WHEN the US imposed sanctions on Shenzhen tech giant Huawei earlier this year, along with the 140 other Chinese companies it quietly added to Washington’s infamous “entity list”, it was framed in the US as punishment for wrongdoing.

Back in Beijing the view was that this had more to do with aggression born of fear as US rivals helplessly watched China’s ascent to tech leadership status.

So the fact that senior Chinese officials have already characterised US sanctions on Cosco subsidiaries as thinly veiled leverage in advance of next months’ trade negotiations is entirely understandable, just as the US stance has positioned this a straight case of ratcheting up pressure on Iran. 

But both explanations represent over-simplification of the detail behind this extraordinary story that has sent shockwaves through the shipping industry as tanker rates surged, lawyers were put on stand-by, P&I Clubs moved to pull cover and charterers rushed to protect themselves from potential sanctions risk, switching away from Cosco tonnage.

The facts of the case are simple enough - the US Treasury department blacklisted two of Cosco’s tanker subsidiaries on Wednesday for shipping Iranian oil.

That provocative move caught both Cosco and the wider market off guard because, despite Washington’s unquestionably unambiguous policy towards Tehran, it has been well known by everyone for some time now that China had remained one of the last few buyers of Iranian crude.

OFAC, the US Treasury department responsible for the sanctions has known about China’s willingness to import Iranian crude for several months.

Despite the subterfuge and opaque nature of Iran’s remaining oil trades, and despite vessels’ AIS signals being turned off, the exploits of Iranian tonnage have been well documented, not least by Lloyd’s List.

To suggest that the US government were in the dark until now would be disingenuous in the extreme.

So why now?

Cosco were caught off-guard and several senior figures have been rushed back to Beijing to discuss solutions with government officials. 

With the next round of trade talks between officials from the US and China set to take place in Washington in two weeks’ time, the suspicions being discussed by Cosco insiders are inevitably assuming the motivation has more to do with the US-China trade war than it does Iran.

But while the timing may smell somewhat suspicious, there were signs that Cosco was well aware of the risk and had already taken precautions.

This requires a quick deep dive into Cosco’s labyrinthine structure to fully appreciate.

The two blacklisted units, Cosco Shipping Tanker (Dalian) Seaman & Ship Management Co (the Shipmanager) and Cosco Shipping Tanker (Dalian) (Cosco Dalian)—were both subsidiaries of Cosco Shipping Energy Transportation (CEST), the Shanghai-and Hong Kong-listed oil and gas shipping arm of Cosco Shipping. The original structure was:

CSET owned 100% of Cosco Dalian who owned 100% of the Shipmanager. The Shipmanager had already been implicated in Iranian oil subterfuge as it was shown as the manager of the Kunlun Shipping tankers – the entity Lloyd’s List reported earlier this year was shuttling crude from Iran to offshore Malacca for ship-to-ship transfer on to Iranian owned tankers for onward sailing to Asia.

However, in June this year, Cosco Dalian disposed of the entire stake in the Shipmanager to Cosco Shipping Investment Dalian, which is not directly affiliated with CEST. Analysts in Asia saw this as a precautionary move to cut the ties of the Shipmanager with the Cosco Shipping’s tanker business. But it seems the US had targeted the Shipmanager before the disposal, so it included Cosco Dalian, not the investment unit, into the latest sanction list.

CSET, which halted trading of shares on Thursday in the wake of the sanctions announcement, has several subsidiaries, including Cosco Dalian, that own and operate its tanker fleet consisting of over 150 ships on the water. But only the company itself knows how many vessels are under Cosco Dalian and are now subject to sanction restrictions. This is also one of the reasons that charterers and brokers are panicking right now.  

As one Broker described the situation - by slapping sanctions on Cosco, the US has managed to pile further pressure on both China and Iran while simultaneously putting a rocket under the tanker market. We can only speculate as to which of those three outcomes were intentional.

The reality is that the US could have announced the sanctions at least a couple of months ago, if not earlier, so the timing of the sanctions salvo so close to the next round of China-US trade negotiations are at least suspicious.

Furthermore there are already fears that if these trade talks don’t work out for Washington, the sanctions could expand to CEST or even the ultimate parent Cosco Shipping.

No doubt a certain other state shipping giant, who owns as many VLCCs as Cosco Shipping does, will be equally concerned as to whether they might now become the next target of the US, and the fallout already seems to have spread to the LNG shipping sector, where Teekay and Dynagas could be potentially affected owing to their partnership with Cosco in a number of artic LNG carriers.

So while Cosco perhaps should not have been quite so confident that this wasn’t an inevitability, it’s equally fair to say that the US application of its sanctions on Iran and Venezuela this year has been haphazard, inconsistent and mercurial. Ships have been blacklisted, and others related to the same entity allowed to trade. 

Entities have been sanctioned sweeping up ships that have no connection whatsoever. 

It seems OFAC wants to confuse and infuse fear and is deliberately leave opacity, providing wriggle room if needed. 

The stage is set for trade talks where the US has both the upper hand (if it wants to play it) and the ability to offer face-saving alternatives to the Chinese government.