We detailed below that TRY was selling off on US accusations that the Turkish economic minister of taking bribes.
Citi’s FX desk explains why Turkish markets are watching the US trial of a banker so closely.
The basics: The US government has accused Turkish banker Mehmet Hakan Atilla of helping Iran evade US sanctions.
Turkey’s former economy minister, Zafer Caglayan, and two other banking executives, have been charged in absentia but Atilla is the only one on trial.
Why it matters: It’s about the implications this has for US/Turkey diplomatic relations. Bloomberg has a good explainer here: ‘The focus will be on whether [Zarrab] implicates Turkey’s banking system or the highest levels of its government.’ The worst case scenario would hypothetically be where the trial results in diplomatic penalties to Turkey and its banks.
An October 30 document submitted to the court by federal prosecutors in New York said that the US “anticipates that the evidence introduced at trial will show that Turkish government and banking officials were integral to the sanctions evasion scheme.” Still, it’s too early to tell, and we watch the wires closely for the latest developments.
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As we detailed earlier, while long forgotten for some, in the summer of 2014, we reported in detail on what appeared to be the biggest, most bizarre money-laundering scheme ever, involving Turkey trading “200 tons of secret gold” with Iran…
The topic of Turkey’s Oil-for-Gold ‘deals’ has not been far from our thoughts over the last few years (here, here, and here) but as Bloomberg reports, after accessing a report leaked on March 14 of a network that spanned Turkey, China, Dubai and Iran, the plot reveals “one of the most complex illicit finance schemes [prosecutors] have seen.” It included the classic money-laundering techniques of over-invoicing and false invoicing (exactly as in the case of the Chinese commodity financing scandal underway) but the secret government plan to juice Turkey’s exports goes much deeper; and if you think that the exposure of this scheme is slowing Turkey’s manipulation, think again. Turkey’s trade balance continues to fluctuate unpredictably as gold stocks flow out of the country in bursts. “Turkey’s going to continue it,” the Turkish economy minister said. “If those casting aspersions on the gold trade are searching for immorality, they should take a look in the mirror.”
We first started noticing major ‘odd’ exports of gold from Turkey to Iran in May 2012. But in 2013, with a plunging currency, surging inflation, slowing growth, and specter of rapid QE-driven hot money outflows leaving his nation desperate; Zafer Caglayan, the minister in charge of Turkey’s $800 billion economy decided that the only way to ensure success in the looming election… was to cheat…
A farcical domestic investigation was undertaken and while the judges and officials who probed the money laundering scheme were either fired or reassigned, the findings in their report were leaked.
The leaked document that Erodgan tried so hard to hide, prepared by the Turkish National Police, shows that investigators probed the activities of a cast of characters that was both powerful and dependent upon each other for favors. There have been some arrests (but no politicians).
The first was Sarraf, the Iranian businessman, who changed his name from Reza Zarrab after he took Turkish citizenship in 2007.
He and Erdogan were photographed on stage together at one public function, and met at a wedding in Ankara.
After Sarraf was arrested in December, Erdogan told reporters that his gold-dealing had “contributed to the country.”
Then, three years later, Bloomberg reports that Zarrab – the gold trader accused of helping Iran evade sanctions – invoked the name of Turkey’s president, Recep Tayyip Erdogan, as part of a scheme that U.S. prosecutors say was supported by Turkey’s government, according to court documents.
U.S. prosecutors in New York have gathered taped conversations and other records that suggest the trader may have sought support from Erdogan.
The Turkish president hasn’t been accused of wrongdoing, and it’s possible that the trader falsely invoked Erdogan’s name to influence others.
The people charged in the case are captured in the recorded conversations, which were introduced in a filing in federal court in Manhattan.
The documents introduced in the sanctions and money-laundering case against the Turkish-Iranian gold trader, Reza Zarrab, could further complicate the relationship between the U.S. and Turkey, a majority-Muslim country long considered a crucial ally in the region.
And now, the day that Turkish President Erdogan has been most fearful of has arrived, despite his best efforts to block it. Erdogan tried to pressure U.S. officials during the Barack Obama and Donald Trump administrations to drop the prosecution of the trader and has complained in public comments that prosecutors were trying to extract a confession from Zarrab and turn him into an informant. He also claimed President Trump apologized for the prosecution in a phone call.
“Erdogan clearly has a strong personal interest in Zarrab’s case, as he has raised it at the highest levels of both the Obama and Trump administrations,” said Amanda Sloat, a senior fellow at the Brookings Institute and former State Department official overseeing U.S.-Turkey relations.
“U.S. judicial proceedings could also hurt the Turkish economy. Since much of Erdogan’s popularity resulted from his successful economic reforms, his domestic political support would be undermined by a downturn.”
AP reports that a U.S. prosecutor says Turkish gold trader Reza Zarrab has pleaded guilty to charges and will reveal at a New York trial how he helped Iran evade U.S. sanctions in an “economic jihad.”
Assistant U.S. Attorney David Denton said Tuesday that Zarrab will be a key witness against Turkish banker Mehmet Hakan Atilla.
The prosecutor said the scheme to evade U.S. sanctions against Iran since 2011 enabled billions of dollars to be moved and threatened U.S. security.
Defense attorney Victor Rocco attacked Zarrab’s credibility in his opening statement, saying the case was really about Zarrab’s crimes.
He said Zarrab made a deal to get out of jail free, possibly joining the U.S. witness protection program so he and his family can live in the United States.
This sparked a plunge near record lows for the Lira (and sent bond yields spiking to record highs)…
Turkish officials remain furious, claiming that the U.S. trial is a “play” staged with the help of a U.S.-based cleric.
Mahir Unal, a deputy chairman of President Recep Tayyip Erdogan’s ruling party, on Tuesday also described the case as a “political” one lacking legal basis.
Unal renewed a Turkish government claim that U.S. judicial officials were cooperating with cleric Fethullah Gulen’s network against Turkey.
He said: “We know who staged this play and what its aim is.”
Ultimately, the case is a test of U.S.-Turkish relations, already at one of the lowest points in the countries’ longstanding alliance, with analysts questioning how close the charges might get to Erdogan himself… and by the look of today’s opening statements, and the responses from Turkey, they are worried!
Bloomberg answers: What are the implications for the Turkey-U.S. relationship?
The U.S. “anticipates that the evidence introduced at trial will show that Turkish government and banking officials were integral to the sanctions evasion scheme,” according to an Oct. 30 document submitted to the court by federal prosecutors in New York. Embarrassing revelations of corruption or criminal activity are sure to further stress ties, already at their worst in recent history. Turkey blames Fethullah Gulen, an elderly Muslim cleric who’s been based in the U.S. since 1999, for the 2016 coup attempt against Erdogan. President Donald Trump’s first national security adviser, Michael Flynn, is said to be under investigation for allegedly plotting to seize Gulen and deliver him to Turkish officials. Further complicating the situation, Turkey hired two close allies Trump — former New York City Mayor Rudy Giuliani and former U.S. Attorney General Michael Mukasey — to try to broker a resolution of the case that’s reaching trial.
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