Price cap on Russian oil comes into effect
As originally indicated in preliminary guidance issued by the US Treasury Department’s Office of Foreign Assets Control (OFAC) on September 9, 2022 and further explained by additional guidance issued by OFAC on November 22, 2022, on December 2, 2022, the US Treasury Department confirmed that the US would be joining the EU and the other G7 nations in imposing a price cap on crude oil of Russian Federation origin (Russian oil) of US$60 per barrel, effective December 5, 2022. As part of that policy, the US will prohibit US persons from providing a wide array of services – including maritime insurance and trade finance – related to the maritime transport of Russian oil unless purchasers buy the oil at or below US$60 per barrel. Importers who purchase Russian oil at or below the price cap will maintain access to brokerage, insurance and financial services that are vital to the oil trade. The price cap comes in response to Russia’s continued actions in Ukraine, and aims to limit Russia’s access to oil revenues while maintaining a reliable supply of oil to the global market. On February 5, 2023, this ban on services will extend to the maritime transport of Russian Federation origin petroleum products unless the products are sold at or below a price cap to be announced before February 5, 2023.
This alert expands upon our previous briefing on the September 9, 2022 preliminary guidance issued by the US Treasury Department. Since then, the US Treasury Department has issued a determination specifying the prohibited maritime transport services, provided additional guidance on the price cap policy and safe harbor, and adopted the US$60 per barrel price cap to align with the rest of the Price Cap Coalition.
Executive Order (EO) 14071, issued April 6, 2022, prohibits the exportation, reexportation, sale or supply, directly or indirectly, from the United States, or by a US person, wherever located, of any category of services as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State, to any person located in the Russian Federation. Pursuant to EO 14071, OFAC issued a determination on November 21, 2022 that provides an exception to the prohibitions set forth in EO 14071, and authorizes US persons to provide certain services as they relate to the maritime transport of Russian oil (the Covered Services), so long as that Russian oil is purchased at or below a certain price (the Price Cap).
The Covered Services include:
• Trading/commodities brokering;
• Insurance, including reinsurance and protection and indemnity;
• Flagging; and
• Customs brokering.
As a result, the export, reexport, sale or supply, from the United States or by a US person, of the Covered Services to any person located in the Russian Federation is prohibited, effective 12:01 am EST, December 5, 2022, unless the crude oil is purchased at or below the US$60 per barrel price cap.
As explained in the November 22, 2022 guidance, the prohibition on providing Covered Services does not apply to Russian crude oil that is loaded onto a vessel at the port of loading prior to 12:01 am EST, December 5, 2022, and unloaded at the port of destination prior to 12:01 am EST, January 19, 2023. The November 21, 2022 determination does not authorize any transactions otherwise prohibited by the Russian Harmful Foreign Activities Sanctions Regulations, 31 CFR part 587 (RuHSR), including transactions involving any person blocked pursuant to the RuHSR, unless separately authorized.
On February 5, 2023, the prohibitions will extend to Russian petroleum and petroleum products unless the products are sold at or below a price cap to be announced before February 5, 2023.
The November 21, 2022 determination does not authorize the import of Russian oil into the United States, which is prohibited pursuant to EO 14066.
Concurrent with the issuance of the November 21, 2022 determination, OFAC issued the following general licenses:
• General License 55, authorizing certain transactions prohibited by the November 21, 2022 determination related to the maritime transport of crude oil originating from the Sakhalin-2 project (Sakhalin-2 byproduct), through 12:01 am EDT, September 30, 2023, provided that the Sakalin-2 byproduct is solely for importation into Japan;
• General License 56, authorizing certain transactions prohibited by the November 21, 2022 determination related to the importation of crude oil into the Republic of Bulgaria, the Republic of Croatia or landlocked European Union Member States as described in Council Regulation (EU) 2022/879 of June 3, 2022; and,
• General License 57, authorizing certain transactions prohibited by the November 21, 2022 determination that are ordinarily incident and necessary to addressing vessel emergencies related to the health or safety of the crew or environmental protection, including safe docking or anchoring, emergency repairs, or salvage operations.1
Safe harbor requirements
As noted in our previous briefing, OFAC has created a three-tier system that delineates the amount of due diligence and recordkeeping service providers are expected to conduct to be afforded safe harbor from civil or criminal enforcement under the oil price cap prohibitions. The tiers set forth a sliding scale of expectations for a US service provider’s attestation and recordkeeping requirements based on their level of access to certain pricing information. Refiners, importers and traders are examples of actors in Tier 1. Intermediaries such as financial institutions and customs brokers are classified as Tier 2. Actors furthest removed from trade, including insurance brokers and machinery insurers, are classified as Tier 3.
