Daniel Pickard, head of the International Trade and National Security Practice of the law firm of Buchanan Ingersoll & Rooney, discusses some of the subtler and long-last impacts that the closure of the Strait of Hormuz will have on global supply chains.
The headlines are full of the immediate impacts of the closure of the Strait of Hormuz, and the U.S.-Iran war generally. Oil prices have skyrocketed, hitting around $110 per barrel for Brent crude as of mid-May, and affecting multiple types of fuel. “It’s the largest oil shock probably in modern history,” Pickard says.
Longer-term, the conflict is causing companies and their supply chains to seek both alternative routings and suppliers. In addition to diversifying supply routes and stockpiling goods and materials, they are ramping up plans to reshore or nearshore production for the U.S. consumer market. “Businesses hate risk long-term,” Pickard says. “To the extent they can mitigate that risk, everybody is happier.”
Legal implications are also arising. Companies are concerned about economic sanctions, specifically Iran’s attempt to collect tolls for ships passing through the Strait of Hormuz. The U.S. Office of Foreign Assets Control (OFAC) has ruled the any business paying tolls to the Iranian government is subject to potential criminal and civil penalties.
A similar quandary occurs on the insurance side, especially with regard to cyberattacks in the form of ransomware. Insurance policies might require that affected companies pay the ransom, but if the money is going to any group designated as a terrorist organization, they could once again be subject to severe punishment by the U.S. government. The big question is “how you threat that needle,” Pickard says.
It’s important that companies and their insurance companies conduct due diligence to ensure that they’re not making payments to specially designated nationals (SDNs) that the U.S. prohibits from receiving such funds, he says.