As we previously reported, on 3 June 2022 the EU adopted its sixth package of sanctions against Russia and Belarus. We know that there has been considerable confusion and widespread debate across the energy and maritime industries over how to interpret and comply with these recent sanctions. Our alert aims to shed some light on what the latest sanctions mean in practice and the direct impact they are likely to have on the day-to-day business of the companies affected.
We will focus, in particular, on the following two key decisions made by the EU which prohibit:
1.) The purchase, import or transfer of crude oil and certain petroleum products from Russia into the EU
2.) Insuring and financing the transport, in particular through maritime routes, of Russian oil to third countries
These two decisions are dealt with in the legislation by virtue of two distinct articles: Article 3m (oil imports) and Article 3n (restrictions on insurance, financing of transport to third countries). How do these articles operate and what do companies need to know? In this update we look to give as much clarification as we can on how to interpret the articles and the key points companies should be aware of.
Article 3m - Prohibition on Russian-origin oil into the EU
Looking at the legislation, helpfully recital 15 (which precedes the articles themselves) sets out how Articles 3m and 3n are to operate:
"Recital (15) Decision (CFSP) 2022/884 also imposes prohibitions on the purchase, import or transfer into Member States [emphasis added], directly or indirectly, of crude oil and certain petroleum products, which originate in Russia or are exported from Russia [essentially Article 3m], and on the insurance and reinsurance of maritime transport of such goods to third countries [essentially Article 3n]. Appropriate transitional periods are provided for."
Therefore, in Article 3m, despite the absence of specific wording, we now know that this is a restriction on imports into the EU only. In our view, this would also prohibit the transfer of crude oil and petroleum products within the EU (i.e., from one EU member state to another) if the product originated in Russia.
No doubt because of a lack of clarity in the legislation, the EU issued an update to its FAQs on 14 June 2022, which states that:
"Article 3m of Council Regulation 833/2014 prohibits only the purchase, import, transfer of Russian seaborne crude oil that is destined for import into Member States [emphasis added], as highlighted in recital 15 by Council Regulation 2022/879 of 3 June 2022 amending Council Regulation 833/2014. An EU company is still allowed to transport Russian crude oil to a third country", where a "third country" is any non-EU country (China, India or Turkey, for example).
To put it simply, Article 3m imposes restrictions on the purchase, import and transfer of Russian-origin oil into the EU only but does not impose similar restrictions on exports to non-EU countries.
As we earlier reported, there are exceptions to this general prohibition, principally:
- Until 5 December 2022 in respect of crude oil transactions (products falling under CN 2709 00), where the transaction is a one-off transaction for near-term delivery, or for pre-existing contracts entered into before 4 June 2022, subject to reporting obligations.
- Until 5 February 2023 in respect of transactions in certain other petroleum products (falling under CN 2710) in similar circumstances and, again, subject to reporting obligations.
Unfortunately, there is less clarity in relation to such reporting obligations. As things stand:
- For reliance on pre-existing contracts, the underlying transaction and any ancillary contracts must have been reported to the relevant Member State authority by 24 June 2022; and
- For a "one-off transaction for near-term delivery" (i.e., spot transaction), all aspects of the transaction (including transportation) should be reported to the relevant Member State authority within 10 days of its completion.
There is still no clarification on who should report within a transaction - seller, buyer, supplier, charterer, or owner - nor is there is any guidance on what form the report should be in (though we have had some feedback that the report should be in English).
In terms of who should report, the obvious candidates will likely always be the buyers themselves (whatever form they take). However, until there is clarity on this, we recommend those parties involved in the purchase and/or transport of Russian-origin crude report the transaction or seek confirmation (or indeed a warranty) that the party responsible for reporting does in fact report.
One-off transactions for near-term delivery
There is still no definition of what a "one-off transaction for near-term delivery" actually is, although the EU has been using the term "spot transactions" seemingly interchangeably, including in its published FAQ on 3 June 2022.
As we see it then, a "one-off transaction for near-term delivery" is a transaction for the one-off deals frequently made within the spot market for crude oil and refined products (i.e., not term contracts, which are agreed for a fixed period and number of deliveries).
We do know that the EU has clarified that an ancillary contract is "a contract necessary for the execution of another (principal) contract, that is, a contract without which the main contract cannot be executed, such as insurance, financing etc".
For shipowners, it is worth noting that if the bunkers themselves are of Russian origin or exported from Russia, the bunkers will likely fall under CN Code 2710 (petroleum products) and therefore be subject to these EU sanctions.
Article 3n - Prohibition on oil transport services
Article 3n provides that:
"1. It shall be prohibited to provide, directly or indirectly, technical assistance, brokering services or financing or financial assistance, related to the transport, including through ship-to-ship transfers, to third countries of crude oil or petroleum products as listed in Annex XXV which originate in Russia or which have been exported from Russia.
2. The prohibition in paragraph 1 shall not apply to:
(a) the execution until 5 December 2022 of contracts concluded before 4 June 2022, or of ancillary contracts necessary for the execution of such contracts; or
(b) the transport of crude oil or petroleum products as listed in Annex XXV where those goods originate in a third country and are only being loaded in, departing from or transiting through Russia, provided that both the origin and the owner of those goods are non-Russian."
The EU defines the following:
"any technical support related to repairs, development, manufacture, assembly, testing, maintenance, or any other technical service, and may take forms such as instruction, advice, training, transmission of working knowledge or skills or consulting services, including verbal forms of assistance."
"(i) the negotiation or arrangement of transactions for the purchase, sale or supply of goods and technology or of financial and technical services, including from a third country to any other third country, or
(ii) the selling or buying of goods and technology or of financial and technical services, including where they are located in third countries for their transfer to another third country."
Financing or financial assistance
"any action, irrespective of the particular means chosen, whereby the person, entity or body concerned, conditionally or unconditionally, disburses or commits to disburse its own funds or economic resources, including but not limited to grants, loans, guarantees, suretyships, bonds, letters of credit, supplier credits, buyer credits, import or export advances and all types of insurance and reinsurance, including export credit insurance; payment as well as terms and conditions of payment of the agreed price for a good or a service, made in line with normal business practice, do not constitute financing or financial assistance."
Importantly, the definition of "financing or financial assistance" includes the provision of insurance and reinsurance services.
As such, all of the above listed services are now prohibited in respect of the transport of Russian-origin oil and petroleum products to third countries (non-EU), the only exceptions being where there is an existing sale contract which predates 4 June 2022, or for certain voyages where the product is only transiting through Russia. As we see things, it seems likely that transport contracts concluded after 4 June 2022 (linked to sale contracts prior that date) would be permitted, given how the EU defines "ancillary contracts" but we are waiting on final clarification from them, on this specific issue.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.