In our previous articles, we have examined the recent disruptions affecting global supply chains, with a particular focus on trade routes in the Middle East. The ongoing Israel-Hamas conflict, which escalated in October 2023, has led to heightened tensions between Iran and Israel, putting vital trade routes at significant risk. One critical passage is the Strait of Hormuz, located between Iran, the UAE, and Oman, which serves as a key maritime route for oil trade. While the Red Sea and Suez Canal remain important for oil transportation, they are currently impacted by tensions in Israel and ongoing Houthi attacks. Additionally, Russian sanctions on transportation and oil continue to pose challenges. As a result, companies and governments are compelled to seek alternative routes, despite the inherent deficiencies and risks associated with these new paths. In this article, we will explore the implications of the disruptions in the Strait of Hormuz on international supply chains, examine the search for alternative routes -particularly the Middle Corridor- and discuss the associated risks and shortcomings of these new options.

This article was written by Luis Ramos ([email protected]) and Sefa Geçikli ([email protected]). Both Luis and Sefa are consultants with RSM Netherlands Business Consulting with a focus on International Trade and Supply Chain.    

Conflict Dynamics and Its Implication on the Supply Chains 

The Israel-Hamas conflict, which erupted in October 2023, has since escalated, extending its reach into Lebanon, Syria, and indirectly affecting Jordan and Iran. Recently, Israel launched a ground offensive in Lebanon, prompting Iran to retaliate with a barrage of 200 missiles aimed at Israel, serving as a stark warning against further escalation into direct conflict.

The Strait of Hormuz plays a crucial role as a primary maritime route for Gulf oil, situated between Iran, the UAE, and Oman. It serves as a vital alternative to the Suez Canal for oil trade in the Middle East. Disruptions in this strait can have more severe repercussions for global oil shipments than issues arising in the Red Sea, especially given Iran's significant role in the oil market. Notably, approximately 20% of the world's oil consumption traverses this route, making any blockage a potential catalyst for severe global trade disruptions and increased shipping volumes.

From a logistical standpoint, the ongoing conflict is likely to lead to heightened shipping and insurance costs for countries directly involved, resulting in longer delays that impact both logistics providers and consumers. As a key player in this region, Iran's involvement means that further escalations in the conflict could disrupt oil supplies, driving up prices and adversely affecting global economies that are heavily reliant on oil imports. The situation is particularly critical, as Iran holds considerable control over the Strait of Hormuz, which is integral to its oil trade routes.

Furthermore, the potential for increased sanctions on Iran in the wake of these events may complicate trade dynamics even further, introducing additional layers of complexity to an already volatile situation.

Emerging Logistics: The Middle Corridor and Its Potential and Risks

In addition to other alternatives, such as the Cape of Good Hope in South Africa, companies are increasingly looking to the Middle Corridor—also referred to as the new Silk Route—as a more direct and cost-effective option for their logistics needs. 

The Middle Corridor was established through a partnership between the EU and China to serve as an alternative to the Northern and Southern Corridors. These latter routes have faced increasing conflicts due to their heavy reliance on passage through Russia, where 86% of land trade between Europe and China transits. However, in response to escalating sanctions imposed by the EU and the US on Russia, countries are seeking to reduce their dependency on these routes.

Formally known as the Trans-Caspian International Transport Route (TITR), the Middle Corridor connects Southeast Asia and China via Kazakhstan, the Caspian Sea, Azerbaijan, Georgia, and ultimately reaches Europe through Turkey. It has emerged as the shortest route from China’s Pacific coast to Europe, with freight transit times of up to 10 days—approximately half the duration of the Trans-Siberian Northern Route, saving over 2,500 kilometres in distance.

While the Middle Corridor shows promise, with cargo volumes rising to 1.5 million tons, it currently accounts for less than 10% of the total cargo transported via the Northern Corridor. Furthermore, the existing infrastructure along this route remains underdeveloped, which poses challenges to its viability as a full alternative to the Trans-Siberian routes.

The corridor operates as a multimodal transport system, relying heavily on existing basic infrastructure and ports. Key developments include:

  • Baku International Sea Trade Port, the largest port on the Caspian Sea, is planning to increase its capacity to 10 million tonnes per year to meet growing demand.
  • Turkey currently lacks adequate rail infrastructure, with a limited capacity of only 700,000 tonnes per year. As a result, cargo must be transferred to road transport, leading to longer delivery times and increased costs.

The more fundamental issue lies in Europe’s challenge to fully leverage the benefits of the Middle Corridor. European markets are not the sole participants vying for capacity along this route; countries like Russia are poised to gain from the associated infrastructure projects. It is well-documented that entities in certain nations evade sanctions by re-exporting goods originally imported from the EU to Russia. Similarly, products from Russia are shipped to these countries and subsequently re-exported to the EU. Trade data starkly illustrates this trend, highlighting the need for thorough third-party due diligence, particularly as the route passes through China, Kazakhstan, Azerbaijan, and Turkey—regions that serve as hubs for sanction evasion, making it difficult to trace the origins of goods. Furthermore, Moscow stands to benefit from the Middle Corridor by rerouting some of its goods to shield them from Ukrainian attacks on Siberian railways and to navigate around sanctions and export controls—a strategy already in motion through Central Asian economies. Additionally, Russia could connect the Middle Corridor with the proposed International North-South Transport Corridor, a project involving Iran and Azerbaijan that would facilitate Russian trade to the Indian Ocean. Ironically, despite the EU’s intention to develop the Middle Corridor as a means to circumvent Russia, it may inadvertently enhance Russia’s international connectivity. 

For companies, particularly logistic service providers (LSPs) operating along the Middle Corridor route, the implications of the evolving geopolitical landscape and the potential for sanction evasion are significant. LSPs may face heightened scrutiny from regulatory bodies due to the complexity of operating in regions associated with sanction evasion. Companies will need to invest more in due diligence to verify the origins of goods and ensure that their supply chains do not inadvertently involve sanctioned entities or countries.

Also, the involvement of China as a main actor in this route bring more compliance challenges to the companies, especially LSPs. From an U.S. perspective, understanding the concept of "facilitation" of a violation, is essential to understanding the legal boundaries and compliance requirements these LSPs must navigate. Any support offered by LSPs in the execution of a transaction involving forbidden, restricted or sanctioned goods or persons/entities can be seen as a violation as well, potentially exposing LSPs to legal accountability, enforcement actions and financial penalties. Therefore, while this route presents an opportunity for companies to navigate around traditional sanctions, it also comes with risks related to increasing US sanctions on China. 

Forward Thinking 

As the Israel-Hamas conflict continues to evolve, the implications for global supply chains are becoming increasingly complex. The Strait of Hormuz remains a focal point of concern, with any disruptions threatening to reverberate throughout international oil markets and beyond.
Companies should not solely rely on traditional routes such as the Suez Canal or the Northern Corridor. Instead, investing in the Middle Corridor offers a promising alternative. By forging partnerships with key stakeholders along this route—including countries in Central Asia and the Caucasus—businesses can enhance their resilience against potential disruptions. As geopolitical tensions rise, companies must bolster their due diligence processes to ensure compliance with evolving sanctions. Establishing robust tracking systems for the origin of goods will be essential. Logistic service providers (LSPs) should implement advanced technologies—such as blockchain and AI—to enhance transparency in their supply chains, thereby minimizing risks associated with sanction evasion.
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