Abdullah Bozkurt/Stockholm
Ismail Demir, a long-time loyalist of Turkish President Recep Tayyip Erdogan and sanctioned by the US, has been appointed chairman of the board of directors of Turkey’s leading iron and steel manufacturer.
Demir, listed under the US Countering America’s Adversaries Through Sanctions Act (CAATSA), has been leading Karabük Iron and Steel Industry and Trade Inc. (Karabük Demir ve Çelik Fabrikaları A.Ş., Kardemir) for the last six months. He replaced former CEO Alparslan Bayraktar, who was appointed minister of energy and natural resources by Erdogan in June 2023.
Demir’s appointment was made official on October 23, 2023 for a duration of three years. Despite remaining on the US sanctions list and being subject to multiple bans and restrictions by US authorities, he has been managing a strategic industrial company with total assets worth 31 billion Turkish lira and revenue of 27.3 billion lira.
On December 14, 2020 the US imposed sanctions on Demir, who was the then-head of the Presidency of the Defense Industry (Savunma Sanayii Başkanlığı, SSB), Turkey’s top defense procurement agency. The sanctions were imposed due to a transaction with Rosoboronexport (ROE), Russia’s main arms export entity, involving the procurement of the S-400 surface-to-air missile system.
Kardemir’s financial statement as of September 2023:
financial_stayement_Kardemir_2023
He was placed on the Specially Designated Nationals and Blocked Persons list (SDN List), maintained by the US Treasury’s Office of Foreign Assets Control (OFAC). The sanction came after repeated warnings from the US, Turkey’s NATO ally, which stated that the purchase of Russian military hardware posed a risk to the NATO military alliance and endangered the security of US military technology and personnel.
The sanction also covered the SSB as an entity and three other SSB officials: Vice President Faruk Yiğit; Serhat Gençoglu, head of the Department of Air Defense and Space; and Mustafa Alper Deniz, program manager for the Regional Air Defense Systems Directorate.
Although Demir left the SSB, his name remains listed among the sanctioned individuals in the OFAC database. At a press conference held in Turkey in February 2024, eight months after he became the CEO of Kardemir, Demir admitted that he is still subject to US sanctions.
It is not clear how the designation of Demir may complicate the business activities of Kardemir. CAATSA sanctions are coordinated by the US State Department, in consultation with the US Treasury. Removing Demir from the sanctions list requires approval from the secretary of state.
Demir is subject to full blocking sanctions, which include a ban on banking and foreign exchange transactions, property blocking and visa restrictions. Demir cannot make payments or credit transfers through financial institutions to the extent that such transfers or payments are subject to US jurisdiction. The same applies to any foreign exchange transactions falling under US jurisdiction.
The property ban means Demir cannot acquire, hold, transfer, import or export any property that is subject to US jurisdiction. He cannot exercise his rights or powers with such property and cannot carry out any transactions involving it.
This may have far-reaching implications for Kardemir, as US nationals are prohibited from engaging in transactions with sanctioned individuals and entities. Additionally, financial or trade activities that pass through US jurisdictions, such as clearing US dollar-denominated payments and transfers, are also at risk for Kardemir unless exceptions are granted by the US government.
Non-US nationals or entities, especially those in the West, generally avoid conducting business with US-sanctioned individuals or entities to avoid risking penalties in the US because of prohibitions that include making any contribution or providing funds, goods or services that may benefit sanctioned individuals or entities.
The public disclosures made by the company have not even mentioned the designation of its new CEO under the US sanctions regime. Although this may very well represent a risk to Kardemir’s operations, especially regarding sales in US dollar denominations, neither the financial assessment report nor the performance reports released by Kardemir and its auditing firm mention such risks.
Kardemir’s performance report as of September 2023 (in Turkish):
Faaliyet Raporu-30.06.2023
Although the company mainly conducts transactions in Turkish lira, the latest financial statement, covering the period until September 30, 2023, shows that Kardemir has total assets of $31 million and liabilities of $420 million. In other words, it has been using the US financial system to transfer US dollar-denominated funds to and from Turkey.
Kardemir has been one of the leading producers and sellers of iron, steel and coke since it was privatized in 1995. Initially sold to its employees, its shares were later listed for trading on the Istanbul Stock Exchange (Borsa İstanbul, BIST). In 2010 the majority of shares were purchased by two family business ventures — the Yolbulan and Güleç families — until they encountered disagreements. This paved the way for the Erdogan government to intervene through regulatory bodies, especially the Capital Markets Board (Sermaye Piyasası Kurulu, SPK).
Starting in 2017, the Erdogan government consolidated its grip on the management, effectively selecting nine out of 10 members of the board of directors. Ömer Faruk Öz, a senior member of the ruling Justice and Development Party (AKP) and a former member of Parliament, became CEO of Kardemir in 2017. Öz has enriched himself during the Erdogan government’s tenure and won generous tenders from both central and local governments. He was succeeded by Bayraktar in 2020.
Kardemir’s presentation for investors in 2023:
Kardemir_investment_presentation_2023
Turkey’s Sovereign Wealth Fund (Türkiye Varlık Fonu), chaired by President Erdogan, acquired 4.4 percent of Kardemir’s shares in November 2022 for a purchase price of 656 million Turkish lira, gaining more leverage over Kardemir’s board. Fuat Tosyalı, a member of the Sovereign Fund’s board and the largest steel manufacturer in Turkey, was briefly rumored to have an interest in taking over Kardemir. Tosyali is Erdogan’s close associate and manages many lucrative business interests on behalf of President Erdogan’s family.
Kardemir has a number of shares, many with total control of entire stakes, in other companies as well. They include power production company Enbatı Elektrik Üretim Sanayi ve Ticaret A.Ş., steel construction and installation firm Karçel Kardemir Çelik Yapı İmalat Sanayi ve Ticaret A.Ş., steel casting and machinery firm Kardökmak Kardemir Döküm Makina Sanayi ve Ticaret A.Ş., insurance company Kardemir Sigorta Aracılık Hizmetleri Ltd. Şti. Şti., cement producer Karçimsa Çimento Sanayi ve Ticaret A.Ş., railway component manufacturer Voestalpine Kardemir Demiryolu Sistemleri Sanayi ve Ticaret A.Ş., research platform Karabük Üniversitesi Teknoloji Geliştirme Bölgesi Yönetici A.Ş., mining company Erdemir Madencilik Sanayi ve Tic. A.Ş. and energy markets management firm Enerji Piyasaları İşletme A.Ş.
In April 2024 Kardemir announced the establishment of a port management and transportation company, Karlimtaş Kardemir Liman İşletmeciliği ve Taşımacılık A.Ş., with capital in the amount of 200 million Turkish lira.
According to Demir, Kardemir will also invest to support Turkey’s growing defense industry sector.
A US-sanctioned defense official joining the board of directors of a leading steel and iron producer is definitely set to raise questions and concerns. Having someone with such a background in a leadership position in a major industrial company could lead to speculation about its impact on the company’s operations, its relationships with international partners and its overall business strategy.
