The fate of Turkish state-owned Halkbank bank is threatening to reopen U.S.-Turkish wounds just as both sides have been working to rebuild ties.
Ankara is voicing growing frustration over U.S. deliberations over penalties for Iranian sanction-busting by Halkbank.
Turkey's Haberturk newspaper Wednesday cited a U.S. official who said investigations into Halkbank are continuing. The official also did not rule out further legal probes.
"Such an indictment will infuriate Ankara," said analyst Atilla Yesilada of Global Source Partners.
Last week, Turkish President Recep Tayyip Erdogan claimed he had received a commitment from U.S. President Donald Trump for a speedy resolution for Halkbank.
"I will give instructions the moment I get back. I thought it was resolved. Why is it taking so long?" Trump said, according to Erdoğan.
The U.S. Treasury's Office of Foreign Asset Control is set to impose a fine on Halkbank, following January's conviction of one of its senior executives, Hakan Atilla, by a New York court for violating U.S. Iranian sanctions.
With the penalty ranging from a few hundred million to billions of dollars, the fine has been viewed by investors as a potential threat to the stability of the Turkish financial market.
The magnitude of the Halkbank fine is ultimately a political decision that analysts say has given Washington significant leverage over Ankara. However, October's release of American pastor Andrew Brunson by a Turkish court facilitated a warming of relations between NATO allies and with it, analysts say, the expectation of a minimum Halkbank fine.
"The thaw between Turkey and the United States after Pastor Brunson's release significantly reduces the likelihood of a large and disruptive fine on Halkbank," said chief economist Inan Demir of Nomura Securities.
The Turkish lira surged on news of Brunson's release and return to the United States. International investors assumed Washington would step back from further financial Turkish sanctions, including a punishing fine against Halkbank. U.S.-Turkish tensions saw the lira lose as much as 40 percent of its value this year.
Ankara hoped an end to the Halkbank investigation would give a further boost to Turkey's beleaguered economy that is facing a recession triggered by a collapsing currency and surging interest rates running at 25 percent.
"Closing the Halkbank dossier, or letting the bank go with a small fine, would probably help Turkish banks borrow at narrower spreads and raise new capital abroad," Yesilada said.
But continuing uncertainty over the magnitude of a Halkbank fine and the threat of new legal probes could deal a blow to Turkey's fragile financial markets.
"The reports of a new indictment prepared by Southern District Court of New York are important," said Demir, "because although the White House can exercise influence on a decision by the OFAC (Office of Foreign Asset Control), it is much less likely to be able to influence a court process."
Any new legal probe could have financial, as well as political fallout for Turkey. Key local elections are due in March, with control of the country's main cities at stake. Erdogan has declared winning the polls a priority.
Analysts say the president will be eager to mitigate the effects of the predicted recession, especially after an opinion poll this month found that 58 percent of those surveyed blame Erdogan's ruling AKP party for the economic turmoil.
Halkbank's fate is further complicated with Ankara hardening its stance toward Washington over its new sanctions against Iran.
"We are working with all sides to lessen the inevitable negative effects of the sanctions on the Iranian people and our bilateral financial and economic relations," Turkish Foreign Minister Mevlut Cavusoglu said Wednesday.
Cavusoglu is expected to visit New York next week. According to unconfirmed reports, he could stop in Washington to discuss Halkbank and Iranian sanctions.
Turkey is one of eight countries that Washington has granted a temporary waiver on its sanctions against importing Iranian oil. Observers point out that Ankara used previous Iranian sanction waivers as a backdoor to circumventing broader sanctions to an estimated $12 billion. Halkbank, according to U.S. prosecutors, played a crucial role in the scam, a charge Ankara denies.
Halkbank could yet pose a nasty surprise for Erdogan and international markets.
"The issue isn't attracting too much market attention right now, as the timing and content of the indictment (against Halkbank) are unknown and uncertain," Demir said. "However, there could be room for negative surprises, because the market has moved toward a much more sanguine view on the Halkbank issue."