In Stratfor's 2018 Annual Forecast, we said that Turkey's economy would be shaky and that it is especially vulnerable to dollar fluctuations. State-backed bank Halkbank is currently under investigation for sanctions violations. Inflation is already high in Turkey, and if one of Turkey's largest banks is cut off from the international financial system, the country's economic situation may worsen.
A recent U.S. court case against a Turkish banker has driven yet another wedge between the United States and Turkey during what has become an exceptionally rocky period in the two countries' relationship. On Jan. 3, a federal jury in New York found Mehmet Hakan Atilla, the former deputy general manager of Turkish state-backed bank Halkbank, guilty of conspiring to defraud the United States, of violating U.S. sanctions law and of committing bank fraud. Atilla, along with eight co-defendants, was accused of helping to circumvent 2012 U.S. sanctions against Iran in a multibillion dollar scheme involving two Turkish banks. In October 2017, co-defendant Reza Zarrab signed a guilty plea deal. In response to the conviction, Turkey's foreign ministry called the trial unfair and said that the verdict was "unjust and unfortunate."
Right now, Turkey's government wants nothing more out of the U.S. judicial system than some traction in its attempts to extradite Islamist cleric Fethullah Gulen, whom Ankara accuses of instigating the country's July 2016 coup. Instead, the United States has delivered a sharp slap on the wrist in the form of an embarrassing trial that implicates a major Turkish bank in what acting U.S. Attorney Joon H. Kim on Jan. 3 called a "massive and brazen" sanctions evasion scheme. And beyond the tension this creates between Ankara and Washington, the case underlines just how determined the United States is to punish sanctions violators. In his statement, Kim declared: "Foreign banks and bankers have a choice. You can choose willfully to help Iran and other sanctioned nations evade U.S. law, or you can choose to be part of the international banking community transacting in U.S. dollars." This case exemplifies Washington's current efforts to implement a harsher, escalating policy against Iran.
As the case continues, Halkbank could face a fine, a penalty or — in Turkey's worst case scenario — a designation on Washington's Office of Foreign Assets Control (OFAC) sanctions list. Since Halkbank is the largest listed bank in Turkey, the third punishment could well damage Turkey's economy. (Turkey's financial sector is worth roughly $791 billion, while Halkbank is worth just shy of 10 percent of that: about $74 billion.) Turkish inflation is now at record levels, and additional limitations on the amount of dollars that can circulate within Turkey's economy will only worsen its economic situation. Over the past year, the ramifications of the sanctions evasion scheme have forced Halkbank to limit some of the transactions it can conduct. A potential full-blown OFAC designation would push the country even further away from dollar-denominated transactions.