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PRICE CAP ON RUSSIAN OIL AGREED: WHAT IS THE BEST PATH TO COMPLIANCE?

On December 2, 2022, the Price Cap Coalition (the EU, G7 and Australia) mutually agreed upon a cap on the price of Russian seaborne crude oil at USD 60 per barrel as of December 5, 2022. A separate price cap for Russian oil products will be introduced on 5 February 2023. Below we would like to present some of the key features of (1) the Price Cap, and (2) the legal framework to enforce the Price Cap in the US, UK, and Europe.
Key features of the Price Cap include:

  • The Price Cap Scheme shall apply to crude oil cargoes falling under CN2790-00 and oil/petroleum products falling under CN2710 according to Annex XXV of the EU Regulation 2022/879.
  • As a transition period of 45 days of vessels transporting Russian crude oil, Service Providers and Shipowners have engaged in trades purchased and loaded prior to 5 December 2022 and will be unloaded prior to 23 January 2023. These cargoes require a separate attestation.
  • The service providers shall provide the covered services for the transport of Russian crude oil to the buyer of the third countries that have not prohibited the import of Russian oil provided that the buyers must demonstrate that Russian oil has been purchased at or below the Price Cap.
  • The significance of the characterization of the Price Cap is that the Coalition will tolerate in accordance with a legal framework to provide services for the marine transport of Russia-origin oil provided the oil is sold at or below the price set by the Coalition.

WHAT OBLIGATIONS DOES THE PRICE CAP SCHEME CURRENTLY IMPOSE ON SERVICE PROVIDERS?

Under the Price Cap Scheme service providers and shipowners providing covered services must comply with the attestation process and record-keeping of Price Cap transactions for a period of 4 or 5 years under different legislatures. However, compliance will be challenging since shipowners or service providers hardly have access to safe price information. Therefore, the guidance, published under different jurisdictions categorizes service providers into three (3) tiers. The burden of the obligation to check the price of the crude oil and the products depends on the proximity of a party to the sale contract, invoice or other documents indicating the price of oil cargo.

  • Tier 1 actors have regularly direct access to the price paid for cargo in the normal day-to-day operations of the business, such as commodities brokers, traders and importers. They hold invoices, contracts, and other documents including pricing and must share the information and/or provide signed attestations to reassure the other Tier parties.
  • Tier 2 actors have a direct interaction with Tier 1 and Tier 3 has no direct access to price information. Therefore, it could be considered to have a relatively light compliance burden. In theory, if they obtain attestation from Tier 1 actors related to the oil cargo purchased below the cap, they can provide services to the relevant transaction.

Although it seems enough for the Tier 2 and Tier 3 parties to depend on a signed attestation after a standard due diligence, they have still under an obligation to ensure the price of the Russian-origin oil to determine the “intention” of the person/party reporting suspicious behaviour or erroneous attestation to eliminate reasonable cause to suspect.

We present below a brief explanation of the sanction regimes of different legislations.

THE UNITED STATES

Firstly, the US prohibited the import of Russian-origin oil under Executive Order 14066. Secondly, The Department of the Treasury’s Office of Foreign Assets Control (OFAC) has published a Determination pursuant to Executive Order (E.O.) 14071 to implement the price cap policy for crude oil of Russian Federation origin. The Determination bans the US persons from providing services including shipping, insurance, finance, custom brokering, flagging and trading/commodities brokering (“Covered Services”) regarding the maritime transportation of certain Russian oil and oil products. Additionally, the US Department of Treasury published Guidance on the implementation of the price cap policy for crude oil of Russian Federation origin. Later, General License 55, General License 56, and General License 57 have been issued by the OFAC.
It is important to note that the Price Cap continues to apply once the oil has cleared customs to any further onshore sales in a jurisdiction other than Russia. However, if the oil is again sold by a buyer via maritime transport without being substantially transformed, the Price Cap still continues to apply.
Equally important, OFAC offers “safe harbor” that is a protection from OFAC enforcement if the US persons providing Covered Services comply in good faith with due diligence standards set out in the Guidance.

VEG Consulting is able to serve about due diligence standards among the Tiers depending on the type of services, OFAC’s potential evasion assessments and enforcement responses, and compliance models to OFAC’s satisfaction to avoid facing strict liability for breach of sanctions.


For further information, please contact with Yamac Guneyli on +44 745 993 4545 or at yguneyli@venusenergyglobal.com.

