this respect, it is hard to see how Turkey “will continue” its “principled attitude,” especially in light of the Halkbank case.

The penalty on Halkbank

In the previous sanctions period that lasted between 2012 and 2015, Turkey had secured certain exemptions both for its companies doing business with Iran, as well as for Halkbank activities. In fact, it is thanks to Halkbank that the Turkish companies were able to continue their presence in Iran.

Halkbank has also been incremental in the trade of other countries with Iran. For example, India used Halkbank to pay Iran for the oil it bought.

But according to the U.S., Halkbank went beyond the maneuver room Turkey had officially secured through talks with the former Obama administration.

Last January, Mehmet Hakan Atilla, former deputy general manager of Halkbank, was found guilty in a U.S. court of conspiring with others to evade U.S. sanctions, of using the U.S. financial system to conduct barred transactions on behalf of the Iranian government and other Iranian entities, and defraud U.S. financial institutions by concealing the true nature of these transactions.

In light of the guilty verdict, the U.S. Treasury and Department of Justice is expected to fine Halkbank following Atilla’s sentence that was announced last May.

Experts had speculated the announcement of the Halkbank fine was postponed to after the June 24 elections in Turkey. That means the penalty the U.S. Treasury and Department of Justice will assess on Halkbank will become public in a matter of weeks.

The immediate effect on the economy in the short term will depend on the size of the penalty. It will certainly pose a challenge for the economy. The consequences of trade with Iran will be equally crucial since Turkish companies will have a hard time to realize their financial transactions with their Iranian counterparts.

Several European and Asian companies have started to pull out of Iran to avoid sanctions.

In recent weeks, several major European companies have said they will exit Iran unless U.S. sanctions are waived. European signatories to the 2015 nuclear deal with Tehran—France, Britain, and Germany, as well as the EU—have been calling on the U.S. to spare EU firms doing business with Iran from punitive measures. However, these calls seem to go to deaf ears in Washington.

Will Turkey be able to secure some exemptions from the U.S.? With so many problematic issues on bilateral ties starting with the purchase of the S-400 ballistic missile system from Russia to the situation in Syria, this will certainly be a hard sell.