By Don Quijones, Spain & Mexico, editor at WOLF STREET. His blog: Raging Bull-Shit.

Since the U.S. and EU began imposing and then widening and tightening sanctions against Russia, some U.S. allies have been getting second thoughts. The latest nation to begin severing ties with the U.S.-dominated Western alliance is arguably the most important yet.

That nation is Turkey, the largest and one of the fastest-growing economies in the Middle East – and most importantly, a long-standing NATO ally. For years Turkey has been slowly drifting away from the West, as its economy and geopolitical influence have grown. It hasn’t helped that its accession to the European Union has been repeatedly blocked by countries such as France and Austria, and is now directly opposed by Angela Merkel.

With recent events in Ukraine and the Middle East sending geopolitical shock waves around the world, Turkey’s Eastward shift appears to be accelerating. In a harbinger of things to come, Prime Minister Recep Tayyip Erdogan’s chief economic adviser, Yigit Bulut, announced that Turkey needs to “strengthen control of its banks and limit foreign ownership.”

Changing the Rules

“The most important thing is to change the structure and weighting of the Turkish banking sector,” Bulut wrote in his column in Star newspaper. The industry “seems to have been abandoned to the control and mercy of both foreigners and ‘foreigners within,’” he said, adding new bank licenses might be granted in pursuit of those goals.

For the moment, Bulut’s comments are just that: comments. But should the recently re-elected Erdogan government – albeit with Erdogan as president rather than prime minister – actually follow through on Bulut’s threats (hardly out of the question given Bulut’s close ties to the president), it could have serious repercussions for a number of large Western banks.

Since suffering one of its worst ever financial crises in 2001, Turkey has attracted a huge influx of foreign banks on the lookout for cheap acquisitions. They include the British giant HSBC, which acquired mid-sized Demirbank in 2001; the Dutch too-big-to-fail institution ING, which swallowed Oyak Bank whole in 2007; and Italy’s Unicredit, whose joint venture with Koc Holding, a Turkish conglomerate, took over Yapi Kredi, Turkey’s fifth-biggest bank, in 2006.

However, the Western bank that is arguably most exposed to a dramatic change in Turkey’s bank ownership rules is Spanish behemoth BBVA, which in 2011 acquired 25% of Turkey’s biggest listed lender, Turkiye Garanti Bankasi AS (GARAN), from the Turkish group Dogus and General Electric. What’s more, BBVA has – or at least had – plans to take majority control of Garanti in 2016.

Old Enemies, New Friends

Turkey is also home to a number of non-Western banks including the world’s largest bank, Industrial and Commercial Bank of China, which recently bought Tekstil Bankasi AS Sberbank. Russia’s biggest bank Sverbank also has a strong market position after acquiring Denizbank, Turkey’s tenth-biggest, from twice-collapsed Belgian lender Dexia last year.

However, the Turkish government – or at least Bulut – seems somewhat less concerned about those particular banks’ activities. As a matter of fact, Bulut argued that Turkey should develop a “cross-border banking alliance” with neighbors such as Iran, Syria, Georgia, Azerbaijan, northern Iraq and… Russia.

It’s yet another sign of the growing rapprochement between Turkey and Russia – a rapprochement that has seen bilateral trade flourish between the two historic imperial rivals. Russia is currently the second (after the EU) among foreign trade partners of Turkey, and Turkey the eighth largest trade partner of Russia. In 2013 alone the volume of trade between the countries amounted to $32.7 billion.

It’s a trend that seems set to continue. Indeed, according to Russian sources, when the Minister of Economic Development of the Russian Federation Alexei Ulyukayev met with Turkey’s Economy Minister Nihat Zeybekchi “on the margins” of the recent G20 meeting of trade ministers in Sydney, the Turkish side proposed strengthening trade and economic relations between the two nations through a bilateral currency agreement that would effectively bypass the US dollar middleman.

US Foreign Policy: The Great Uniter

All of which goes to show just how effective U.S. foreign policy can be at bringing other nations together – albeit in mutual opposition to the U.S. In the case of Turkey, one of the main motivations behind distancing itself from the West and cozying up to BRICs nations like Russia are government fears over the prospect of multibillion-dollar SEC fines against its state-owned banks for violating U.S. sanctions on Iran and “financing terrorism.” Don Quijones. An exclusive for Wolf Street.

“The glue of the sanctions is starting to dry,” mused Sergio Trigo Paz, head of emerging market fixed income at BlackRock, the world’s largest asset manager. That was in May. Now the glue had dried. Read…. Sanctions Are Eating their Lunch: Russian CEOs Beg for Bailouts, German Economy Swoons

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