Middle East conflict: sanctions risk posed by re-routing of supply chains

Sanctions expert Stacy Keen of Pinsent Masons was commenting as many businesses consider altering their global supply chains because of the disruption to the production, supply and movement of goods and materials due to the ongoing conflict.

• Read more: implications of the Middle East conflict for businesses

Since the conflict began on 28 February, there has been severe disruption to shipping by air and by sea as a result of the partial or full closure of airspace and the risks attached to transiting through the Strait of Hormuz. The disruption to the production of oil and gas in the Middle East and to its onwards transportation, coupled with attacks on energy infrastructure in the region, have pushed up shipping prices too. These factors are making it harder for businesses to access goods and materials that would normally be produced in, or supplied via, Middle East trade routes, as well as increasing the time and cost involved in sourcing supply. Many container ships have been re-routed round the Cape of Good Hope.

The disruption is forcing many businesses to rethink how their supply chain operates. Keen said businesses in this position need to ensure their compliance programmes are designed to respond to identify sanctions-related risk. Those risks are multi-faceted in nature, she said.

“The most obvious sanctions-related risk facing businesses in the context of the current conflict are those that relate to doing business in Iran or to dealings directly with Iranian entities,” Keen said. “The US, UK and EU have long maintained sanctions programmes targeting Iran, though the position has changed substantively a couple of times over the past decade.”

UN sanctions on Iran were lifted in 2016 after the country signed a ‘joint comprehensive plan of action’ (JCPoA) in 2015 in tandem with the US, China, Russia, UK, France, Germany and the EU, under which it committed to a series of actions limiting its nuclear and weapons programs. Under the UN sanctions package, global businesses were banned from exporting nuclear materials to the country, or from providing banking, insurance and other financial services to Iranian entities. Arms trade restrictions and asset freezes were also provided for in the package.

Iran was subsequently accused of reneging on the agreement and of ramping up its uranium enrichment activities. The US withdrew from the JCPoA in 2018 and then reinstated US sanctions that had been lifted under the agreement. Last October, the UN sanctions were reimposed on Iran after France, Germany and the UK triggered a ‘snapback’ mechanism providing for the reinstatement. The UK and EU have subsequently imposed a wider range of sanctions relating to Iran that go further than the UN package.

The Iran sanctions packages only form part of the sanctions picture businesses need to consider when exploring Middle East supply re-routing, according to Keen.

“Iran is not the only country in the Middle East subject to Western sanctions,” Keen said. “Lebanon, for example, is subject to US, EU and UK sanctions regimes.”

“Businesses also need to be mindful of the 'spider effect’ of sanctions and factor this into their due diligence and risk assessments,” Keen said.

“Russian sanctions packages that are in force could also be relevant. Individuals and entities outside of Russia, including in the Middle East, have been targeted by a combination US, EU and UK sanctions for trading or transporting Russian oil. Vessels considered to form part of the ‘shadow fleet’ of Russia or Iran have also been designated under the Iranian and Russian sanctions regimes,” she added.

In relation to supply chain rethinks, sanctions compliance risk can arise in respect of new individuals and entities that businesses have dealings with, new countries supply is re-routed through, and specific vessels involved in the transportation of goods or materials, according to Keen.

Fears the conflict would lead to a protracted disruption to supplies in the Middle East pushed the oil price to nearly $120 a barrel on 9 March, the highest level it has been at since Russia’s invasion of Ukraine in February 2022. This has also driven sanctions-related developments that businesses exploring changes to their global supply chains need to consider, Keen said.

Keen said: “US president Donald Trump announced his administration would ease some sanctions on oil-producing countries until the conflict eases, and on 12 March authorised, for 30 days, the delivery and sale of crude oil and petroleum products of Russian origin. US treasury secretary Scott Bessant described the measure as short term move to promote ‘stability in the global energy markets’. However, the UK and EU have not followed suit with the US, meaning there is divergence between the sanctions imposed by the UK and EU and those imposed by the US.”

“Divergence between sanctions regimes creates significant compliance and operational challenges for businesses navigating a potential myriad of regimes that apply to their national and global footprint,” she added.