U.S. sanctions could hit Turkish defence sector hard

While President Recep Tayyip Erdoğan appears determined to defy the United States and acquire S-400 surface-to-air missiles from Russia, Turkish defence companies are likely to be hurt by U.S. measures that could start with being shut out of building F-35 advanced fighter jets and extend to sanctions damaging other defence and civil aviation projects.

In a letter sent to Turkish Defence Minister Hulusi Akar two weeks ago, acting U.S. Secretary of Defense Patrick Shanahan set July 31 as the deadline for Ankara to drop plans to acquire the Russian missiles, or be ejected from the F-35 programme for which Turkey produces 6 to 7 percent of the parts. NATO says Russia could use the S-400s to glean sensitive information on F-35 defences if Turkey deploys both weapons systems.

U.S. Undersecretary of Defense for Acquisition and Sustainment Ellen Lord said on Monday that U.S. authorities had been looking at potential sanctions against a wider range of Turkish firms under the U.S. Countering America’s Adversaries Through Sanctions Act (CAATSA). The Pentagon plans to end Turkey’s manufacturing role in the project by early next year, Reuters said.

Achieving strategic autonomy in the defence sector is one Erdoğan’s main targets for the 100th anniversary of the foundation of the republic in 2023. Turkey’s existing defence strategy relies on co-production arrangements and technology transfers that it hopes in time will free it from its dependency on the United States and Europe.

Turkey’s military expenditure increased by 65 percent between 2009 and 2018 to $19 billion. Last year, Turkey made the biggest increase in military expenditure among the top 15 global military spenders with a 24 percent rise, according to Stockholm International Peace Research Institute. The Turkish Defence and Aerospace Industry Manufacturers Association (SASAD) said Turkey’s defence exports increased by 17 percent in 2018 compared to 2017 to $2 million, with $698 million of exports to the United States and $521 million to European countries.

This is not the first time Turkey is facing the risk of U.S. sanctions due to its military procurement, said Sıtkı Egeli, an academic at the Izmir University of Economics and former foreign relations director of Turkey's Undersecretariat for Defence Industries. 

In 2013, Turkey’s decision to choose a Chinese company to supply a $3.4 billion long-range missile system raised similar concerns among its Western allies. Turkish companies faced sanctions as a result.

“Turkey experienced first-hand the unexpected consequences of this. For example Turkey’s largest defence company was denied receiving services from a U.S. finance institution for a public offering,” Egeli said.

This time Turkey not only faces the risk of sanctions, but also a possible collapse in its established alliances with the West and that could put its defence industry in jeopardy. Turkey’s existing defence products and its manufacturing and technology infrastructure are fully structured around its alliances with the West.

According to SASAD figures, almost 40 percent of intermediate defence goods, including some critical technologies, have been procured from abroad. Abandoning decades of cooperation and procurement from Western companies and restructuring the industry with other producers with different standards would be a very painful process, Egeli said.  

The United States froze Turkey’s participation in the F-35 joint manufacturing programme in April. Eight Turkish contractors building 937 parts for the stealth fighter will be directly affected by the decision; Alp Aviation, Ayesas, Havelsan, Roketsan and Tubitak-SAGE, Turkish Aerospace Industries (TAI), Kale Aerospace, and Fokker Elmo. The production of an advanced precision-guided missile, involving Roketsan and Tubitak-SAGE in particular is regarded as a critical project for the Turkish defence sector.

“The Turkish firms in the F-35 programme are expected to lose each a minimum of 30 percent of their annual turnovers and they are concerned that other defence procurement projects with the United States will also be affected in time,” a senior official of a Turkish defence firm told Ahval. “The companies at the moment are considering all other options including moving production to other countries,” the official said.

CAATSA includes prohibition on loans and export-import bank assistance, restrictions on procurement of goods and services and denial of visas. The law also gives U.S. authorities the power to deny export licenses and impose restrictions on bank payments.

If the United States extends sanctions, other Turkish-U.S. co-production projects could be terminated or suspended. For example, TAI, which supplies F-35 centre fuselages and other parts, signed a contract with U.S. manufacturer Sikorsky in 2014 to produce T70 utility helicopters, based on the Black Hawk, in a deal with some $3.5 billion.

According to the contract, TAI will also deliver an equal number of baseline S-70i Black Hawk aircraft for export to Sikorsky over 30-years. TAI is also the subcontractor in the Boeing-led Peace Eagle airborne early warning and control programme for Turkey. In 2009, Raytheon picked Roketsan as the U.S. company's first major trans-Atlantic supplier for Patriot batteries and in 2014 the two companies signed a new contract according to which Roketsan produces control units for Patriot’s GEM-T Air Defence Missile systems.

Financial measures against Turkey’s defence industry could also include airport operators and civil aviation companies. European companies would also likely not want to risk jeopardising their business with the United States and so cut joint defence projects with Turkey.  

A mock-up of Turkey's first combat jet, developed by TAI with technological assistance from Britain’s BAE Systems, made its debut at the Paris Air Show on Monday. But in order to fly, the aircraft needs an engine that was to be developed by Turkey’s Kale Group and Rolls Royce, according to a $133 million deal signed in 2017. However, the British engine maker announced in March that it had scaled back the project, which for Kale group was also an important step towards entry into the civil aviation market.

In civil aviation, Turkey’s TAI last year signed a new agreement with Boeing to produce parts for the 737 MAX, while the United States is Turkey’s number one trading partner for civilian aircraft and components, according to SASAD.

If U.S. sanctions extend to civil aviation projects, Turkey’s total exports in defence and aviation could fall by as much as 50 percent, or by $1 billion a year, Egeli said. Sanctions could hamper Turkey’s military capabilities and affect its F-16, attack helicopter and drone projects, which play crucial roles in its military operations, the analyst said.

Turkey’s acquisition of Russian missiles could also cost jobs. According to SASAD, 67,000 people were employed in Turkish defence companies in 2018, 24 percent them engineers. Turkey already does not have the human capital it needs to achieve government targets, according to some analysis, while a parliamentary motion last year revealed that 272 defence industry officials, mostly senior engineers, had left for jobs abroad.

Some analysts said the defence industry brain drain was related to a lack of rights, restrictions on research and development opportunities, and the purge of government on opponents following the 2016 failed coup.

U.S. sanctions could now also add to the list of concerns. “Many people are resigning from their jobs and moving abroad with their families due to concerns over visa restrictions,” said the Turkish defence company official.

The opinions expressed in this column are those of the author and do not necessarily reflect those of Ahval.