The Sanctions Game

 

Here's an extreme example of globalization's tenacity and resilience: Russia, while subject to over 30,000 separate sanctions from nations around the world, has nevertheless exported $913 billion of oil and gas these past few years. The lion's share – $213 billion – was sold to the E.U., which is, now as before, Russia's biggest rival and customer. How can this happen? And why?

I've said before that cargo, like water, will find its path from seller to buyer. When that cargo is critical, as it is in the global energy markets, imagine the political and economic pressure. Even if 30,159 sanctions stand in the way of a deal, it's likely to just happen.

In "No Coffee for You" in the May/June 2024 edition, I noted that origin paperwork for the E.U.'s Supply Chain Act might be "cut to fit." And while I personally consider coffee, not crude, to be the true "black gold," caffeine is small change compared to fossil fuels.

WORKAROUNDS

Buyers and sellers are relentless in their drive to find workarounds for their businesses. They've loaded their cargoes onto Moscow's 600-vessel "shadow fleet," avoided port calls using ship-to-ship transfers of oil and gas in international waters, hidden vessel ownership behind spiderwebbed shell companies and management arrangements and gotten around origin rules by blending Russian and non-sanctioned fuels together.

Yet the most audacious workaround is not a tactic, but a country: Turkey. Turkey offers a systematic, structured way to indirectly but legally do business with Russia – a way that economically benefits itself, Russia and the companies that fear violating sanctions. The reason is found in Turkey's tricky diplomatic history.

Turkey is nominally a Western ally with European aspirations, but its interactions with the U.S. and E.U. have suffered from strategic frictions. In 2003, Turkey's parliament refused to let U.S. troops use Incirlik Air Base for the Iraq War. In 2016, when Turkish President Recep Tayyip Erdo?an was targeted by a military coup, the U.S. rejected Turkey's demand for the extradition of Fetullah Gülen, a critic of Erdo?an.

During the Syrian civil war, the U.S. armed Kurdish fighters whom Turkey deemed terrorists. Then, more recently, Turkey purchased Russian S-400 missiles, which broke its military compatibility with NATO, of which Turkey is a member, and led to its exclusion from the F-35 fighter program. And throughout, Cyprus has blocked Turkey's E.U. membership due to its illegal 1974 invasion of the island.

That list of issues is long and potentially crippling. Perhaps, then, the surprise is not that Turkey is looking for other dance partners but that bouncers haven't escorted it out?

RUSSIAN/TURKISH COOPERATION

Apart from a few difficult moments, Russia has over time deepened and broadened its connection to Turkey. Evidently, Russia and Turkey see enough strategic value in each other, or need each other enough, to mend rifts as they appear.

In November 2015, for example, Turkey shot down a Russian Su-24 fighter jet during the Syrian civil war. Russian leader Vladimir Putin called it "a stab in the back" and imposed sanctions on Turkey. It looked like the end of the line. Yet within seven months, Erdo?an sent a letter of apology and, remarkably, the two countries emerged with stronger ties than before.

A review of Turkish and Russian projects shows, overall, a broad spectrum of successful cooperation that helps sustain the relationship. Beginning with the Astana partnership between Turkey, Iran and Russia that paralleled U.N. efforts to broker a Syrian ceasefire, then continuing through the $23 billion TurkStream natural gas pipeline and the $20 billion Akkuyu nuclear plant, which Russia is building and maintaining, Turkey has leaned on Russia to reduce its dependence on the U.S. and E.U.

In charting a diplomatic course between major powers, Turkey has recast Mediterranean trade by allowing Russia an outlet – geographically and economically – for its oil and natural gas. While doing so, Turkey has threaded the needle with its Western partners: The E.U. is Turkey's biggest trading partner, and NATO's Article 5 provides Turkey a security guarantee that Russia, especially now, cannot match.

Turkey has implemented only sanctions that have been ratified by the U.N. Security Council, such as the ones targeting North Korea. So transactions with Russia that would be prohibited under U.S. or E.U. rules remain legal in Turkey. This has led to frustration for some and opportunity for others.

Al-Arabiya quoted a senior U.S. Treasury official, who asked to remain anonymous: "We've shared our concerns with the Turkish government and private sector and informed them of the significant risks of doing business with those we've sanctioned who are tied to Russia's war."

But Russia's ships passing through the Dardanelles and the Bosporus are protected under international treaty law by the 1936 Montreux Convention, at least during peacetime. And the otherwise permissive legal and diplomatic environment in Turkey encourages Turkish companies to acquire Russian business whenever possible.

In 2023, for example, one company transported 49 million barrels of Russian oil, leading the U.K. to sanction it in February 2024. But its Russian oil operation didn't stop. It just moved down the hall. Three other Turkish companies with the same address and the same owners took over.

A COMPLETE ECOSYSTEM

The scale of Turkey's blending and re-exporting operations can be derived from statistics. Turkey's purchasing of Russian oil products went up 105 percent from 2023-2024, but its domestic oil consumption grew just eight percent – so it's not satisfying domestic demand. A refinery in Izmir, Turkey, reportedly processes 98 percent Russian crude, mostly from Lukoil. These refined oil products are labeled "Turkish" and become legal for export to the E.U.

Similar loopholes are permitted by the E.U. when it comes to blending. In late 2023, one terminal in Ceyhan, Turkey received 26,923 tons of gasoil from Novorossiysk, then legally exported a similar quantity to a refinery in Greece ten days later, per the Centre for Research on Energy and Clean Air.

Meanwhile, Turkish shipping lines have captured 55 percent of the Russian-Black Sea container market. International carriers abandoned this market, and Turkish firms expanded services specifically for Russian routes. One such line, launched in May 2022, offers its Novorossiysk Express Service to connect Russian ports with Turkish facilities and railways.

And then there are the Turkish banks affiliated with the Credit Bank of Moscow. The most famous of these facilitated payments from buyers and transferred proceeds to Russian banking institutions after taking off its own commission. The comprehensive oil-for-credit scheme it was running legally bypassed traditional Western financial channels.

In aggregate, Turkey has pursued an approach that has led to the establishment of other maritime clusters: a combination of clearinghouse services, financing, vessel management, port and terminal operations and shipyards for repair and refit. What is unique is the complete ecosystem that Turkey offers, which enables Russian trade to flow while Western competitors face compliance problems and legal obstacles.

AN INDISPENSABLE SERVICE

The key is that Turkey has cleverly maintained strategic leverage in both directions. Cyprus and the United Arab Emirates (UAE), both significant Russian gateways, have not fared as well. Cyprus is constantly pressured by the E.U. while the UAE, according to the Atlantic Council, has been gray-listed by the G7's Financial Action Task Force.

Right now, Turkey is providing Russia and the E.U. with an indispensable service. But, as Charles de Gaulle said, "The graveyards are full of indispensable men."