Iran has established a shipping channel north of Larak Island through which vessels can transit the Strait of Hormuz under supervision of the Islamic Revolutionary Guards Corps, with payments assessed in Chinese yuan. At least one vessel has paid $2 million for passage, and Malaysia has reported that Iran allowed its ships to pass through the strait. Lloyd’s List reported that the IRGC is conducting the assessments, establishing a pricing mechanism for transit through an international waterway that operates entirely outside the established legal framework governing freedom of navigation.
The United Nations Convention on the Law of the Sea, to which Iran is not a party but whose provisions on transit passage through international straits are generally considered customary international law, establishes that ships of all nations have the right of transit passage through straits used for international navigation. States bordering such straits may regulate certain aspects of transit, including safety and pollution prevention, but may not impede or suspend passage. Iran’s imposition of a fee for transit and its requirement that passage be coordinated with the IRGC constitute a unilateral restriction on transit passage that violates the UNCLOS framework, regardless of Iran’s non-party status.
The yuan denomination introduces a currency dimension that has attracted attention disproportionate to its commercial significance. The volume of transit through the Iranian channel is a fraction of pre-crisis flows, and the $2 million per-vessel fee makes the channel economically viable only for high-value cargoes that cannot access alternative supply routes. The geopolitical significance is greater than the commercial impact: Iran’s explicit preference for yuan-denominated payments represents a sanctioned state’s active promotion of an alternative settlement currency for energy trade. For the U.S. Treasury, which monitors dollar-denominated energy flows as a sanctions enforcement mechanism, the yuan channel creates a transactional category that sits outside conventional surveillance frameworks.
The insurance and liability questions are unresolved. Vessels transiting the Iranian channel do so without the commercial insurance coverage that the London market has withdrawn from the strait. The IRGC’s supervision provides a degree of physical security but does not constitute the insurable risk framework that commercial shipping requires. Vessels that transit without insurance bear unlimited liability for damage, cargo loss, and environmental incidents. The P&I clubs, which provide the third-party liability coverage that most ports require for entry, have not extended coverage to vessels using the Iranian channel. This creates a regulatory gap where vessels can physically transit but cannot legally dock at most destination ports without insurance documentation.
The precedent being established has implications that extend beyond the current conflict. If Iran successfully demonstrates that it can charge for transit through an international strait and denominate those charges in a non-dollar currency, other states bordering strategic waterways may seek to exercise similar authority. The Strait of Malacca, the Bab el-Mandeb, and the Turkish Straits all have bordering states with varying degrees of interest in controlling transit. The legal framework that prevents such control is the UNCLOS transit passage regime, and Iran’s unilateral abrogation of that regime, if it is not reversed, weakens the legal foundation that supports freedom of navigation globally.
For investors and corporate risk managers, the Iranian channel represents a regulatory black hole: a transit option that exists physically but lacks the legal, insurance, and compliance infrastructure that commercial shipping requires. Companies that use the channel accept operational risks that are not covered by their existing insurance policies, contractual liabilities that may not be enforceable in the jurisdictions where disputes would be adjudicated, and potential sanctions exposure from engaging with IRGC-administered payment systems. The channel’s existence provides marginal supply relief but does not restore the regulatory and commercial framework that makes the Strait of Hormuz function as a global trade artery.
