A ship recycling operation in the port of Alang, in India, is struggling to recycle sanctioned ships as banks refuse to grant ship-breakers the letters of credit needed to finance the purchase, reports The Economic Times.

Alang, in Gujarat, is the world’s largest shipbreaking yard. The 14 km stretch of coast sees over a third of retired cargo ships pass through it for dismantling and salvaging of parts. As increasing controls on sanctioned ships, especially from Iran and Russia, make it harder for so-called “shadow fleets” to operate, many owners are choosing to scrap the ships instead. The vessels are often much older than industry norms, but are kept in operation because of increasing demand for ways to transport Iranian and Russian oil covertly.

The first sanctioned ship to be sent to Alang for scrapping was an oil tanker. It was sent to the shipbreaking yard in February 2025 because increased US sanctions had made it impossible to continue operations, Bloomberg reported. 

Since then, dozens of similar vessels have been sent to Alang to be taken apart. However, prospective buyers are struggling to get financing to buy the ships as banks are refusing to grant letters of credit necessary for the purchase.

If it ain’t fixing trade, break it

Cargo ships, which can cost up to £110 million or more when new, are sold to ship recyclers for about £4 million to £17 million. Buyers usually finance the significant sum through letters of credit, which guarantee payment to a seller even if the buyer cannot pay. 

However, banks are refusing to grant the financing once they see it is tied to the purchase of a sanctioned vessel for fear of being linked to sanctions evasion or being sanctioned themselves, sources told The Economic Times. 

South East Asia, especially India, Pakistan, and Bangladesh, is the global hub of shipbreaking, the dangerous but lucrative industry of taking apart old cargo vessels and recovering usable parts and scrap metal to sell. Shipbreaking is often done by hand at no small danger to the workers, who tear apart ships lying on the seabed at low tide. It has also garnered international attention for its polluting nature, releasing toxic chemicals into the waters and improperly disposing of waste. 

In June 2025, the Hong Kong International Convention for the Safe and Environmentally Sound Recycling of Ships (HKC) came into force, regulating the environmental standards to be followed by shipbreakers around the world. Hundreds of shipbreaking yards in Alang have just finished expensive renovations to become HKC-compliant, making the recent reduction in business even more economically taxing. 

Where sanctions fit in

The increased scrutiny and consequent lack of financing are making it increasingly difficult for owners of sanctioned ships to get rid of their vessels; a recent sale of a US-sanctioned Iranian tanker in Alang involved complex documents hiding the seller’s identity and extremely favourable payment terms, including a 180-day window to complete payment.

No trade finance instruments were used in the transaction, indicating the urgency of sellers amid tightening sanctions. Instead, documents seen by Bloomberg allowed the buyer to complete the payment in any number of transactions over the six-month period, all interest-free and without the involvement of credit insurers, guarantees, or letters of credit. 

The extensive use of shell companies – not uncommon in the shipbreaking industry as companies often “re-flag” their ships to avoid domestic environmental laws – went beyond usual practices, showing how nervous the original owners of the 30-year-old blacklisted ship were to remain anonymous. 

Widening sanction regimes have seen an increased targeting of individual business owners, with the US sanctioning Indian shipping magnate Capt Jugwinder Singh Brar in April over breaking sanctions on Iranian commodities. The US specifically targeted India, doubling its tariffs from 25% to 50% starting on 27 August, accusing it of importing Russian oil in defiance of US sanctions – a retaliation India called “unjustified and unreasonable.”

The EU significantly tightened sanctions on Russian oil in July, targeting individual vessels in the “shadow fleet” and banning transhipment through third countries to evade sanctions. Increasing US and UK pressure during the same month has turned the spotlight on maritime shipping and especially the sanction-evading “shadow fleet,” which was estimated to transport £6.4 billion worth of oil in July, mainly from Russia. The rise in sanctions evasion is sharply increasing the risk in the entire maritime shipping industry, leading to higher reporting requirements and more potential for disruption of shipping routes. 

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Shipbreaking is the last step in the life of a cargo vessel, but also one of the most crucial. Dismantling ships safely is necessary to keep the global maritime shipping industry afloat, and the 80% of global trade flows it moves with it. 

As with all other steps of international trade, trade finance is an indispensable facilitator of shipbreaking. When the trade finance process breaks down due to geopolitical risk and sanctions, so do the transactions it enables, placing all of global trade at risk.