EU to cut flow of funds to Turkey as drilling spat heats up

BRUSSELS (Bloomberg) -- The European Union is poised to freeze most high-level contacts with Turkey and cut the flow of funds to the country, while holding back for now on sanctions that could target Turkish companies involved in offshore drilling in the eastern Mediterranean.

EU diplomats have agreed on the wording of a draft decision due to be formally adopted by the bloc’s foreign ministers on Monday, two officials familiar with the talks said. The draft calls for suspending negotiations on an aviation agreement with Ankara, halting scheduled ministerial meetings, reducing aid and inviting the European Investment Bank to review sovereign-backed lending to Turkey.

The bloc will also reiterate that it’s working on targeted sanctions in light of Turkey’s continuing controversial drilling practices, according to the final draft of the communique seen by Bloomberg. The statement was agreed on Friday afternoon after several rounds of redrafting, and it will be rubber-stamped by EU ambassadors on Monday before ministers sign off later in the day.

Turkey and Cyprus are at loggerheads over offshore gas reserves in the eastern Mediterranean that are claimed by the Cypriots and disputed by Ankara. Turkey has sent exploration vessels into the area, a move Cyprus calls a violation of its sovereignty.

Deep-sea exploration

EU leaders have squarely sided with Cyprus in the dispute, declaring last month that they’re ready to consider sanctions if Turkey continues drilling. That could target companies, individuals, and Turkey’s deep-sea hydrocarbon exploration and production sectors, though such measures weren’t officially on the menu of options debated this week.

Still, the escalation marks a new low in EU-Turkey relations, which have been deteriorating since President Recep Tayyip Erdogan pushed through constitutional reforms that Brussels claims weaken the country’s democratic safeguards.

The European Commission says Turkey has been drifting further away from the prospect of eventual EU membership, and some member states, such as Germany and France, have considered formally shelving long-stalled accession talks.

The spat with Brussels adds to a climate of uncertainty weighing on Turkish assets, following the dismissal of the country’s top central banker and the prospect of U.S. sanctions over Erdogan’s decision to purchase Russian missiles. Washington has also called on Turkey to cease drilling off the coast of Cyprus.

Maintaining communication

Despite renewed tensions in the Mediterranean, the EU is wary of an escalation that would risk a landmark 2016 migration agreement, under which Turkey stemmed the bulk of refugee flows to Europe in exchange for financial assistance. Even though options for targeted sanctions were mandated by the bloc’s leaders last month, they are not being activated at this stage.

An EU diplomat said the bloc in its Monday decision will seek a balance between sending a clear message to Ankara and agreeing on measures that won’t harm the interests of EU nations or cut all ties with Turkey. The EU wants to keep some lines of communication open in areas such as migration and terrorism, the diplomat said, asking not to be named discussing sensitive issues.