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Is this how sanctions are supposed to work? (Macro Macchiato 30/09/19)

Look Mum, we’re in the papers! It isn’t often that shipping finds its way onto the pages of the mainstream press. Usually it’s because of bad news. This week it’s because the US-Iran phony war has spread to the tanker market and has leached into the US-China trade war.

Last week the US State Department announced that, as part of its sanctions on Iran, it would sanction oil tanker companies that lift Iranian oil. Two units of China’s Cosco tanker shipping arm were named. COSCO Shipping Tanker (Dalian) Co., Ltd. (“COSCO Tanker”) and COSCO Shipping Tanker (Dalian) Seaman and Ship Management Co., Ltd. (“COSCO Management”). Four other Chinese companies and several individuals were placed on the list of “Specially Designated Nationals and Blocked Persons” (“SDNs”) by the US Office of Foreign Assets Control (“OFAC”). The sanctions were effective immediately, giving no winding down period.

I quote here from a useful note issued by solicitors WFW:

“US persons” (i.e., individual US citizens or permanent residents, entities organized in the US and any other persons in the US) must cease all transactions with these entities. Any accounts that the sanctioned entities have in the US generally must be “blocked” or “frozen,” meaning that the funds cannot be accessed until sanctions are lifted. Furthermore, because US dollar payments are processed through the US, the sanctioned entities generally cannot deal in US dollars, meaning that they cannot make or receive payments on US dollar loan agreements, charters and other contracts. The SDN designations also subject the sanctioned entities to “secondary” or “extraterritorial” sanctions, which target non-US persons. Following such designation, any non-US persons who have “materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of” any of the sanctioned entities are themselves at risk of being added to the SDN list. Due to the close proximity of the sanctioned entities, any transaction with a non-sanctioned COSCO entity should be carefully scrutinized to ensure that there are no violations. For example, a transaction with a non-sanctioned COSCO entity in which a sanctioned entity or individual is involved could be treated as an indirect violation of sanctions.”

China of course has objected to the sanctions on two grounds. First that they exceed the US’s legitimate boundaries for action by taking aim at third parties, and secondly that they interfere with China’s legitimate interaction with Iran. Several Chinese vessels that had been fixed to load US cargoes of crude oil in the coming months have been cancelled and it may well be that the US finds itself unable to export oil to China for lack of willing carriers. As China prepares for its national day on 1st October, commercial activity may stall for a few days this week, but we can expect political declamations as the leadership asserts its increasingly confident role in world affair.

Saudi Arabia has meanwhile called for further action to isolate Iran, warning that an escalation of conflict in the region could push oil prices to “unimaginable” levels and wreck the global economy as oil supplies are constrained.

The Take Away

Shipping’s traditional lack of transparency is working to drive the tanker freight markets upwards as charterers and traders look for ships and cargoes that do not have any links with sanctioned organisations or related third parties. The rush to apparent safety adds to the impetus already provided by the closing deadline for the IMO 2020 regs, the Abqaiq attacks and regular seasonality as we head into the winter season in the northern hemisphere. It looks like we could be heading for one of the strongest and one of the most volatile fourth quarter tanker markets for a number of years. Strap yourself in for a bumpy ride.

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