Feb. 10 (Bloomberg) -- New European Union sanctions on Iran’s largest ports operator will curb billions of euros in otherwise legal trade, if EU authorities police those seeking ways around the rules, according to trade lawyers, shipping and insurance executives and EU officials.
The EU’s announcement of an Iranian oil embargo on Jan. 23 overshadowed an asset freeze approved the same day on Tidewater Middle East Co., Iran’s dominant ports operator, a move with consequences for European companies all along the trade and supply chain. The EU was Iran’s top trade partner in 2010, with about 13 billion euros ($17.3 billion) in non-petroleum trade that year, European Commission and International Monetary Fund figures show.
The new measure forbids any EU person or entity from making direct or indirect payments for Tidewater’s benefit. That means exporters, importers, shipowners and charterers can’t pay loading fees at Tidewater’s seven ports, including the Shaheed Rajaee complex at Bandar Abbas. Ninety percent of Iran’s container traffic passes through that port at the mouth of the Strait of Hormuz.
Until last month, “a U.K. company could legally ship legal goods like medical equipment or glass to Iran,” Nigel Kushner, chief executive officer of Whale Rock Legal, a London law firm whose clients include exporters that trade with Iran, said in a phone interview. “Now if they ship that to Dubai, knowing it will be shipped to Bandar Abbas, they may be in breach of sanctions.”
“In practice, much trade will become impossible,” Kushner said.
Illicit Arms Shipments
The EU action followed a similar step by the U.S. Treasury Department on June 23. The U.S. said Tidewater was co-owned by Iran’s Islamic Revolutionary Guard Corps and used by the elite military unit for illicit arms shipments.
Tensions over Iran have risen in the last week, with U.S. Defense Secretary Leon Panetta expressing concern about a potential Israeli military strike on Iran’s nuclear facilities by mid-year. Policy makers in Washington and Europe say economic pressure on Iran to abandon illicit aspects of its nuclear program is the best way to forestall a military confrontation. Iran says its program is for civilian energy and medical research.
The Tidewater ban, which took immediate effect, also will have ripples beyond the EU, impairing the ability of shippers worldwide to get insurance coverage for trade with Iran, insurance and shipping executives said.
Mohammad-Reza Khoshrou, head of public relations for Tidewater, wasn’t available to comment after two phone calls were made to the company’s headquarters in Tehran yesterday. Tidewater Middle East Co. isn’t connected to Tidewater Inc., a New Orleans-based marine services provider that isn’t under sanctions.
Looking for Enforcement
Given Tidewater Middle East’s size and reach, it may be difficult to channel trade to small, non-Tidewater ports hundreds of miles away, or for other port operators to soak up all the business.
Kushner said he hasn’t seen evidence that the U.K.’s Treasury has taken action yet against British companies shipping to Tidewater’s ports. “There have been exports in the last two weeks, and I would eat my hat if there aren’t a large number that have gone through from the U.K. to those ports” since the ban was imposed, he said.
Mustapha Pakzad, chairman of Pakzad Consulting Co. in London, which advises clients doing trade with Iran, said EU exporters are settling port charges through their representative companies in Iran, and former Soviet states are acting as “platforms” for some trade related to Iran.
James Barbour, a U.K. government spokesman in Washington, said his government “is committed to the robust implementation” of sanctions. “We take these allegations extremely seriously and they will be investigated,” he said in an interview.
The 27-nation EU is still working on a text with precise implementing measures to guide member states on how to enforce the sanctions, according to Silvia Kofler, spokeswoman for the EU delegation in Washington.
Tidewater may attempt to evade the barriers by transferring business to subsidiaries, sanctions specialists such as Michael Swangard said.
“I suspect tomorrow there will be new port agents appointed,” turning enforcement into a cat-and-mouse game, Swangard, an international trade attorney at Clyde & Co., a London-based law firm, said in a phone interview.
The EU, not just Iran, will bear the cost of sanctions, as law-abiding traders give up business, said Martin Johnston, executive director of the British-Iranian Chamber of Commerce in London.
The EU has been Iran’s principal trading partner, exporting 11.3 billion euros in goods to Iran in 2010, led by machinery, transportation equipment such as cars, and chemicals, according to European Commission figures.
Iran was the EU’s 25th-biggest trade partner, with the 27-member region importing 14.5 billion euros in goods from Iran in the same period, led by fuel and minerals. Only 11 percent of EU imports from Iran were non-petroleum products, led by 757 million euros in chemicals and 390 million euros in agricultural goods, European Commission data shows.
Crude for March delivery gained $1.13 to $99.84 a barrel yesterday on the New York Mercantile Exchange, the highest settlement in three weeks. Prices are up 1 percent this year.
Johnston and Kushner estimate that when official figures are released for 2011, U.K. exports to Iran will have dropped 60 percent over the past three years, due to tightening restrictions on financial transactions with Iran.
EU exporters’ loss may be China’s gain. Trade between China and Iran rose 52 percent in the year following the imposition of new U.S. and United Nations sanctions on Iran in June 2010, according to the World Trade Organization.
Kiran Khosla, director of legal affairs at the International Chamber of Shipping in London, the trade association representing 80 percent of the world’s merchant fleet, said prudent EU shipowners already adjusted their business following U.S. sanctions on Tidewater.
Last summer, “the advice to the shipowners was to refrain from engaging in any business” with Tidewater and that any payments to them might endanger the shipowners’ U.S. trade, she said.
Peter Sand, chief shipping analyst for Bimco, the Denmark-based largest international shipping association, said the reality that “shipowners constantly have to keep track of companies and individuals that they should not do business with doesn’t make their business life any easier.”
The Tidewater ban will also affect countries that aren’t EU members and didn’t sign onto sanctions, such as Norway and Russia.
Insurers even outside the EU now will be inclined to deny liability coverage to companies shipping to or from Iran, said Douglas Jacobsohn, chief executive officer of Skuld Group, an Oslo-based marine insurer providing protection and indemnity policies, and legal coverage to shipowners and charterers worldwide. Norway isn’t a member of the EU, though Skuld is part of a London-based insurance pool.
“Russians have so far been able to do large trade with Iran,” he said in a phone interview. “But they need cover from P&I clubs to be able to trade legally, and if we can’t provide them with that anymore, it’s really a problem for them,” because “coverage from Russian insurance is not considered adequate,” he said.
While non-petroleum trade with Iran is still legal in the EU, P&I clubs are likely to deny coverage because “it’s very hard to ensure that somebody doing legal business with Iran is not going to have links with something illegal,” Jacobsohn said. P&I clubs are mutually owned by shipowners, ship operators and charterers and provide risk coverage that’s not available from traditional marine insurers.
In October 2010, the EU banned the provision of insurance and reinsurance to the Iranian government and all Iranian companies. It didn’t bar insurance for EU entities doing legal trade with Iran.
Hugo Kidston, head of communications for Munich-based Allianz Global Corporate & Specialty AG, a corporate insurance company, said Iran has reportedly increased the capacity of its own insurance industry, with support from the Russian and Chinese markets, through ceding arrangements, such as reinsurance, and through direct investments.
Emanuele Ottolenghi, a senior fellow at the Foundation for the Defense of Democracies in Washington, a research group that supports sanctions on Iran, said the Tidewater ban is an important step in hampering Iran’s weapons proliferation.
Ottolenghi said he worries that Tidewater, along with determined traders or shippers, will find ways around the ban.
“What happens if Tidewater transfers its business to its subsidiaries” that aren’t covered by EU or U.S. sanctions, he said. Sanctioned Iranian banks and ships have resurfaced under new names, he said. “Presumably, you will see much of the same.”
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