When Sanctions Aren't Enough

If NATO wants to stanch Russian adventurism in Eastern Europe, it needs a comprehensive security plan (and fast).

It should be clear now that the West has a Russian security problem. Twice in the last six years, the Kremlin has seized territory in a neighboring country on the grounds of protecting minorities or ethnic Russians and Russian speakers. In each instance, the rejoinder from the West proved to be inadequate. Now, this threat demands a broad response that goes beyond the steps taken to date, that will deter the Kremlin from further aggression.

In 2008, the victim was Georgia. The Russian army took control of South Ossetia and Abkhazia and recognized their declarations of independence. This past winter the victim was Ukraine. Russian troops seized Crimea and proctored a dubious referendum in which 97 percent of the voters allegedly chose annexation by Russia. Less than one week after the vote, the Russian government formally "annexed" Crimea.

Russian President Vladimir Putin has since declared that he has no further territorial designs on Ukraine. In his March 18 speech in the Duma, however, he noted that the Bolsheviks in 1918 gave to Ukraine the "historical South of Russia" (a swath of land from Kharkiv, Luhansk, and Donetsk in Ukraine's northeast stretching southwest to Odessa) with "no consideration for the ethnic makeup of the population." He reiterated his intention to protect Russians abroad and expressed concern about the "ongoing disorder" in Ukraine. Yet it is the Kremlin that continues to send in clandestine agents to stir up unrest and continues to marshal large military forces near Ukraine's eastern border.

Putin has shown a willingness to violate sovereign borders, Russian obligations, and international law. Having declared himself the protector of ethnic Russians and Russian speakers outside of Russia, he has used this principle to pressure neighboring governments and to change territorial borders by force.

The question now is how the United States and NATO should respond. President Barack Obama has designed financial sanctions to chasten the Kremlin for its aggression against Ukraine, and the European Union has followed suit. But Obama now needs to lead NATO in developing a security response -- the West needs to take seriously the possibility of future Russian aggression.

There are many countries at risk from Kremlin trouble making "on behalf" of ethnic Russians. Of most immediate concern to NATO are its Baltic members. Ethnic Russians make up 28 percent of the population in Latvia and 25 percent in Estonia (and 6 percent in Lithuania). NATO should consider measured steps to increase its defensive capabilities in the Baltic states, for example by providing anti-aircraft missiles and anti-armor systems. Putin's aggressive concern for ethnic Russians is also a danger to the states of Central Asia. Ethnic Russians number 23 percent of Kazakhstan's population, concentrated in the north along the border with Russia.

The U.S. decision to increase the contingent of F-15s in Lithuania and dispatch F-16s to Poland were smart steps to assure nervous Central European allies, but more is necessary. NATO should continue to commit at least 10 fighters -- the number of U.S. F-15s now in Lithuania, up from the usual four NATO fighters -- to the Baltic air-policing mission for the foreseeable future.

At the same time, NATO should review its policy on its eastern flank. In 1997, it affirmed that "in the current and foreseeable security environment, the Alliance will carry out its collective defense and other missions by ensuring the necessary interoperability, integration, and capability for reinforcement rather than by additional permanent stationing of substantial combat forces." Putin's actions have dramatically altered the European security environment; the Alliance should consider whether it should change its policy in response.

NATO attention should not exclude its southeastern flank. Cynical Kremlin exploitation of ethnic Russian minorities makes Transnistria in Moldova, Romania's neighbor, a potential flashpoint.

The point of this review and the deployments to NATO's Baltic and Central European members is to deter further Russian aggression and to signal to the Russian General Staff that the seizure of Crimea has complicated their strategic position.

In parallel with the above steps, NATO should freeze all arms sales to Russia. The German government announced last week that it would not proceed with the sale of an advanced combat simulator to the Russian army. The French should cancel, or at a minimum suspend, sale of Mistral-class helicopter assault ships to the Russian navy.

