Introduction
A ban on services related to the maritime transport of Russian-origin crude oil sold above a pre-determined price cap of $60 per barrel began on December 5, 2022, with a similar price cap ban related to other Russian-origin petroleum products expected to begin February 5, 2023, with a yet-to-be-determined price level. The United States, G7, the European Union and Australia (collectively, the Price Cap Coalition) established this extraordinary measure to limit global revenues flowing to the Russian Federation following Russia's invasion of Ukraine in 2022, while still maintaining the Russian supply of oil to global markets.
The new price cap policy will create complex new sanctions compliance and recordkeeping obligations for global industries involved (directly or indirectly) in Russian energy trade, including the insurance, trade finance, banking, brokering, navigation, shipping and refinery industries. The price cap at $60 per barrel is below the Brent international index for crude oil, which has been trading at about $87 per barrel (though the price for Urals crude has been trading below $80 since early November). The Price Cap Coalition reportedly will review the price cap regularly, with the intent to keep the cap at least 5 percent below the market price.
Members of the Price Cap Coalition have previously announced outright bans with various effective dates on the import of Russian-origin crude oil and petroleum into their jurisdictions (unless otherwise authorized). The United States banned the import of each category by Executive Order in March 2022; the EU's and UK's respective bans on crude oil imports become fully effective on December 5, 2022, and their bans on petroleum imports, on February 5, 2023. Accordingly, the new price cap policy will complement the existing outright import bans in these jurisdictions. It will allow persons from the Price Cap Coalition member countries to provide certain covered services in support of global Russian crude trade destined for export to third countries only when such exports are priced at or below the price cap. As such, the price cap is intended to provide sufficient incentive for Russian producers to continue to sell oil to the global market, especially to low- and middle-income countries. Meanwhile, Russia has announced that it will "not accept" the cap.
The price cap announcement underscores the extremely coordinated approach among the US, the EU, the UK and other allied governments on Russia sanctions measures, resulting in severe prohibitions or restrictions on trade in Russian energy products but stopping short of imposing full blocking sanctions against Russia's largest energy giants.
This Client Alert provides an overview of these regulatory developments in the United States, the European Union and the United Kingdom.
US Russian Crude Oil Price Cap Implementation
Oil Price Cap – A Ban With Exceptions. On November 22, 2022, the US Department of the Treasury's Office of Foreign Assets Control (OFAC) released Final Guidance (OFAC Guidance) interpreting certain prohibitions under E.O. 14071 ("Prohibiting New Investment in and Certain Services to the Russian Federation in Response to Continued Russian Federation Aggression") and a subsequent Determination of November 21, 2022, under the E.O. that prohibits certain services related to the maritime transport of Russian crude oil, unless it is conducted at or below the price cap. OFAC released an additional Determination on December 5, 2022, setting the price cap at $60 (collectively, the Determinations).
Effective at 12:01 a.m. on December 5, 2022, the Determinations prohibit the "exportation, reexportation, sale, or supply" from the United States or by a US person of a list of "Covered Services" relating to the maritime transport of crude oil to "any person located in the Russian Federation." The Determinations also include a general authorization permitting the export of Covered Services if the seaborne Russian oil is purchased at or below the price cap. Such services are prohibited if the seaborne Russian oil is purchased above the price cap. The Covered Services subject to the Determinations are:
- Trading/commodities brokering
- Financing
- Shipping
- Insurance, including reinsurance and protection and indemnity
- Flagging
- Customs brokering
The Determinations and related FAQs also clarify that certain Russian oil trade is exempted from the price cap when such crude oil is loaded onto a vessel at the port of loading prior to 12:01 a.m. Eastern Standard Time on December 5, 2022, and unloaded at the port of destination prior to 12:01 a.m. Eastern Standard Time on January 19, 2023.
The OFAC Guidance provides additional clarity on the scope of the prohibitions defined in the Determination. First, it notes that the price cap does not include the cost of shipping, freight, customs or insurance, which instead must be invoiced separately and at commercially reasonable rates; OFAC explicitly views the billing of any commercially unreasonable costs as a sign of evasion of the price cap.
