United States: OFAC Updates U.S. Oil Price Cap Policy Against Russia

Highlights

• The U.S. Department of the Treasury Office of Foreign Asset Control (OFAC) has published a determination expanding its Russian oil price cap rule to include Russian petroleum products along with related general licenses and compliance guidance, all of which directly impact a wide range of the maritime sector to include trading/commodities brokering, financing, shipping, protection and indemnity (P&I) insurance, as well as reinsurance, flagging and customs brokering.
• OFAC released a determination pursuant to Executive Order 14071 (Determination) on Feb. 3, 2023, restricting certain services related to the maritime transport of petroleum products of Russian Federation origin (Russian petroleum products) that exceed a certain price. OFAC also provided additional guidance regarding the Determination that mirrors supplementary direction applied to crude oil of Russian Federation origin.
• The U.S. price cap on Russian oil and petroleum products is a coordinated action by the Price Cap Coalition – a coalition comprised of the G-7, European Union and Australia – to curtail enrichment to the Russian Federation.

As an update to an earlier Holland & Knight alert on the same topic, the U.S. Department of the Treasury Office of Foreign Asset Control (OFAC) has published another determination pursuant to Executive Order 14071 expanding "petroleum products" of Russian Federation origin (Russian petroleum products) to the original prohibitions placed on U.S. persons from providing certain services related to the maritime transportation of crude oil of Russian Federation origin (Russian oil) that exceed a price cap (Determination). (See previous alert, "OFAC Publishes New Guidance on Russian Oil Price Cap with Impact on Maritime Services," Nov. 30, 2022.)

Russian Petroleum Products

OFAC has provided additional guidance (Guidance) that places Russian petroleum products into two categories: Premium to Crude and Discount to Crude. The Premium to Crude price cap covers the Harmonized Tariff Schedule of the United States (HTSUS) subheadings below, which include gasoline, motor fuel, blending stock, gasoil and diesel fuel, kerosene and kerosene-type jet fuel, and vacuum gas oil.

All other articles defined at HTSUS Subheading 2710, to include naphtha, residual fuel oil and waste oils, are subject to the Discount to Crude price cap.

The Determination is part of a coordinated action by the Price Cap Coalition, a coalition comprised of the G-7, European Union and Australia. Specifically, the European Union and U.K. have taken similar actions to curtail enrichment to the Russian Federation deriving from Russian oil and petroleum products.

New Price Cap for Russian Petroleum Products

Also on Feb. 3, OFAC released an additional determination pursuant to E.O. 14071 setting the price cap for Discount to Crude Russian petroleum products at $45 per barrel and Premium to Crude Russian petroleum products at $100 per barrel. These price caps are in addition to the original price cap on crude oil of Russian Federation origin, which is set at $60 per barrel.

Both determinations go into effect on Feb. 5, 2023. However, any Russian petroleum product loaded onto a vessel at the port of loading prior to 12:01 a.m. ET Feb. 5, 2023, and unloaded at the port of destination no later than 12:01 a.m. ET April 1, 2023, is grandfathered and therefore not subject to the Determination.

Russian Response to the Oil Price Cap Policy

In response to the ongoing effort by the international coalition that includes the U.S., EU and G-7 countries to curtail enrichment to the Russian Federation derived from Russian oil and petroleum products, Russian Federation President Vladimir Putin signed a decree prohibiting all exporters from exporting Russian oil and petroleum products to foreign legal entities and individuals if the contract mechanism for the export directly or indirectly adheres to the price fixing mechanisms – the price cap policy – put in place by the international coalition. Russian exporters are required to report any price fixing mechanisms found in contracts to the appropriate Russian authorities and eliminate the violation within 30 days before completing the transaction.

Impact on the Maritime Sector

These determinations and Guidance place identical safe harbor and attestation requirements on Russian petroleum products that are currently placed on Russian oil. Essentially, this is one more installment of the ever-evolving compliance measures by the U.S. government in what have been several years of concerted effort to more closely scrutinize global trade within the complex maritime sector (See previous Holland & Knight alerts, "U.S. Sanctions on Russia: Impact on Shipping Business and Contractual Considerations," March 7, 2022, and "Executive Order Targeting Russian Energy Sector Has Immediate Effect on Shipping Industry," March 14, 2022.).

Impacted U.S. parties must continue to conduct case-by-case due diligence and risk assessments, which now will require U.S. purchasers to determine if purchased Russian petroleum products are Discount to Crude or Premium to Crude petroleum products. U.S. parties must also be prepared to evaluate and explain whether they "knew or had reason to know" Russian oil or petroleum products were purchased above the relevant price cap using falsified or erroneous documentation. Thus, the attestation and recordkeeping burden placed on U.S. parties should not be treated as a trivial matter.

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