October 16, 2019

On October 9, Sen. Lindsey Graham (R-SC) and Sen. Chris Van Hollen (D-MD) announced bipartisan legislation that would impose a number of different sanctions on Turkey and its leadership, but not an outright trade embargo. The draft legislation is summarized here. Unless the terms of the measure as finally implemented would be much broader than the current draft legislation, it appears unlikely that the legislation would have a material impact on most private commercial transactions, except for transactions in the energy and defense sectors.   

In reaction to the Graham-Van Hollen legislation, and to Congressional concern over President Trump’s announced pull-out from Syria and the “abandonment” of the Kurdish forces that have been working in conjunction with US interests there—particularly, anger expressed by some senior officials within the President’s own party—Treasury Secretary Steven Mnuchin announced on October 11 that the President would soon sign an Executive Order authorizing certain sanctions on selected parties “connected to the Government of Turkey.” 

OFAC Sanctions

On October 14, the US Treasury Department’s Office of Foreign Assets Control (OFAC) released the mentioned executive order, and issued sanctions on three Turkish Government officials, and two government agencies—the Ministry of Energy and Natural Resources and the Ministry of National Defense

There are limited exceptions to the sanctions provided in so-called “general licenses” so that, for example, existing contracts with sanctioned parties can be wound-down until November 13. The general licenses are at the following links:

The list of sanctioned parties is likely to grow larger in the coming days. The Treasury Department may also issue some additional guidance on the scope and application of the new sanctions. There is still much that is unclear about how they will be applied.

We note that services provided to the Turkish Petroleum Corporation (TPAO) do not appear to be implicated at this time, as TPAO is owned by the Turkey Wealth Fund, not Turkey’s Ministry of Energy and Natural Resources.  There is a possibility, however, that there will be further impact to Turkey’s energy industry, as the executive order authorizes sanctions on persons who “operate in such sectors of the Turkish economy as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State.”  In addition, there is some risk that measures may eventually be extended to certain state-owned entities, and even to certain private companies in which President Erdogan and his close associates are thought to have interests. 

Graham-Van Hollen Legislation

By issuing sanctions, the Trump Administration is likely hoping to preempt the passage of the Graham-Van Hollen legislation that, in the Administration’s eyes, will tread upon the prerogatives of the executive branch. After Congress passed the last major piece of sanctions legislation, the Countering America’s Adversaries Through Sanctions Act (CAATSA), which expanded the existing sanctions on Russia and Iran, President Trump threatened to veto the bill because, in his opinion, it usurped Executive Branch authorities. He was politically restrained from doing so, however, due to the fact that the Mueller investigation was in full swing at that time, and the accusations that Trump was too cozy to Vladimir Putin made it very difficult for President Trump to veto any sanctions on Russia. (Moreover, CAATSA was passed by an overwhelming majority, and any such veto would have been future, as it would have been met with a Congressional override.)

The same political dynamic may be at work in the current geopolitical situation with Turkey, though to a much lesser degree. If the Graham-Van Hollen legislation moves forward toward passage—and indications are that it may move quickly, as companion legislation is being prepared in the House of Representatives—it may be politically difficult for Trump to veto legislation that sanctions the Turkish regime, even though he may have concerns about Congress acting in areas that are typically considered to be within the foreign affairs powers assigned to the executive branch under the US Constitution.  Further, any such legislation may well pass with a veto-proof majority. 

Much could happen in the coming weeks to slow the progress of the Graham-Van Hollen bill, though the measure appears to have significant political inertia behind it at this time. It was proposed with bipartisan support, and it plays to the concerns of both Democrats and Republicans.  Both parties have expressed concerns as to actions that President Erdogan has taken against his political opponents and the press, and his promotion of family members and personal associates to key political and commercial positions. Turkey’s agreement to purchase the Russian S-400 missile system, in the face of strong objections from the US and its NATO allies, has further weakened support for Turkey in Congress, even among those members who were most appreciative of Turkey’s very important role as a stable ally in the region.   

Additionally, in recent years Congress has been increasingly activist in the area of foreign affairs, as evidenced by the passage of the CAATSA legislation mentioned above (which passed the Senate with a vote of 98-2, and the House with a vote of 419-3). The new sanctions announced by OFAC may be sufficient to hold off Congressional action, or may be sufficient to justify a veto of the measure by President Trump. Thus far, there is no indication that any sanctions will be so broad as to materially disrupt the $20 billion in annual US-Turkey trade; however, given the extremely dynamic political environment in Washington, and President Erdogan’s willingness to manifest defiance and provoke concerns even among Turkey’s strongest supporters in the US government, it is hard to be confident that the new sanctions will remain limited in scope and application.  The charges brought against Türkiye Halk Bankası AŞ (Halkbank), a Turkish state-owned bank, on October 15 for fraud, money laundering, and sanctions offenses related to the bank’s participation in a multibillion-dollar scheme to evade U.S. sanctions on Iran may further irritate the situation.

Some reports indicate that President Erdogan has his hands in most of the significant businesses in Turkey, whether directly, or through the activity of close associates like his son-in-law, but even businesses that have no such affiliation with the Erdogan group could eventually come under sanctions. It is not unheard of for US sanctions to extend to prominent and profitable private enterprises, even those with no connection to political leaders, simply as a means of generating opposition and imposing additional pressure on a foreign government. The US has sometimes imposed sanctions on such foreign businesses with the justification that those businesses have “benefitted from” the offending policies of the foreign leaders in question—and this sort of justification may be applied to almost any successful business in the foreign country targeted.

Finally, this afternoon Vice President Pence announced that, with the agreement of a temporary ceasefire by Turkey, no additional US sanctions would be imposed. He further stated, “And once a permanent ceasefire is in effect, the President has agreed to withdraw the economic sanctions that were imposed this last Monday." It is far from clear, however, what such a “ceasefire” would have to look like, or whether Congressional leadership will be satisfied enough to forego proceeding with its own sanctions initiative.   

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