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Divergence between regulatory approaches underlines complexity

 

By Carly Fields

 

The escalating sanctions regime against Russia is reshaping trade flows, supporting parallel markets, and challenging traditional oversight. 

In yesterday’s Baltic Exchange Sanctions Policy Update webinar Jos Standerwick, chief executive of Maritime London, and Daniel Martin, a partner and lead for HFW's sanctions team, spoke about the complexities of the evolving sanctions environment and its implications for the shipping industry.

Standerwick opened the discussion with a statistic: "So far in 2025, according to my rough calculations, we've seen circa 700 vessels designated by G7 countries for their suspected involvement in trading non-compliant Russian oil." This rapid acceleration in vessel designations underscores the G7's intensified efforts to curb Russia's oil revenues and maintain a degree of exposure to the trade under the price cap mechanism, he added.

Martin stressed the novelty of the oil price cap in the context of sanctions, describing it as a policy "that hadn't been tried before”. He explained that the past months have been a constant calibration of this mechanism, acknowledging the need to address the extent to which the oil price cap has created a parallel trade.

The inherent demand for Russian oil globally, coupled with Russia's desire to export, led to the proliferation of the shadow fleet.

This parallel trade, while maintaining the flow of a valuable commodity, has raised significant concerns for regulators, particularly regarding "the growth in substandard vessels carrying those cargoes”, Martin said, presenting a serious pollution risk.

 

Fragmented approach

Added to this, the current geopolitical climate reveals a fragmented sanctions approach. Martin identified "four, arguably separate, blocks: the US, the UK, and the EU, almost split into two blocks on its own”. This fragmentation is a direct result of politically driven sanctions, responsive to different domestic issues. A notable divergence, according to Martin, is "a fragmentation between the US position on Russia and the historic joint position of EU, UK and others on Russia”. The internal political dynamics within the EU, exemplified by the difficulty in progressing the 18th package of sanctions against Russia, further compound this complexity. 

The fundamental question for the EU, he said, is "is the EU able to be sufficiently dynamic with respect to sanctions when requiring unanimity among Member States and or does there have to be a bit of movement there?" This uncertainty, particularly with potential shifts in US policy within the next 50 days, creates "significant uncertainty" for businesses, marking the biggest challenge from a commercial perspective.

The recent announcement by the US Administration regarding 100% secondary sanctions on buyers of Russian energy introduces another layer of complexity.

Martin characterised the US announcement as consistent with the current administration's approach of "announce things at a very headline level with a real lack of detail”. 

He suggested that the new announcement might lead those behind the US sanctions bill to "pause what they're doing, and not take it any further forward, because the announcement yesterday suggests, at least to some extent, the two are aligned."

Martin said the intent behind those measures was "use whatever economic levers are available to the US - in particular to target those who continue to buy Russian oil and thereby are said to be funding Russia's war against Ukraine”. The core mechanism is that countries that continue to buy Russian oil will face tariffs in the event that they import goods into the US, he said. This, he added, sends a powerful message, particularly to India and China: “You can buy Russian oil, or you can trade with the US, but you can't do both." This forces a "complicated domestic calculus" for these nations, where they must weigh their economic interests.

 

Divergent approaches

The differing approaches between the US and the EU/UK were also examined, with Martin suggesting that the EU and UK's focus on vessel-specific designations is driven by "pollution related concerns, relating to the terrifying scenario where a shadow fleet vessel, laden with Russian oil, has an incident, there's a pollution claim, and there's no cover”. In contrast, he noted, for President Trump, that the one word he “loves more than any other in the English language” is tariffs. “So it's perhaps not surprising that that's where he sought to put pressure." 

Martin concluded that while EU/UK designations are a "relatively targeted legal approach”, the US tariff approach is "a much more broad brush focus on the country as a whole”.

If both policies run in parallel, he warned, "that is going to lead to divergence”.

The webinar delivered a sobering assessment of the long-term consequences. Standerwick noted that "the longer these sorts of measures go on and the more onerous they become, it is likely that people see a growth in domestic services to provide services to the parallel fleet - that's just going to be the consequence”. 

Martin agreed, predicting an "accelerated" trend where the "heavily regulated" fleet struggles to compete with the "parallel fleet, which is subject to much lower regulatory and compliance burdens”. This, he explained, creates a disadvantage for local insurers, local operators, and local brokers, even in trades not involving sanctioned countries. 

He attributed this consequence to the "novel" nature of the Russia scenario, given the size of economy, the extent of the measures, and the duration of the measures. "We're in the middle of something certainly I didn't anticipate back in 2022," Martin said. The ramifications of these far-reaching sanctions are, it seem, only now becoming fully apparent.