There is no expectation that American or NATO forces should defend Ukraine from further Russian invasion. But there is every reason to help Ukraine to defend itself. First, the West should help Ukraine guard itself from Russian subversion. It should provide border control equipment and training to help Kiev keep Russian agitators and provocateurs from entering the country. Second, the West should also share intelligence with Ukraine about Russian efforts to destabilize the country and Russian military plans threatening Ukraine. Third, NATO should conduct regularly scheduled joint exercises in Ukraine. Finally, should the Russian military continue its threatening stance, NATO should provide anti-tank and anti-aircraft weapons, and appropriate training, that would raise the costs of any further aggression against Ukraine.

The Kremlin's aggressive new posture could threaten other states on its border, including Georgia and energy-rich Azerbaijan. Kazakhstan -- where 23 percent of the population, or higher along the northern border with Russia, is ethnic Russian -- also might be vulnerable. Uzbekistan in the past has had concerns about Russian ambitions in the Central Asian region. Key NATO members should consult with the governments of these countries on the implications of Moscow's apparent new policy.

These steps would bolster NATO security, strengthen Ukraine's ability to resist aggression, and offer political support to other countries made nervous by Putin's recent actions. More pointedly, such a show of strength could discourage the Russian leader from more Crimeas.



Turkey's Teflon Don

As new corruption allegations swirl around Prime Minister Recep Tayyip Erdogan, how long can his election mandate protect him?

Turkish Prime Minister Recep Tayyip Erdogan triumphantly addressed thousands of supporters Sunday night from the balcony of his party's headquarters in the capital of Ankara. He thanked his supporters for "protect[ing] the ideal of a great Turkey" and promised to deal decisively with his enemies. Despite a litany of leaks that raised questions of corruption within the top ranks of his government, Erdogan's ruling Justice and Development Party (AKP) secured a comfortable victory in the country's municipal elections, which were largely viewed as a referendum on Erdogan himself.

With a grueling campaign behind him, Erdogan is riding high. But even if he increasingly looks bulletproof among Turkey's electorate, he still should be worried about how the most recent corruption allegations will damage Turkey's sagging standing in the West. Two weeks ago, a Turkish prosecutor's report that included 300 pages of corruption allegations against his government leaked to local media. The leak was undoubtedly an attempt by Erdogan's enemies to weaken him before the elections -- the top suspect is presumably followers of Pennsylvania-based cleric Fethullah Gulen, who have been accused of leaking damning recordings of top Turkish officials discussing everything from how to hide millions of dollars to whether to provoke a war with Syria.

The prosecutor's report sheds further light on Turkish involvement in a money-laundering scheme that helped Iran evade international sanctions. It has already been revealed that Turkey helped Iran profit from some $12 billion in illicit gold sales between 2012 and 2013 -- but the scope of the money laundering is now alleged to be even greater. The prosecutor's report charges that a raft of front companies and intermediaries across Turkey -- with help from entities in Dubai and China -- helped launder Iranian oil and gas revenues.

Due to U.S. sanctions, Iran's foreign currency was locked up in escrow accounts overseas that the regime could only use in local currency to buy local products. Turkey now appears to have been Iran's country of choice to circumvent these strictures. The bulk of this illicit activity appears to have been between 2012 and 2013; it's unclear whether it is still ongoing.

As the report explains, Turkish front companies issued invoices for fake transactions for goods such as food and medicine that were permissible for Iran under international sanctions. For example, the report cites one May 2013 invoice detailing a luxury yacht company selling nearly 5.2 tons of brown sugar to Iran's Bank Pasargad, with delivery to Dubai, using Turkey's state-owned Halkbank at the whopping price of 1,170 Turkish lira per kilo -- the equivalent of approximately $240 per pound. This is a classic example of a money-laundering technique called over-invoicing, which "allows illegal organizations the opportunity to earn, move and store proceeds disguised as legitimate trade," as the U.S. Immigration and Customs Enforcement's website puts it. 

