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Investors’ relief at ‘mild’ Turkey sanctions masks deeper trouble with US ties



After years of fretting that Turkey would face crippling economic measures for its decision to buy the Russian-made S-400 air defence system, foreign investors reacted with relief to this week’s US sanctions on its defence procurement agency and four senior officials.

“The sanctions are very mild,” said Gilles Seurat, a fund manager at La Française, a Paris-based asset manager. Investors can “at last put this S-400 issue behind us with no economic cost for the country”.

Yet the decision to impose punitive measures on a Nato ally underlines the deep strain between Turkey and its western partners — and serves as a reminder of a thorny foreign policy challenge that Joe Biden will inherit when he takes office as US president next month.

“The Biden administration will still have to deal with the S-400 crisis,” said Asli Aydintasbas, a senior policy fellow at the European Council on Foreign Relations. “It’s a fairly significant thing for a Nato country to be sanctioned by the US . . . Getting to a place where the S-400s are no longer an issue between Turkey and the US will be tough.”

Even if the immediate financial impact of the sanctions was limited, with the embattled Turkish lira enjoying a calm day of trading on Tuesday, the measures risk striking a blow to the burgeoning defence sector that Turkey’s president Recep Tayyip Erdogan has taken great pride in expanding. 

While the country now produces armoured vehicles, tanks, helicopters and armed drones at home, they require foreign parts, such as electronic components and sensors.

Defence analysts warn that western companies may be hesitant about signing new contracts with Turkish companies for fear of falling foul of US sanctions.

“While the Turkish defence industry isn’t going to collapse, it will be inconvenienced,” said Aaron Stein, a Turkey expert at the Foreign Policy Research Institute in Philadelphia. “It will cause some pain.”

That means that Turkey — which had already been suspended from the US-led F-35 fighter jet programme in punishment for the S-400 purchase — was likely to be eager to “get these sanctions lifted”, he added.

There are signs that Turkey is open to negotiation. Mr Erdogan, who has often used harsh language to attack the US, has toned down his rhetoric following Mr Biden’s victory in last month’s presidential election — as well as the prospect of further sanctions from Europe.

Speaking last week, he stressed Turkey’s “deep-rooted political and economic relations with both the United States and the European Union”, adding: “There is no issue that cannot be solved through dialogue and co-operation.”

Yet it remains unclear whether the Turkish president is willing to make the compromises that will be demanded of him in return for the lifting of sanctions and a broader normalisation of US-Turkey ties.

Daniel Fried, a former senior state department official who covered Turkey, said the incoming Biden administration needed to craft a “reset” with the country. “[But] Erdogan’s got to want to do this,” he said, adding that the Trump administration’s sanctions were “designed to push the Turks, but not trash things”.

A clause in this year’s National Defense Authorization Act — a US defence spending bill that was passed by both chambers of Congress last week with a veto-proof majority, but which has yet to be signed into law — stipulates that S-400 sanctions can be lifted only if Turkey “no longer possesses” the Russian-made system.

“That’s never going to happen,” said Mr Stein. “So the Biden administration is going to have to make the case for Turkey. To compromise, Turkey is going to have to do something.”

Mr Stein said that Ankara’s proposals to establish a working group fell far short of what would be necessary for sanctions to be lifted. Turkey could commit never to use the Russian system, which US officials argue poses a serious security threat to Nato technology, but he warned: “If the Turks are going to be intransigent and unwilling to compromise, then even people who want to lift [these measures] . . . are going to have problems.”

There are other obstacles to a reset in relations. The two nations remain profoundly at odds over Syria, where Washington continues to support Kurdish fighters who Turkey view as an existential national security threat. 

In March, Turkey’s state-owned bank Halkbank will go on trial amid accusations that it facilitated an oil-for-gold scheme that violated US sanctions on Iran. A guilty verdict could lead to a multibillion-dollar fine.

Mr Biden, who told the New York Times in 2019 that Mr Erdogan was an “autocrat”, has vowed to prioritise human rights, putting him on a possible collision course with Turkey’s president over his harsh tactics towards domestic political opponents.

The incoming US president will also have to reckon with a Congress that is hostile to the Turkish leader.

Still, advocates of rebuilding the relationship argue that there is much to be gained from strengthening ties with Turkey, which remains a strategically important western partner, and pulling Mr Erdogan away from the orbit of Russian president Vladimir Putin.

Many analysts think that the pragmatic Turkish president will at least embark on the Biden era seeking better relations.

“Erdogan is an astute student of US politics,” said Soner Cagaptay, a senior fellow at the Washington Institute for Near East Policy. “I think the first year will be quite positive.” But he said that irreconcilable disagreements between the two sides were likely to lead to an eventual breakdown. “If the past offers any lessons, I think it will start well but it won’t end well.”

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Coronavirus latest: Boris Johnson extends lockdown restrictions in England to July 19




New York state has the lowest seven-day average Covid-19 positivity rate at 0.44 per cent, governor Andrew Cuomo said, citing Johns Hopkins University data.

