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Cold Turkey: Will new EU sanctions freeze out more investment?

Andrew Hood
15/11/2019

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United Kingdom

A fresh set of economic restrictions aimed at penalising Turkish oil drilling off the coast of the contested territory of Northern Cyprus have added further complexity to the already convoluted network of EU sanctions which businesses must navigate.

For investors that may have felt reassured by US President Donald Trump's decision not to impose tough sanctions against Turkey last month, a recent decision by EU foreign ministers will necessitate a rethink. 

On 11 November, EU ministers agreed a legal framework for issuing economic sanctions over Turkey's exploratory drilling for oil and gas in the East Mediterranean, off the northwest coast of Cyprus. 

The EU described the drilling as "illegal", while Turkey claims it is operating in waters on its own continental shelf or in areas where Turkish Cypriots (who reside in the disputed and internationally unrecognised Turkish territory of Northern Cyprus) have rights.

The EU's framework for restrictive measures essentially make it possible to sanction persons or entities responsible for operating or assisting hydrocarbons drilling not authorised by Cyprus (as distinct from Northern Cyprus), within its territorial sea, exclusive economic zone or continental shelf.

Following Turkey's military operations in Syria last month, the US pledged to issue substantial and wide-ranging sanctions against Turkey, including secondary sanctions on those engaging in "significant transactions" with designated persons. 

In fact, the Executive Order only targeted a limited number of Turkish officials and ministries and reinstated previous steel tariffs.

More forceful sanctions were instead put on ice, indicating a reluctance by the Trump administration to antagonise Turkey's strongman president, Recep Tayyip Erdoğan.

With the threat of US sanctions still simmering in the background, the EU's announcement reminds companies operating or investing in Turkey (or considering doing so) that the geopolitical mood towards the country is more difficult to read than ever. 

At this stage, the EU's sanctions do not target any Turkish officials or companies, but does freeze preferential treatment for Turkish agriculture exports to the EU.

EU member states, which voted unanimously in favour of this new sanctions regime, will now put forward names of those they think should be listed under the framework.  It is understood that this two-step approach is intended to give Turkey a chance to cease drilling before any measures come into force, however Erdoğan's response to the EU's sabre rattling thus far suggests Turkey is unlikely to back down.

Companies with existing or planned investments with those operating or assisting hydrocarbon drilling targeted by these measures will want to understand the exact scope and potential impact of these sanctions and closely track any EU decisions that name targets and give these sanctions real teeth

To speak to our sanctions team about how this recent development may affect your businesses and what steps you can take to mitigate its impact, please contact Andrew Hood.