THE UNITED KINGDOM

UK legislation is particularly important for the marine service providers such as P&I Clubs due to their financial arrangements and contracts subject to English Law. While there are different types of sanctions outlined in Russia (Sanctions) (EU Exit) Regulations 2019, Office of Financial Sanctions Implementation (the “OFSI”) published a document called UK Maritime Services Prohibition and Oil Price Cap Guidance. Additionally HM Treasury published General Licence INT/2022/2469656 regarding the Oil Price Cap Scheme and General Licence INT/2022/2470256 regarding Oil Prirce Cap Wind-down including arrangements for handling tankers already loaded Russian oil.

According to the Russia Regulations 2019, the bans will prevent all persons within the territory and territorial sea of the UK and to all persons, wherever they are in the world:

  • supplying or delivering by ship oil or oil products from a place in Russia to a third country or from one third country to another third country,
  • providing financial services, funds and brokering services to anyone globally who is supplying or delivering by ship oil and oil products, from a place in Russia to a third country, or from one third country to another third country.
    The Guidance once defines and then describes all the burdens on “Involved Person” shoulders.
    Fisrts, Involved Person is a person who is involved in either:
  • the supply or delivery of oil with regard to HS 2709 and oil products with regard to HS 2710, or
  • the provision of financial services, funds, or brokering services related to the supply or delivery of oil and oil products.

Involved Persons must ensure that all transaction that they involved related to Russian oil from 5 December 2022 and Russian oil products from 5 February 2023 are sold at or below the Price cap by complying with the attestation process and record keeping requirements.

UK service providers has a legal requirement under Regulation 70 to report the breach of UK sanctions şf they have a reasonable cause to suspect a person has committed an offence. In this regard, all Involved parties must undertake appropriate due diligence to satisfy OFSI based on the proximity of the price information and demonstrate that they have fulfilled the requirements of attestation in full.

If you need help with any of the above compliance checks or would like to understand and mitigate your exposure to OFSI sanctions, please get in touch with Yamac Guneyli at yguneyli@venusenergyglobal.com or on +44 745 993 4747.

EUROPEAN UNION

Together with the Legislation (Council Regulation (EU) 2022/2367, Commission Implementing Regulation (EU) 2022/2368 and Council Decision (CFSP) 2022/2369) introduced by the EU, the European Commission published an FAQ and a Guidance document on how the Price Cap Scheme was to be interpreted.

Despite similarities that contained in the US and UK legislations, below you can find some important differences presented under existing EU legislation.

Unlike the UK legislation, EU Price Cap Scheme will continue to apply in circumstances after the oil has cleared customs at the third country destination where it then “… becomes seaborne again without being substantially transformed into a different good in line with non-preferential rules of origin. (i.e. without being refined) …”. Morover, ship-to-ship transfer must occur at or below the Price Cap.

The EU Guidance draws our attention to the adjustment requirement of the market participants’ invoicing models to show the price of oil till the port of loading and the price for transportation and other services separately to prevent the significant deviation of the shipping and other service charges.

The EU service providers must perform appropriate due diligence regarding the origin of oil and should obtain the well known documents such as certificate of origin to ensure the origin of oil and the products.

Each service provider to the seaborne Russian oil has to demonstrate by securing pricing documents and/or attestation that oil has been purchase at or below the Price Cap.

For further information, please contact with Yamac Guneyli on +44 745 993 4545 or at yguneyli@venusenergyglobal.com.

COMMENTS

Special attention will be given to the differences between the UK, EU and US regimes, which need to be taken into account when considering compliance.

The service providers involved in transactions of Russian oil transport to third countries are required to keep records of Price Cap transactions and despite no government-mandated measures, all parties must retrospectively demonstrate to OFSI, OFAC or national competent authorities that they have implemented appropriate but self-determined due diligence measures to comply with the price cap framework and fulfilled the requirements of the attestation process on time and in full to their satisfaction to avoid facing strict liability for breach of sanctions.

Previous practices have presented that after the sanctions were entered into force, there would be parties acting knowingly and intentionally by preparing falsified or erroneous attestations or other documents to subvert the price cap on Russian oil. Therefore, parties have to be acted in good faith and should take the appropriate steps to ensure compliance with the price cap.
 
We would like to provide the below services to all parties participating in the supply chain of seaborne Russian-origin oil and petroleum products according to their industry and their role:
 

  1. Full compliance check to eliminate the possibility to evade the enforcement,
  2. Following appropriate due diligence to reveal the reliability of signed attestation or price information and to assess the origin of oil,
  3. Preparation of reports to OFSI, OFAC or other national competent authorities in the event of any possible circumvention or breach of the price cap,
  4. Drafting/reviewing sanction (“sanction limitation”) clauses in policies, charter parties, etc. to ensure that no trade will be carried out above the price cap,
     
    If you need help with any of the above services or would like to understand and mitigate your exposure to OFSI sanctions, please get in touch with Yamac Guneyli at yguneyli@venusenergyglobal.com or on +44 745 993 4747.

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