Industry Spotlight: Shipping
/By Connor Bulgrin, Research Associate
In 2019, Iran exported an estimated $27 billion of goods to its trading partners. The majority of these exports were oil and other mineral-based fuels, but they also included plastics, organic chemicals, mineral ore, and fruit. Because Iran’s mountainous terrain is difficult to traverse, over 90% of Iranian exports are delivered by sea. As a result, Iran’s shipping industry is vitally important to its economy.
The Strait of Hormuz gives Iran its comparative advantage in shipping. Connecting the Persian Gulf and the Gulf of Oman, the strait provides Iran access to international waters and dominance over one of the busiest channels in global shipping. While Iran has threatened to close the strait on occasion, it has never done so. Instead, Iran has focused on using its advantageous geographic position to become a significant player in global shipping.
The Iranian shipping industry boasts over 300 ocean-going vessels owned by the Islamic Republic. Additionally, 4,000 privately-owned and operational registered dhows transport imports, exports, and capotage in the Persian Gulf and the Gulf of Oman. The Managing Director of Iran’s Port and Maritime Organization, Mohammad Rastad, claims that Iran’s ports handle “nearly 246 million tons” of goods annually and that Iran’s fleet of vessels “ranks [among the top] 14 or 15 in the world.” According to the United Nations Conference on Trade and Development (UNCTAD), Rastad’s estimate is only slightly off. Iran ranks 22nd in terms of its fleet’s carrying capacity in dead-weight tons and 17th if one accounts only for vessels sailing under their home nation’s flag.
This disparity in ranking exists because almost all Iranian shipping takes place on vessels bearing the Iranian flag. Most vessels can register in foreign nations under “flags of convenience” rules that allow them to avoid the taxes and regulations imposed on vessels in their home country. For Iran, this process is not so simple. Many countries are reluctant to allow Iranian vessels to fly their nation’s flag, fearful of violating American sanctions. Similarly, many countries have retracted permission from specific Iranian vessels to fly their flag, a practice known as “deflagging.” In 2019, for example, Panama deflagged dozens of Iranian vessels to comply with American sanctions.
Despite international pressure on Iranian-flagged ships, Iran’s shipping industry has seen some of the fastest growth in the world. UNCTAD reports: “Ships under the flag of the Islamic Republic of Iran more than tripled their growth compared with 2019.” UNCTAD attributed much of this growth to the unmet demand in Iran produced by international sanctions. They state: “The quadrupling of the number of ships sailing under the flag of the Islamic Republic of Iran derives from increased pressure exerted by sanctions.”
International sanctions do appear to have prompted increased investment in shipping by Iran. Mohammad Rastad has said that in order to combat shortages resulting from sanctions, the government aims to have Iranian ports reach a total capacity of 285 million tons next year, a 15% increase from their current stated capacity. Rastad claims that: “[S]upply of the basic goods did not stop despite heavy sanctions on the maritime organization thanks to the success of Iran’s maritime sector.” This statement is an exaggeration, as the value of Iran’s imports has significantly shrunk since 2018, but it does give insight into the messaging and ambitions of Iranian shipping policy.
Central to Iran’s shipping industry is the Islamic Republic of Iran Shipping Lines (IRISL). This state-owned enterprise has over 100 vessels in its fleet and is the “largest shipping company in the Middle East.” However, its ownership by the Iranian government has made it subject to great foreign scrutiny. In June 2020, the U.S. State Department sanctioned the company, alleging that IRISL is “the preferred shipping line for Iranian proliferators and procurement agents” and that the company has participated in “transporting items intended for Iran’s ballistic missile program… [and] proliferation-sensitive cargo.”
In response, IRISL has adopted several tactics to avoid the impact of sanctions. The IRISL has renamed vessels and changed their unique identification codes to make them challenging to identify. The IRISL has also reflagged their ships using fake flags of foreign countries or receiving authentic flags using forged registration documents. The crews onboard IRISL vessels have also been known to disable or manipulate transponders used for international monitoring, allowing them to avoid being detected by unfavorable observers. Lastly, exporters conduct offshore ship-to-ship transactions that permit them to carry out trade without needing to dock at another nation’s port.
These tactics appear to be working, as sanctions are not appreciably slowing the growth of Iranian shipping. In recent months, the Iranian shipping industry has been diversifying and professing global ambitions. In February 2021, Iran announced that it would be developing a direct shipping line to Latin America and South Africa in order to expand its non-oil trade. President Rouhani also recently celebrated the inauguration of an oil terminal near Jask port on the Gulf of Oman, which will ensure Iran’s ability to export oil regardless of tensions in the Strait of Hormuz.
The Iranian shipping industry’s audaciousness was even at the center of a recent international incident. In early June, an Iranian naval transport ship, the Makran, reached the Atlantic Ocean without making any intermediate stops for the first time in history. The free navigation of the Makran was due in large part to its status as a naval auxiliary. Under international maritime law, the Makran enjoyed sovereign immunity from interdiction by American forces. This legal protection is critical, as the United States has seized previous shipments transported on Iranian commercial vessels en route to Venezuela. As the Makran reached the Atlantic, the American intelligence community fretted that it might be transporting arms and attack boats to Venezuelan President Nicolas Maduro. After the Biden administration urged the governments of Venezuela and Cuba not to let the vessel dock, it changed course. Still, many analysts remain worried about the potential for future clashes between America and Iran in the Western hemisphere.
Iran’s emerging presence in the Western Hemisphere’s waters and markets —particularly in Latin America, a region dominated by America since the Monroe Doctrine— is a test of American power. President Biden’s administration is still crafting its response. In one of the administration’s scant references to the topic of Iranian shipping, Defense Secretary Lloyd Austin commented that he is “absolutely concerned about the proliferation of weapons, any type of weapons, in our neighborhood.” But such a comment reveals little. In the coming months, Iran’s shipping sector appears poised to continue booming. The industry will allow Iran to expand its trade with new partners across the globe. The American reaction to the growth of Iranian shipping could be crucial to the industry’s future, but that reaction is yet to be seen.