On Sunday, the state health department said 383 new positive cases were identified from 110,437 tests – a rate of just 0.35 per cent.

“We’re beating back Covid-19 across the state and New York has the nation’s lowest seven-day average positivity rate, but it’s going to take more vaccinations to get us across the finish line,” Cuomo said.

The state plans to offer “exciting incentives” for vaccinations, he added.

Cuomo said more than two-thirds of New York adults – 67.2 per cent – now had at least one vaccine dose, and 60 per cent were fully vaccinated.

“I encourage everyone eligible who hasn’t yet been vaccinated to take advantage of a free $20 lottery ticket.”

Scholarships in the State University of New York system and City University of New York were also being offered.

The number of new coronavirus cases tallied in the US has remained near levels not seen since the early days of the pandemic, an encouraging decline that has prompted some states to scale back their daily reporting of Covid-19 trends.

Infections, hospitalisations and deaths related to Covid-19 have dropped sharply since a winter surge, brought down by a vaccination rollout that kicked off in December. 

Overall about 64 per cent of American adults have now received at least one shot, according to the Centers for Disease Control and Prevention.

The US has reported 15,928 infections per day in the week ending June 10, which is down about half in the span of one month and 94 per cent from a January peak of nearly 251,085, based on a Financial Times analysis of figures from Johns Hopkins University.

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Hong Kong-Taiwan spat threatens cross-Strait business




Official representation between Hong Kong and Taiwan is set to end this year as mounting political tensions threaten one of the region’s most important trade and investment relationships.

The number of staff in Taiwan’s representative office in Hong Kong has dwindled over the past two years as the territory has stopped issuing visas, with the documents of those who remain due to expire by the end of November.

Hong Kong also abruptly suspended operations of its representative office in Taipei two weeks ago, ending its official presence there. The stand-off has grown so severe that Taipei has begun making contingency plans for a situation without on-the-ground representation in Hong Kong, two senior Taiwanese government officials said.

The breakdown in relations follows rising military tensions between Taiwan and China and a crackdown by Beijing on pro-democracy groups in Hong Kong that has led some activists in the territory to seek refuge in Taipei.

China claims Taiwan as part of its territory and has threatened to annex it if the island fails to submit to its control indefinitely.

Analysts said that cutting official channels would undermine Hong Kong’s traditional role as a conduit for business and financial exchanges between Taiwan and China. Despite the dispute with Beijing over sovereignty, Taiwanese companies are among the largest foreign investors, employers and exporters in mainland China.

Taiwan air force personnel during the visit by President Tsai Ing-Wen
Military tensions between China and Taiwan have escalated, but investment and trade across the Taiwan Strait remains important to both countries © Ritchie B Tongo/EPA-EFE/Shutterstock

A significant part of trade across the Taiwan Strait trade goes through Hong Kong, and many Taiwanese investors in China also use Hong Kong for financial, taxation and legal purposes. Last year, Taiwan was Hong Kong’s second-largest trading partner, while Hong Kong was Taiwan’s fifth-largest, with HK$504bn (US$65bn) in total bilateral trade. Taiwanese companies invested US$912m in Hong Kong in 2020, while Hong Kong-registered companies invested US$555m in Taiwan.

“Hong Kong has been a springboard for Taiwanese companies into mainland China and it has also been a springboard for Chinese [companies] into Taiwan,” said Liu Meng-chun, a research section director at the Chung-Hua Institution for Economic Research, a Taiwanese government-backed think-tank.

Tensions between Hong Kong and Taipei have escalated over the past two years after the territory started demanding Taiwanese diplomats sign documents declaring their country part of China as a precondition for being issued a visa.

After Taipei refused, the number of staff at its office in Hong Kong began to dwindle, from 20 to eight today, according to the Mainland Affairs Council, Taiwan’s cabinet level China policy body.

Hong Kong, meanwhile, said it was temporarily closing its Taipei office because “Taiwan’s series of actions in recent years has severely damaged Hong Kong-Taiwan relations”.

A Hong Kong government official suggested the suspension came on instructions from Beijing.

“I think Beijing is of the opinion that [Taiwan’s representative office] affects national security,” said Sung Yun-wing, an economics professor at the Chinese University of Hong Kong, who is also a member of a semi-official think-tank, the Chinese Association of Hong Kong and Macao Studies, in Beijing.

“There have been reports that Taiwan has been encouraging the protest movement in Hong Kong, which has turned violent, so the protest movement is not only against the Hong Kong government but also Beijing,” said Sung. He added China was also concerned Taiwan was “sheltering” Hong Kong protesters.

While Taipei has been careful to avoid being seen as making it too easy for Hong Kong dissidents to flee to Taiwan, civil society groups in the country have supported the protest movement with advice, money and logistics. “This is something we cannot interfere with as they have done nothing illegal,” said a senior Taiwanese China policy official.

Historically, Hong Kong’s most important economic role in the Taiwan-China trade has been as a sea and air trans-shipment hub for Taiwanese companies to supply their factories in southern China with components.

