Sanction measures, particularly those against Syria and Iran, are hitting trade with the Middle East hard, forcing investors, oil companies, exporters, and indeed the entire fabric of global trade, to take stock of trading relationships, investments and business partners. 

In the current climate of progressive, more restrictive legislation, doing business with countries under sanction is, says Ross Denton, partner at law firm Baker & McKenzie, not impossible, but increasingly uncomfortable. “It’s like moving down a funnel, ie, increasingly restrictive as it goes on. As a company, you’re going to spend more on transactions if you choose to proceed with them.”

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While the US economic embargo with Iran dates back to the 1980 hostage crisis, what has changed is both the extent of sanctions, the willingness to enforce them, and their increasing international nature. At the end of January 2012, the EU imposed an oil embargo on Iran, while at the close of 2011 US president Barack Obama signed into law a measure that will make life extremely difficult for any foreign financial institution dealing with Iranian counterparts that intends to maintain a presence on US soil. Dealings with Syria are similarly thwarted by sanctions – intended to bring about a resolution of the intractable conflict, with even the Arab League imposing measures against its former member.    

For policymakers, sanctions have the advantage of flexibility, the prevailing vogue being for so-called 'smart' sanctions levelled against individual organisations or individuals, avoiding the clumsiness of full-scale embargoes that damage the country's economic livelihoods of those they are intended to benefit.

Paying the penalty

But that is not to say that sanctions are not firm. In 2010, for example, the shipping line Maersk paid a $3.1m fine for transporting containers to and from Iran and Sudan in US-flagged vessels. The fine could have been much higher – by a factor of 20 – had the US Treasury’s Office of Foreign Assets Control (OFAC) found the violation to have been ‘egregious’. In the same year, Barclays Bank was fined $300m for sanctions violations, and in 2011 JPMorgan reached a settlement with the OFAC for $88m arising out of allegations that it had breached Cuba, Sudan and Liberia sanctions.

If anything – perhaps related to 2012 being an election year in the US – this year promises more vigilant enforcement will be in store. In January, the US State Department hit Chinese, Singaporean and United Arab Emirates oil traders with sanctions for selling refined oil products to Iran. It also announced a settlement with the international freight carrier FedEx. The message is clear: ignore at your peril.

Syrian impact

Lawyers handling sanctions work say that because of the particular sensitivities surrounding Iran’s alleged desire to create a nuclear weapon (and as the United Nations, US and EU resolve to prevent it from succeeding), Iran-related work certainly dominates their workload. But concerns about Syria have swiftly moved up the agenda. Gulfsands, an independent oil company, has recently claimed force majeure with regards to its operations in Syria, as a response to EU sanctions last year. Speaking to fDi, the company’s president, Mahdi Sajjad, says the measures, which proscribed EU businesses from continuing to transact with a number of Syrian state-owned entities, effectively made it “impossible [for Gulfsands] to continue to deal with General Petroleum Corporation, our counterparty in Syria”. 

“We had to stop everything. That of course had a number of repercussions – in terms of paying our contractors, bills and everything. But that’s life. The sanctions were very clear. More recent sanctions on January 19 and 23 clarified the situation, because there were a few grey areas that that first round of sanctions created… Now we have stopped all our operations entirely,” says Mr Sajjad. 

Gulfsands has also chosen to cease exploration, despite not being explicitly precluded from such activities, because it considers doing so to “be consistent with the intent of the sanctions and a matter of financial and operational prudence in response to increasing difficulties in procuring access to essential technical services and supplies required”.

Legal grey areas

Many investors, traders and banks have entirely ceased activities in affected countries instead of spending time and money on navigating the ever-shifting and complex layers of law. Indeed, Tomas Wlostowski, a Brussels-based trade lawyer, advises “all EU companies to get out of Iran, unless they do an incredible amount of business there, as it seems they will eventually have to anyway and compliance costs will soon outweigh commercial gain”. The situation in Syria, he says, will soon follow suit.

Another lawyer, Ben Knowles of Clyde & Co, points out further ironies: one being that in some circumstances the trade is legitimate, but sanctions against Iranian banks render actually receiving payment “a near impossibility”. He adds that some financial institutions have put in place compliance requirements even more demanding than those required by the law. 

But he says that there are question marks about enforcement and implementation. “You can imagine, for example, that a lot of oil will find its way to places it shouldn’t, because of the on-selling of cargo… What happens if a cargo of crude from Saudi is co-mingled in the UAE with a cargo of Iranian crude? These issues give rise to all sorts of problems and grey areas,” says Mr Knowles.

Sanctions disparities

Shades of grey cast a shadow on the rapidly drafted Libya sanctions that prevailed until the unceremonious dispatch of the country's leader, Muammar Gaddafi. Not only was it alleged that the sanctions were asymmetrically applied to the protagonists in the conflict, but more than the usual dose of disparity infused the interpretation of EU measures by member states.

Mr Denton at Baker & McKenzie recalls the example of Libyan oil company Tamoil. “It was wholly owned by four Libyan entities, all of which were designated persons under the EU restrictive measures. In the UK it was forbidden to do any business with them whatsoever. But by absolute contrast German companies were virtually ordered to carry on doing business with Tamoil, because, were the supply of oil to be cut off, the German economy would have been brought to its knees,” he says. 

Many analysts speculate that the oil embargo against Iran will prove more damaging to Europe than its intended target – particularly if the latter maintains trade with Asia. 

At the time of writing, tensions are high in the Strait of Hormuz, through which Gulf oil must pass in order to reach its markets, as they are also in the chambers of the UN, where members are debating the probable effect of further measures against the government of Syria. Certainly sanctions have an impact – only time can ever tell whether they work.