Erdogan says US sanctions would 'disrespect' Turkey

President Tayyip Erdogan said on Friday U.S. sanctions over Turkey's purchase of Russian S-400 missiles would be disrespectful of a NATO ally, after sources said Washington was poised to take the step likely to worsen bilateral relations.

Turkey's lira tumbled nearly 2% after Reuters, citing sources, reported U.S. sanctions are set to be announced as soon as Friday and target Turkey's Defense Industries Directorate.

They would be enacted by U.S. President Donald Trump as President-elect Joe Biden prepares to take office on Jan. 20, and could test diplomacy already strained by disputes ranging from the conflict in Syria to a Turkish cleric living in exile in the United States.

"For America to get up and confront Turkey with a matter like CAATSA is disrespectful to a very important NATO partner," state-owned Anadolu agency cited Erdogan as saying of the so-called CAATSA sanctions, which target weapons deals with Moscow.

"After the U.S. transfer of power we will no doubt see the trend much more clearly," Erdogan added of the coming Biden presidency. "So it is for us to be patient and see."

Turkey's economy and ties with the West could come under more pressure from a separate agreement by European Union leaders to apply sanctions over offshore Mediterranean claims - another move rejected by Ankara.

The lira, which has hit a series of record lows and is among the worst performers in emerging markets this year, weakened past 8 to the dollar for the first time in two weeks.

A 25% currency depreciation has worsened economic fallout from the coronavirus pandemic this year, and exacerbated Turkey's depleted FX reserves and double-digit inflation.

Ankara acquired the S-400 ground-to-air defenses in mid-2019 and says they pose no threat to allies and will not be integrated into North Atlantic Treaty Organization (NATO) defenses. Washington says the S-400s are a threat and last year removed Turkey from a F-35 jet program.

'DEEP CRISIS'

Two sources familiar with the matter, including a U.S. official speaking on the condition of anonymity, told Reuters Trump had given aides his blessing for the sanctions.

He would likely need to select from a list of 12 CAATSA options ranging from mild to harsh.

Even mild U.S. sanctions would further roil U.S.-Turkish relations that "have been in deep crisis for quite some time," said Galip Dalay, fellow at Robert Bosch Academy. "Domestically it will increase further anti-Americanism.. and it is unlikely to change Turkish policy," he said.

Erdogan was quoted by Turkish media as saying he had no problems during Trump's four years in office and that Biden also knows him well.

But the lira's fall rattled other Turkish markets. FX volatility gauges spiked and a fall in the government's dollar-denominated bonds pushed up the cost of insuring them against default using derivatives.

A treasury desk trader at one bank said the simultaneous U.S. and EU moves were negative but would not directly harm the Turkish economy in the short term, and have only a limited market impact if they remain mild.

The economy has slumped badly twice in as many years. The lira rebounded from a record low of 8.58 last month after Erdogan replaced Turkey's top two economic policymakers and pledged a new market-friendly economic era.

Timothy Ash at Blue Bay Asset Management said Trump would be expected to choose lighter sanctions and "clear the air" for Biden to reset relations. "Surely it can only get better from here," he said.

In Brussels, EU leaders agreed a statement paving the way to punish individuals accused of planning or taking part in what the bloc says is unauthorized drilling off Cyprus in the eastern Mediterranean. They shied away from a threat in October to consider wider economic measures.

Turkey, which says it is exploring for hydrocarbons in waters within its rights, called the EU approach "biased and illegal".