Second, for the Covered Service of "Financing," the OFAC Guidance clarifies a variety of specific requirements for the financial services industry. The prohibition on financial transactions above the price cap is broad, covering "a commitment for the provision or disbursement of any debt, equity, funds, or economic resources, including grants, loans, guarantees, suretyships, bonds, letters of credit, supplier credits, buyer credits, and import or export advances." However, this definition excludes the "processing, clearing, or sending of payments by banks" where the bank (1) is operating solely as an intermediary and (2) does not have any direct relationship with the person providing services related to the maritime transport of Russian oil as it relates to the transaction. Similarly, services with respect to "foreign exchange transactions and the clearing of commodities futures contracts" also fall outside the scope of Financing. Financial institutions must also undertake specific due diligence efforts to benefit from the compliance "safe harbor," as described below.
Third, the OFAC Guidance details when the ban "starts" and "stops" for various Russian oil transport scenarios. It applies from the moment oil is sold by a Russian entity for maritime transport and continues until the oil has first cleared customs in a jurisdiction other than the Russian Federation. After the Russian oil has cleared customs, the price cap no longer applies to further onshore sale. Once the Russian-origin oil is "substantially transformed"—meaning, is refined or otherwise processed such that it "loses its identity and is transformed into a new product having a new name, character, and use"—it is no longer considered to be Russian-origin oil; it is thus not subject to the price cap and may be transported by sea again. However, if Russian-origin oil exits a jurisdiction via maritime transport after having cleared customs and without "substantial transformation," then the price cap would continue to apply. Persons assessing whether crude oil is of Russian origin may rely on a certificate of origin but should exercise caution if they have reason to believe that such certificate has been falsified or is otherwise erroneous.
Fourth, the OFAC Guidance clarifies that "crude oil" covers all articles defined under subheading 2709.00 of the Harmonized Tariff Schedule of the United States (Chapter 27).
Fifth, the OFAC Guidance clarifies that three sets of services are excluded from the scope of Covered Services: (1) medical evacuation or other emergency services for crew members; (2) health, travel or liability insurance for crew members; and (3) classification, inspection, bunkering and pilotage. We recommend that companies exercise caution when considering the provision of other categories of services that are neither specifically listed as Covered Services nor excluded under this provision.
Sixth, E.O. 14071 contains an express prohibition on "facilitation" by a United States person, wherever located, of a transaction by a foreign person where the transaction by that foreign person would be prohibited if performed by a US person or within the United States. In other words, a US person cannot take behind-the-scenes actions, such as approving, financing or guaranteeing, that would assist a non-US person in undertaking actions prohibited by the relevant regulations
Compliance Safe Harbor. Anticipating the compliance challenges for US persons engaged in the provision of Covered Services for the trade of Russian crude at or below the price cap, the OFAC Guidance sets forth an elaborate recordkeeping and attestation framework that creates a "safe harbor" from enforcement for US persons demonstrating adherence to the policy. Under this framework, each party in the supply chain of Russian oil shipped via maritime transport must demonstrate or confirm that the Russian oil has been purchased at or below the price cap in order to be shielded from strict liability for sanctions breaches where the providers inadvertently deal in the purchase of Russian oil sold above the price cap due to falsified or erroneous records provided to them by others.
The guidance divides service providers into three tiers based on the directness of their involvement:
- Tier 1 – Commodities brokers and traders, as well as any other actors with direct access to price information, must maintain and retain price information (e.g., invoices, contracts, receipts, proofs of accounts payable) indicating that Russian oil for maritime transport was purchased at or below the price cap. Moreover, Tier 1 actors may also need to provide attestation to lower-tier actors that such oil is in compliance with the price cap.
- Tier 2 – Financial institutions, ship and vessel agents, commodities brokers, and others who "sometimes are able to request and receive price information from their customers" are required to request and retain price information from their customers, including Tier 1 actors, to the extent practicable, or a signed attestation from their customers when a direct receipt of price information is not practicable. In particular, the safe harbor requirements for "financial institutions" depend on whether "transaction specific" or "general" financing is provided in connection with a particular transaction.
- Tier 3 – Shipowners and carriers, flagging registries, insurers (including reinsurers and protection and indemnity (P&I) clubs), and others "who do not regularly have direct access to price information" can receive safe harbor using sanctions exclusions clauses in policies or contracts or signed attestations from higher-tier customers.
A customer's or counterparty's refusal or reluctance to provide the necessary documentation or attestation should be considered a red flag. The availability of the safe harbor also requires service providers to retain relevant records for five years, in accordance with 31 C.F.R. § 501.601, in addition to complying with the ordinary requirements of OFAC's risk-based due diligence expectations.
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