Our previous blog post discussed the G-7's recent proposal to impose a price cap on Russian oil in an effort to diminish the energy revenues of the Russian state. In this post, we examine the new guidance issued by the U.S. Department of the Treasury ("Treasury"), Office of Foreign Assets Control ("OFAC") establishing a framework for the implementation of the proposed price cap.
Treasury has already prohibited further Russian energy imports into the United States, and the "price cap" proposals would not change this. OFAC's new guidance states that the oil price cap policy has "three objectives: (i) maintain a reliable supply of seaborne Russian oil to the global market; (ii) reduce upward pressure on energy prices; and (iii) reduce the revenues the Russian Federation earns from oil after its own war of choice in Ukraine has inflated global energy prices."
To implement this policy, OFAC anticipates issuing a determination pursuant to Executive Order ("E.O.") 14071 ("Prohibiting New Investment In Certain Services To The Russian Federation in Response to Continued Russian Federation Aggression"), which will (i) prohibit the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of services related to the maritime transportation of seaborne Russian oil, and (ii) provide an exception allowing such services if the seaborne Russian oil is purchased at or below the price cap. Enforcement may target either U.S. persons providing services in violation of sanctions, or non-U.S. persons who "cause" U.S. persons to do so by, e.g., providing false or misleading documentation relating to the price.
As a threshold matter, U.S. and G-7 sanctions on the provision of maritime services for Russian oil exports would (unless the price-based exception applies) render it very difficult or effectively impossible to obtain shipping, insurance and other services related to such exports. This is the case for buyers based in G-7 countries adhering to the policy, but also for buyers in other jurisdictions given the compliance obligations of international maritime service providers.
Setting the oil price cap
OFAC's guidance envisions that the countries adhering to the policy will reach a consensus on the level at which the price cap is set. OFAC will issue additional guidance on how the level of the price cap will be published and updated.
Services related to seaborne oil
The maritime services policy, constructed as a ban on services, will have an important exception: importers that purchase seaborne Russian oil at or below the price cap may receive maritime services related to that oil, and service providers can provide those services for shipments of seaborne Russian oil sold at or below the price cap. Service providers for seaborne Russian oil will not face an OFAC sanctions enforcement action, provided that the service provider obtains particular, specified documentation that the purchase price of the oil is at or below the price cap.
Complying with the price exception
The price exception will rely on a recordkeeping and attestation process that allows each party in the supply chain of seaborne Russian oil to demonstrate or confirm that oil has been purchased at or below the price cap. OFAC recommends different types of documentary evidence for service providers to create "safe harbors" from liability of sanctions in cases where service providers inadvertently deal in the purchase of seaborne Russian oil above the price cap due to falsified records provided by those who act in bad faith and make material misrepresentations. OFAC will expect the actors in Tier 1, Tier 2, and Tier 3 to retain relevant records for five years.
- Tier 1 Actors. Actors who regularly have direct access to price information in the ordinary course of business, such as commodities brokers and refiners, "should retain and share" documentary evidence such as invoices, contracts, or receipts/proof of accounts payable to show that seaborne Russian oil was purchased at or below the price cap.
- Tier 2 Actors. Actors who are sometimes able to request and receive price information from their customers in the ordinary course of business, such as financial institutions, "should, when practicable," retain documentary evidence such as invoices, contracts, or receipts/proof of accounts payable to show that seaborne Russian oil was purchased at or below the price cap, but when not "practicable," should obtain and retain customer attestations in which the customer commits to not purchase seaborne Russian oil above the price cap.
- Tier 3 Actors. Actors who do not regularly have direct access to price information in the ordinary course of business, such as insurers and protection and indemnity clubs, "should obtain and retain" customer attestations in which the customer commits to not purchase seaborne Russian oil above the price cap.
OFAC recommends that persons providing services related to the maritime transportation of seaborne Russian oil in compliance with the price exception be vigilant about the red flags listed below, which may indicate possible evasion.
- Evidence of deceptive shipping practices. As detailed in the Treasury's recent global advisory, a range of shipping practices may provide sanctions evasion "red flags"; the Treasury has recommended a number of compliance "best practices" in its Advisory.
- Refusal or reluctance to provide requested price information.
- Unusually favorable payment terms, inflated costs, or insistence on using circuitous or opaque payment mechanisms.
- Indications of manipulated shipping documentation.
- Newly formed companies or intermediaries, especially if registered in high-risk jurisdictions.
- Abnormal shipping routes. The guidance notes that abnormal routing (based on evidence of past practice), unexplained transshipment, sudden, unexplained route changes, and a lack of historic AIS data for the relevant tankers or shipping companies are all red flags.
UK and EU perspectives
In the U.K., the dual change in head of government and head of state in the last four days has, understandably, likely shifted some attention away from the oil price cap discussions. Discussions likely won't pick up until after the period of mourning for Queen Elizabeth II and an anticipated funeral bank holiday on September 19, 2022. Notably, the U.K. is not dependent on Russian gas, and the new Prime Minister, Liz Truss, has just announced that the U.K. will freeze energy bills for two years beginning on October 1, 2022. There are also discussions about fracking, and also about possibly opening up all the North Sea taps in the short term.
The E.U. has begun discussions on how to implement the oil price cap, but the discussions have not resulted in anything concrete.
Russia's reaction to the oil price cap
Russia has stated that it will withhold exports to countries that enforce the cap unless Western sanctions are removed. Depending on Russian responses and energy market developments, there may be considerable incentives for non-compliance by some purchasers, testing the effectiveness of this novel new sanctions tool.
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