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While analysts suggested that much of this commerce could continue even if official ties between Taiwan and Hong Kong were severed, they foresaw a sizeable impact on financial services, tourism and education.

“Hong Kong plays a very important role for Taiwanese private wealth management,” said Patrick Chen, head of Taiwan research at CLSA, the brokerage.

He said many Taiwanese individuals had accounts in Hong Kong, where the local units of Taiwan’s banks offered them offshore investment products not accessible under the island’s stricter regulations.

Liu of the Chung-Hua Institution for Economic Research said many Taiwanese enterprises kept profits from their China operations with their Hong Kong affiliates for tax purposes.

“These things would become a lot more cumbersome without official representation because you would have to start sending documents back and forth for notarisation,” Liu said.

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Nato leaders fret China’s Atlantic ambitions




China’s growing military and economic presence in the Atlantic region is expected to trigger a rare warning from Nato leaders about the potential security threat when they meet on Monday, diplomats said. 

From joint Chinese drills with Russia to western worries that China wants to set up military bases in Africa, the Nato focus reflects China’s primacy among western foreign policy concerns, in particular those of US president Joe Biden.

“This is not about ‘Nato going to China’,” said Claudia Major, a defence analyst at the German Institute for International and Security Affairs. “It’s about ‘China is coming to Europe and we have to do something about it’.”

In 2015, joint military drills with Russia brought the Chinese navy into the Mediterranean and the heart of Europe for the first time. Since then, China has built up the largest naval fleet in the world and invested in critical European infrastructure, including ports and telecoms networks.

“China [through its navy] has come through the Indian Ocean, into the Gulf, up to the Red Sea and they’ve been in the Mediterranean,” according to one British military official, who said China had not yet deployed submarines in the north Atlantic but could do so in future.

“You build nuclear submarines for range and stealth. And China does like to test the boundaries.”

The planned joint statement by the transatlantic security alliance, which diplomats said was still under discussion and subject to change, would be only the second time that Nato leaders have addressed the subject of China head-on. The first was in December 2019, at the insistence of the administration of Donald Trump.

But Biden is understood to be pushing for tougher language than the bland “opportunities and challenges” terminology used that time.

Nonetheless, how to deal with the issue represents a dilemma for the 30-member group, which was originally set up in 1949 to deal with cold war-era threats.

Internally, Nato countries are divided over how to treat China: member Hungary, for one, has good political relations with Beijing.

In addition, there is reluctance to confront Beijing in its own Pacific region — although the UK and France have followed the US in deploying ships to carry out freedom of navigation exercises in the South China Sea.

Chinese and Russian marines take part in joint exercises in China’s Guangdong province
Chinese and Russian marines take part in joint exercises in China’s Guangdong province © Li Jin/Getty

China’s joint military operations with Russia are viewed as a particularly unwelcome development by some Nato members. As well as their annual military exercises, Beijing and Moscow have recently added joint missile defence drills and training for internal security forces.

“Their [the Chinese/Russian] relationship is transactional and pragmatic rather than ideological,” the UK military official said. “But working together in any form provides confidence. And confidence is something we should be wary of.”

As the Center for a New American Security, a bipartisan US think-tank, warned in a January report: “Where Russian and Chinese interests align, Moscow and Beijing could eventually co-ordinate their combined capabilities to challenge US foreign policy.”

Another Nato anxiety is Africa, which China could use to expand its military presence in the Atlantic as part of its long-term goal to become a truly global armed force.

Gen Stephen Townsend, head of US Africa Command, told the US Senate in April that his “number-one global power competition concern” was what he described as Chinese efforts to establish a militarily useful naval facility on Africa’s west coast. “I am talking about a port where they can rearm with munitions and repair naval vessels,” he said.

Experts on the Chinese military said there was no evidence that Beijing was trying to establish such a west African base, yet. However, China has a base in Djibouti and has already used international anti-piracy missions in the Gulf of Aden to train thousands of military personnel and to build military relations with countries outside its usual neighbourhood.

Each time a naval contingent finishes deployment, for example, it typically takes a detour on the way home. Some have visited the Mediterranean and the east and west coasts of Africa.

Another trend vexing Nato allies is the growing involvement of Chinese companies in critical infrastructure in Europe, such as through telecommunications company Huawei.

Chinese state shipping company Cosco also owns a controlling stake in Piraeus, Greece’s largest port, and is reportedly in talks to invest in a Hamburg port terminal.

Such economic ties complicate Nato’s efforts to create a unified approach on China — as do the political relationships between Beijing and friendly European leaders.

That creates the potential for clashes, with the tougher stance of Washington and Jens Stoltenberg, Nato’s secretary-general, who last month warned that China was “coming to us” in areas including cyber space, Africa and the Arctic.

“There is a risk that having this discussion within Nato surfaces very uncomfortable differences between allies on how much China is actually perceived as a threat,” said Sarah Raine, an expert in geopolitics and strategy at the International Institute for Strategic Studies.

“The fact is that there are countries which are seen by hawks as making very pro-China arguments within Nato, at least with regards to being robust but not confrontational.”

Additional reporting by Katrina Manson in Washington

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