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Why sanctions make shipowners insomniacs

In the first of a regular monthly column for Splash, Pierre Aury explains why sanctions do not work, and how easy it is for shipowners to fall foul of these constantly changing bans.

There was a time when shipping was a free market: supply and demand and just a couple of rules. Over the years however shipping has become, like most other industries, ensnared in an ever growing number of laws and regulations, each of them becoming more complicated as time passes.

Politicians around the world tend to have this bias toward not enforcing existing laws and making new ones when something happens, which could have been dealt with simply by enforcing the existing ones. They need to be seen doing something.

A prime example is the worldwide knee-jerk reaction after the great crisis of 2008 with a lot of countries enacting new laws to prevent the production of fraudulent accounts, as if it had ever been legal to produce fraudulent accounts in the first place.

Shipping is in a worse position than a lot of other industries as a shipping company has to abide not only by the laws of the country where the company is headquartered but as well by the laws of the country(ies) where its ships are registered, the laws and regulations of each country where its ships are calling, international conventions like all the International Maritime Organization (IMO) ones to mention a few. And, of course, as, strangely, most payments in shipping are made in US dollars most shipping companies have de facto to abide by a number of US laws because the money although electronic is going physically through the US when it is wired.

Now throw in international sanctions and the already messy situation gets messier.

And it is no joke as falling foul of international sanctions can have serious consequences as BNP would testify having been slapped by a $9bn fine by the US back in 2014 for having breached US sanctions against Cuba, Iran, Sudan, and Libya.

Before we go any further let us try to clarify a bit what is meant by sanctions. The typical sanction toolbox is comprised of the following tools:

  • Export restrictions or ban
  • Import restrictions or ban
  • Financial flows restrictions or ban
  • Asset freezing or vesting
  • Travel restrictions or ban
  • Cultural sanctions
  • Aid program restrictions or cancelation

The first three items on the list often have direct implications for shipping in terms of reduction and/or change of trades.

The number of these sanctions enforced over the years is quite amazing. Since World War I the tally is at about 250. The split in percentage by countries of issuance is shown in the graph below:

Figure 1: Sanctions per country of issuance

Sanctions are typically used to try to achieve a number of things like:

  • Regime change
  • Policy change
  • Harm military capabilities
  • Disrupt military operations
  • Obtain compensation

The thing is that generally sanctions in practice don’t work but politicians have got to be seen doing something. Compiling studies made by various universities and think tanks the graph below gives an idea of how the sanctions work or not depending on their aim:

Figure 2: Estimated success rate of sanctions

Typically sanctions are materialised by lists of individuals, companies and/or countries who with certain things can or cannot be done.

Prior to February 2022 sanctions were dealt with by:

In the US

  • 4 Executive Orders
  • 4 OFAC (Office of Foreign Asset Control) directives
  • 9 OFAC general licences
  • 50 OFAC FAQs and their answers related to sanctions
  • 1 legislative act

In the EU

  • 13 Council decisions
  • 20 Council Implementation rules
  • 26 FAQs and their answers

And the US and the EU rules are not the same and within Europe member states have the possibility to enact their own rules which can vary from those of the EU.

This has created a gigantic, ever-changing mess. To take a measure of the mess just go the current SDN list of the OFAC. SDN stands for Specially Designated Nationals (and blocked person) and OFAC for Office of Foreign Assets Control. This list can be accessed through the US Treasury resource centre website. The list which is changing all the time is as of today a 2,019 pages long document with three columns per page.

For Ukraine the following is the list of sanction packages enacted by the EU against Russia since February last year:

  • 23rd/24th of February 2022 first EU sanctions package
  • 25th of February 2022 second package
  • 28th of February 2022 third package
  • 15th of March 2022 fourth package
  • 8th of April 2022 fifth package
  • 3rd of June 2022 sixth package
  • 21st of July 2022 seventh package
  • 26th of September 2022 eighth package
  • 22nd of December 2022 ninth package

In addition to these nine packages, numerous other measures and clarifications were produced over the same period.

And remember each and every package was announced as being the one to bring Russia to its knees.

This clearly confirms the fact that sanctions tend not to work to disrupt military operations as shown in the graph above.

There is no way that a normal shipping company with no in-house legal/compliance department can protect itself with 100% certainty from getting trapped involuntarily by one or more of these ever-changing rules. I am not sure how a shipowner can sleep well these days.

Pierre Aury

Starting out as a cadet with Louis Dreyfus in 1977, Pierre’s shipping career has taken him across the world including stints in Sydney, Istanbul, London and Paris, working for Clarksons, Enron and Platou along the way. Among a host of roles as a shipping consultant for the past eight years, Pierre heads up Competitive ShipBrokers, an association with 14 famous brokers as members.

Comments

  1. Good article thanks Pierre. It is indeed a minefield. Ignorance of the law is generally not a defence for breaking it. The biggest work-around seems to be the dark fleet, where the UBOs, the ultimate beneficial owners, either don’t care about the sanctions or are generating acceptable risk/reward (in their minds) to work sanctioned trades.

  2. You supposed to live in western democracy, where stupid/old/freak/dope politicians, making wrong decisions, must be easily re-elected. Or not? What about free trade? Or free trade is only there, where big boss Uncle Samantha allows you?
    There is always choice to be sheeple or be free.

    1. Great comment mate! You are spot on! Much better life under Talibans, Al Qaeda et al. 🤣🤣🤣

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