VIEWPOINT: Bunker Industry Should Be Wary of Upcoming Sanctions Landscape
Chris Morgan is global head of credit at Delta. Image Credit: Delta Energy
Richard Meade in Lloyd's List at the end of last week was sagely foretelling the possible implications from the likely next round of sanctions stemming from the ongoing G7 summit in Japan.
The first measure to emerge from the meeting room was a ban on importing Russian diamonds, which is significant only because it illustrates the desire of the G7 nations to 'go after the money'.
If we - very simplistically - reckon on 'the money' being international trade, and shipping being the primary enabler for this, then it seems clear that bunkering can only be at the absolute forefront of the sanctions thinking.
We have seen a spread of measures so far which haven't really affected bunkering as much as perhaps some of us initially feared. Right after the war started, Delta Energy adopted a rigid and hyper-conservative sanctions compliance policy and this has paid dividends for us since then.
The coming round of sanctions are, we expect, likely going to be of more specific significance.
However, the coming round of sanctions are, we expect, likely going to be of more specific significance for us as an industry.
It seems logical that measures incoming will eventually target Russian UBOs. This means, again simplistically, Russian-owned businesses registered in domiciles other than Russia.
Obviously without a formal announcement it serves little useful purpose to pre-empt what might happen, but it does bear discussion to note that up to now, sanctions against Russia have focused broadly on SDN additions to the OFAC list and also putting a price cap in place on Russian hydrocarbon exports to ensure it cannot easily be traded profitably.
It is not just Russia that tries to evade sanctions by using offshore SPVs.
Turning the spotlight on the UBOs would be a significant change of approach. It means they are looking, amongst other things, at offshore shell companies.
Shipping, and by association bunkering, has an unbreakable love affair with the single purpose vehicle (SPV) offshore holding entity. It forms nothing less than the basis for the ownership of the majority of the global fleet.
Through registering ships and their ownership SPVs offshore into low- or zero-tax domiciles offshore, shipping companies can pay less tax, are not bound to adhere to the latest (expensive) safety and crewing standards and can obscure ownership to avoid liability and attachment of group assets in court if they have a big claim.
In bunkering, having offshore-domiciled holding entities is widely done for similar reasons. It is just a symptom in both cases of a hyper-competitive and over-supplied market. There is nothing wrong with it; it is a perfectly legal and legitimate way of working. More do it than don't.
One area where direct action is a little easier to contemplate is sanctions avoidance by vessels themselves.
Of course, there are players and nation-states that abuse the system to help them circumvent sanctions. Mr Meade's succinctly-put point at the end of his editorial was that whilst pursuing Russian money into the UBO realm may be laudable (and it absolutely is), we should not be surprised at what else 'scurries out from under the rocks'.
He refers, of course, to the fact that it is not just Russia that tries to evade sanctions by using offshore SPVs. Iran, North Korea, Venezuela, Cuba, Syria and others all use the same mechanism. How the US, EU and other bodies might realistically be able to compel full transparency from all flag states is not an easily-solved problem.
The simple fact is that companies can be shuttered and assets moved much faster than such a process could or would possibly take. To carry on the Meade metaphor, the rocks can be lifted and what is underneath made visible right until what is there scuttles under another of the hundreds of rocks clustered around. It then becomes less of a bug hunt and more like 'Whack A Mole'.
One area where direct action is a little easier to contemplate is sanctions avoidance by vessels themselves, (AIS spoofing, AIS blackouts, dark port calls, illegal STS, etc). Class, P&I and flag states have a less intractable record than these offshore domiciles in responding to industry and governmental pressure and, pleasingly, we have already seen several flag states state categorically that where deliberate sanctions avoidance behaviour is proven to have occurred, that the vessel and owner concerned would be struck from that register.
One might imagine the market ... splitting into two.
Compelling more flag states to agree to the same thing seems rather easier to do than demanding all offshore domiciles give up their shells.
One might imagine the market then splitting into two. On one hand you have flag states and class/P&I willing to actually enforce policy against sanctions avoiding vessels and companies linked to them, and on the other you have what has been referred to in some circles as 'the dark fleet'.
This would be vessels flagged with registries that do not care about sanctions or the actions of their members out of practical reach of action from the US, EU etc, either sailing with similarly-minded class and P&I, or, chillingly, without either, largely paying in cash for all consumables. From a purely analytical point of view, a visible delineation between pools of "good" and "bad" is a positive thing for a credit and compliance professional like my peers and myself.
Right now, we have no such line in the sand.
How you determine the good from the 'dark' is an exercise in time and experience. You have to check every single vessel.
How you determine the good from the 'dark' is an exercise in time and experience.
Not just for what you see on the screen for port calls, registered owner, flag and so on, but also for what you don't see. It isn't easy, and salvation lies in having a system and policy designed to 'fail safe' so only vessels you have specifically approved go in the trading bucket.
If you cannot prove it is okay, then you don't do it. It sounds simple but this relies on having an ironclad policy behind you that you update dynamically as new sanctions measures emerge.
What comes out in the next few days, weeks and months after the G7 summit will, without question, be something that will affect compliance policies across all the major bunker trading houses and the ripples of which will be felt across all of shipping.