Turkey exudes confidence but investors fear fresh sanctions threat
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Emerging Markets

Turkey exudes confidence but investors fear fresh sanctions threat

Investors in Turkey enjoyed some relief after the government agreed to withdraw from northern Syria. The country’s finance ministry has told GlobalMarkets it is confident but some fears that measures passing through the US Congress could lead to fresh sanctions being imposed that one said was a threat

Investors were on a knife edge last night as the government insisted that it had avoided the risk of US sanctions while independent analysts warned the measures moving through Congress could have devastating consequences.

Turkish assets enjoyed a strong rally after Turkey agreed to withdraw troops from northeast Syria, easing tensions with the Trump administration. “Following the agreement between Turkey and the US, we do not expect any sanctions to be imposed,” Bülent Aksu, Turkey’s deputy finance minister told GlobalMarkets yesterday. The US has repealed the sanctions it imposed this week by executive order. 

But while Aksu was confident, some investors were still worried. A bill proposed by US senator Lindsey Graham that includes sanctions on Turkish sovereign debt is still making its way through the Senate. If imposed, investors say the consequences for the Turkish economy would be severe.

Aksu said he was confident the congressional sanctions bill would not be passed. “The proposed sanctions by the Senate need to go all the way through legislation process, and we do not expect to see them enacted, as the US Government is committed to stop the existing sanctions and to not implement new ones,” he said. “So, we are not worried about any sanction on our sovereign borrowing.”

Although Turkey is confident in the US executive branch’s support, discontent is clearly formenting in Congress. Two US senators, Jim Risch and Bob Menendez, will introduce “new comprehensive legislation in response to Turkey’s military incursion into northern Syria and attack on America’s partners in northeast Syria, including the Kurds”.

The aims of the bill include a “report on potential Turkish war crimes during the Syrian incursion”.

Halkbank sanction threat

An emerging markets focused investor said: “While the pressure is off Turkey for now, US Congress clearly poses a threat. While Trump is friendly, his position has been weakened by impeachment proceedings, and he cannot afford to expend political capital on protecting Turkey indefinitely.”

Turkey has also reiterated that the suspension of military activity in Syria is a “pause” rather than a ceasefire. If hostilities resume, the US/Turkey diplomatic relationship could worsen rapidly.

The news of Turkey’s withdrawal from Syria prompted a 1% strengthening of the lira and a 3.5% bump in Turkish stocks. However, while Turkey’s deal with the US precludes further executive sanctions over its military action in Syria, potential sanctions could still be imposed over Halkbank, a Turkish bank accused of circumventing US sanctions on Iran. One emerging market investor said: “The Halkbank case is far from over, and could be seriously damaging to Turkey.”

Aksu believes the investigation so far has not been conducted satisfactorily, accusing the US Attorney’s office of failing to take into account the evidence provided by Halkbank and refusing to interview key witnesses proposed by the bank.

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