The latest U.S. sanctions designations on China’s independent “teapot”’ refineries signal a more targeted and commercially impactful approach to constraining Iran’s oil exports. This article explores how these measures work and their effectiveness.
Key takeaways
- The U.S. is sanctioning China’s independent “teapot” refineries to increase pressure on Iran’s oil exports.
- SDN designations have immediate commercial consequences, cutting affected companies off from the U.S. financial system and discouraging banks, insurers and traders from dealing with them.
- Restructuring or renaming does not remove risk unless it is clear that the new entity is genuinely separate from the sanctioned one.
During this Trump term, the United States has adopted a more nuanced approach to the “maximum pressure” campaign to squeeze Iran’s oil export revenues. As China is the largest buyer of Iranian oil, that trade route was always under scrutiny by the U.S. authorities. However, the designation of independent “teapot” refineries is a novel approach that started earlier this year.
Why Hebei Xinhai Chemical stands out
Hebei Xinhai Chemical was targeted in the third round of teapot designations and sent a particularly strong message because, unlike the other teapots that are domestic-facing, Xinhai is a relatively big teapot with full-on crude import quotas. It is “independent”, but at the same time more connected with the international market. While the less connected intra-China teapots can absorb or tame the impact of the sanctions, international transactions are where these designations “bite” because being placed on OFAC’s SDN List blocks a company’s access to the U.S. financial system, including the use of U.S. dollars.
How sanctions effectiveness is felt in practice
The “effectiveness” of the sanctions is measured by how much the sanctions are complied with and how much the targeted behavior changes. Companies’ risk appetites fluctuate based on the exposure they have to the U.S. financial system. If a non-U.S. company has a lot of U.S. counterparts that it deals with, or has contracts denominated in U.S. dollars, that company will not want to take the risk of an OFAC designation through secondary sanctions. Even without having a U.S. counterparty, an SDN listing makes the life of a company extremely difficult, where parties including banks and insurers alike – especially in the Western world – will not want to deal with an SDN.
The pattern of U.S. designations targeting different participants of the Iranian oil supply chain, whether it be the vessels carrying these products, the ports receiving them, or the refineries processing them, has certainly been effective in terms of increasing the risk averseness of the parties that may be looking to ship in this trade route. On the receiving end, it is understood some of the sanctioned teapots are renaming and reorganizing themselves, presumably because these sanctions do bite.
Do restructurings reduce sanctions risk?
As a result of the restructuring activities, if a new entity is formed and it does not have sanctioned ownership, the default position is the new entity would not be considered sanctioned (though it may be targeted in a future action). However, if the new entity is seen effectively as a “spin-off” of the previously sanctioned entity, then that may be sufficient to deter parties from dealing with it depending on the commercial risk appetite.
A similar issue arises when a previously sanctioned complex expands. An expanded complex may continue to run into practical difficulties and face risk averseness if it is not clear from the outside that the expanded parts are entirely distinct from the sanctioned parts, in terms of ownership and property interest.
In short, formal corporate restructuring does not necessarily mitigate commercial sanctions risk unless the independence and ownership of the “new” entity can be demonstrated with clarity.