Our previous alert included a chart issued by OFAC to illustrate the general requirements for the attestation process for US service providers to be afforded safe harbor. These requirements are part of and in addition to OFAC’s expectation that US service providers will continue to maintain their standard due diligence practices in accordance with their respective industries and for their roles in any particular transaction. All required records for the attestation process are subject to a five-year retention requirement.
OFAC advises that all actors involved in the transportation or receipt of maritime Russian oil exercise vigilance in identifying red flags. Potential red flags include, but are not limited to, evidence of deceptive shipping practices, reluctance to provide pricing information, and deviations from typical pricing practices.
The November 22, 2022 guidance included several updates and clarifications from the September 9, preliminary guidance, including:
• For the Russian crude oil service prohibitions, the US$60 per barrel price cap applies from the point when the crude oil is sold by a Russian entity for maritime transport through the first landed sale in a jurisdiction outside of Russia (through customs clearance). The price cap does not apply to any further onshore sale unless the Russian oil is then transported on water again without being substantially transformed outside of Russia. Once the oil is substantially transformed through refinement or other such substantial transformation that the product’s identity changes in a jurisdiction other than Russia, it is no longer considered to be of Russian origin and the price cap will no longer apply. OFAC does not consider blending of crude oil alone to be substantial transformation for the purpose of the determination.
• As noted above, the Covered Services for Russian oil purchased at any price are authorized, provided that the crude oil is loaded onto a vessel at the port of loading for maritime transport prior to 12:01 am EST, December 5, 2022, and unloaded at the port of destination prior to 12:01 am EST, January 19, 2023.
• OFAC would not consider oil to be of Russian origin solely because it contains a de minimis amount of crude oil left over from a container or tank (e.g., a “tank heel,” or unpumpable quantity of substance that cannot be removed from the container without causing damage to the container).
• For purposes of assessing whether crude oil is of Russian Federation origin, US persons may reasonably rely upon a certificate of origin but should exercise caution if they have reason to believe such certificate has been falsified or is otherwise erroneous.
• The price cap does not include certain ancillary costs, such as shipping, freight, customs and insurance costs, which must be invoiced separately and at commercially reasonable rates. The guidance provides that OFAC would view the billing of commercially unreasonable shipping, freight, customs or insurance costs as a sign of potential evasion of the price cap.
• The December 5, 2022 determination does not prohibit certain services, including medical evacuation or other emergency services for crew members; health, travel, or liability insurance for crew members; and classification, inspection, bunkering, and pilotage.
• The processing, clearing or sending of payments by banks does not fall within the scope of “financing” 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 the Russian oil (i.e., the person is a non-account party) as it relates to the transaction.
Any US person service provider – including traders and commodity brokers, financial institutions, ship/vessel agents, customs brokers, shipowners/carriers, insurers/reinsurers/P&I clubs and flagging registries – should institute procedures that align with the safe-harbor protocols outlined in the November 22, 2022 guidance. In particular, Tier 2 actors such as financial institutions must institute procedures that either enable them to obtain and retain documents that show that Russian oil was purchased at or below the relevant price cap or if obtaining such documents is not practicable, to obtain customer attestations in which the customer commits that for the services provided, the Russian oil was purchased or will be purchased at or below the relevant price cap. As is the case in the context of trade-based money laundering, Tier 2 actors should be attentive to circumstances that might indicate that attestations are potentially fraudulent.
A US service provider’s due diligence and recordkeeping practices will be essential for ensuring compliance with the prohibitions and protecting eligibility for the safe harbor. With the prohibitions and price cap now in effect for Russian oil (and applicable to Russian petroleum in late February 2023), US service providers should ensure their due diligence and recordkeeping policies and practices align with the recommended requirements set forth by OFAC to maximize their opportunities for risk mitigation. It is advisable for all US service providers to assess their risk exposures and current compliance measures for potential gaps that may arise in the context of the oil price cap and create a risk-based plan to ensure compliance with the new regulations.
US service providers that become aware that they are providing a Covered Service related to Russian oil that was purchased above the relevant price cap need to cease providing such Covered Services and contact OFAC. Persons subject to other jurisdictions that have imposed prohibitions on services related to the maritime transport of Russian oil should seek appropriate guidance and/or authorization in those jurisdictions. In certain cases, US persons who comply with the attestation process may subsequently discover that someone has caused them to inadvertently provide Covered Services for Russian oil purchased above the relevant price cap. US persons that seek to continue to provide Covered Services prohibited by the determination should contact OFAC and request a specific license to do so.
Our team will continue to monitor these developments and publish additional updates as appropriate.
Source: Norton Rose Fulbright