In this way, at the height of the sanctions regime designed to deprive Iran of cash, Iranian banks accumulated untold sums in hard currency from Halkbank, where Iranian funds from oil and gas sales to Turkey were held in escrow, only to be transferred as approved transactions. Indeed, the bank transaction receipts in the prosecutor's report include assurances that the "goods and services are not related to EUR Reg 423/2007 and 428/2009" -- the European legislation restricting authorized exports to Iran.

The Turkish network bypassed past sanctions offenders, which had already been cut off from the financial system, and instead moved funds through companies in Turkey and money exchange houses in Dubai (which may well have converted the Turkish lira to more universally accepted currencies, like dollars or euros). The funds eventually made their way to the handful of Iranian banks -- including Karafarin, Pasargad, Parsian, Saman, and others -- that were not cut off in 2012 from the SWIFT electronic transfer settlement platform.

The Iranian money also passed through China. The prosecutor's report, along with a leaked document believed to have been issued by Turkey's National Intelligence Organization (MIT in Turkish), further asserts that Turkey was working with Chinese banks to process transactions that helped Iran circumvent sanctions. It is unclear whether the banks were aware of this. Nor is it clear whether the five China-based international trading firms were cognizant of their role in the complex financial scheme -- but the prosecutor's report specifically demonstrates that there were millions of dollars moved to Iran in bank transactions involving several of these entities. The proof comes in the form of actual SWIFT receipts.

The prosecutor's report further alleges that several Dubai-based entities played an integral role in Turkey's illicit scheme with Iran. Al Nafees Exchange and Al Massoumi General Trading, based on phone transcripts, are alleged to have issued forged invoices to other companies involved in the scheme.

The prosecutor's report also confirms countless stories out of Turkey that identify Reza Zarrab, an Iranian with Turkish nationality, as the linchpin of this scheme. Barely 29 years old at the time of his arrest, Zarrab rose quickly from obscurity to celebrity gossip status by amassing a fortune and splashing it around. He boasted a pop-star wife, yachts, private jets, a $72 million villa, and a racehorse (registered in his wife's name) aptly named "Duty Free." Zarrab apparently financed his lavish lifestyle by leveraging a complex web of companies -- sometimes officially owned by close associates -- to rake in healthy commissions on Iranian transactions.

The report identifies Zarrab's parent company as Royal Holding, which Zarrab established in 2010. The report cites intelligence gathered by the Financial Crimes Investigation Board (MASAK), noting that, "Royal Holding's subsidiaries Durak Döviz, Tural Ltd. Sti. and Pirlanta Ltd. Sti have been exporting gold bars to Iran and Dubai … with their export revenues buying more gold bars from banks and … mediating the flow of money from Iran-related trade activities in and out of Turkey."

This was apparently a family business: The report also singles out Zarrab's brother and father as figures who allegedly profited from these financial dealings. Another individual mentioned was Taha Ahmet Alacaci, who was reportedly once a partner of Zarrab, but after a falling-out with the Iranian gold trader has apparently gone on to become a competitor, with a network of companies across Turkey.

From all indications, many of the companies listed in the report are still active today in Turkey. Almost all of them are based in Istanbul. Of the approximately two dozen Turkish companies mentioned in the report, 11 hail from the Istanbul neighborhood of Fatih, an Islamist stronghold. In fact, six are on the same street in that neighborhood.

It is areas like Fatih that gave the AKP an edge in Sunday's election for Istanbul's mayoralty. With the win, Erdogan will undoubtedly view the elections as an indication that he does not have to answer for the financial crimes alleged against his government.

But this is not entirely true. Washington recently identified Turkey as posing a risk to the international financial system. And that was merely a response to Ankara's insufficient technical and legislative capabilities to counter terrorism finance. As the prosecutor's report winds its way through Washington and other Western capitals, uncomfortable questions about Turkey's illicit finances continue to cast doubt on the country's value as a reliable and trustworthy ally. As the leaks continue -- through Twitter, YouTube, or other media -- these questions will only continue.