In this update, we set out a summary of the key developments concerning the proposed price cap in relation to the carriage of Russian oil by sea.
As stated by the EU, the intention of implementing the price cap is to mitigate adverse consequences on energy supplies to third countries and reduce price increases driven by extraordinary market conditions, while limiting Russian oil revenues. The US Treasury has published some preliminary guidance outlining the intended operation of the price cap. As part of the 8th sanctions package, the EU has commenced the enactment process, but left out the key provisions concerning the price cap itself. Therefore, at this stage, whilst we have some idea of the overall framework, there is much detail still missing from the picture. Given this, please note that these comments are only preliminary comments pending further OFAC guidance and full enactment of the price cap by the EU and other G7 countries.
A. Current Position moving into the price cap
The import into the US of all Russian crude oil and petroleum is banned pursuant to Executive Order 14066. With regard to the EU, Regulation 833/2014 was amended on 4 June 2022 to include a prohibition on the import into the EU of all Russian oil and petroleum products (as listed in Annex XXV) that originate or are exported from Russia. This includes technical assistance, finance, insurance and brokering services. There are two exemptions from this ban, spot transactions and contracts concluded before 4 June 2022 (with notification to the EU Commission) have up until 5 December 2022 and 5 February 2023 respectively. Under the current rules, carriage of Russian oil to third countries is allowed, but other maritime services, including the provision of insurance by EU insurers is not.
It seems that the intention is that the new price cap measures will follow on from these two deadlines. Therefore, from 5 December 2022 and 5 February 2023, there will be a total prohibition on the carriage of Russian crude and petroleum (respectively) to third countries. However, there will be an exemption from this general prohibition, namely where the oil carried has been purchased under a fixed price cap.
B. United States and the Preliminary Guidance
On 9 September the US treasury published ‘Preliminary Guidance on Implementation of a Maritime Services Policy and Related price Exception for Seaborne Russian Oil’ (the “Preliminary Guidance”).
The ‘Price Cap’
Preliminary Guidance sets out the fundamentals of the price cap policy:
The Guidance differentiates parties involved in any transaction involving the carriage of Russian oil by sea as follows:
a) Tier 1 Actors – those who have direct access to price information e.g., commodities brokers and refiners.
b) Tier 2 Actors – those who are ‘able to request and receive price information from their customers in the ordinary course of business’. Ship owners have been put into this category (albeit incorrectly referred to as ‘shippers.’)
c) Tier 3 Actors – those who do not have direct access to pricing information. P&I Clubs are in this tier.
Those involved in transactions involving Russian oil will have to maintain a record keeping and attestation process to demonstrate that the cargo has been purchased at or below the price cap. This is discussed more fully in the final section below.
C. Summary of the price cap in the EU Council Regulation (EU) 2022/1904 of 6 October 2022
As part of the EU’s 8th sanctions package, the EU promulgated EU Council Regulation (EU) 2022/1904 of 6 October 2022 (“EU Council Regulation”).
The EU Council Regulation follows the general framework of the concept set out in the US Preliminary Guidance and includes the following:
D. Guidance on compliance and comments
As mentioned above, it will be necessary to a have a ‘recordkeeping and attestation process’. The purpose of this is to show that the parties involved have made the necessary enquires and evidence to demonstrate compliance with the oil price cap. The Preliminary Guidance suggests that where a party does not directly receive the price information, it is entitled to reasonably rely on representations as to price. We expect the OFAC guidance to give more detail on this, but requirements for compliance will probably be tighter the closer the party is to the pricing information. The guidance for tier 2 actors (i.e., ship owners) is as follows:
Request, retain, and share, as needed, price information (when practicable) or attestation from Tier 1 (when direct receipt of price information is not practicable)
It gives the following examples of information to be obtained:
Invoices, contracts, receipts/ proof of accounts payable; price cap attestation
And some recommendations:
Providing guidance to trade finance department/ relationship managers/ compliance staff, updating requests for information (RFIs) or sanctions questionnaire templates, updating bill of lading templates to include attestations
The EU position is similar and states that the price cap mechanism would rely on an ‘attestation’ process and that ‘operators’ involved in the supply chain of seaborne Russian crude oil and petroleum products will be responsible for demonstrating that they had purchased the commodity within the price cap. ‘Operator’ is not defined and may be further clarified in due course. However, given the Preliminary Guidance, we assume that this will include ship owners.
Ship owners are put in an awkward position as a ‘tier two actor’. The US Treasury considers them to be in a position where they can obtain price information and documents in support. Of course, the problem is that the ship owner usually has no relationship with the shipper (or other tier one actor) and pricing information can be difficult to obtain, particularly if there is a long charterparty chain with intermediary charterers who have no interest in the underlying transaction itself. Furthermore, oil cargoes are often traded during the voyage. At this stage it is not clear to which transaction the price cap will apply, or whether it will apply to all sales in the chain.
It will be prudent to put necessary protections in any charterparty by way of a bespoke clause. This should include having charterers warrant that the price cap has been complied with and imposition of obligations to provide supporting documentation, including price information from ‘tier one’ actors’ or those who have access to the pricing information.
Internal sanctions compliance policies and procedures should be updated with this in mind. Employees should be made aware of the need to:
a) have obtained the attestation information;
b) that the attestation information should be retained as part of compliance record keeping;
c) to look out for any ‘red flags’ with related to compliance with the price cap requirements; and
d) to continue to conduct due diligence on entities, owners and vessels – especially considering that vessels transporting Russian origin crude oil and petroleum products will be blacklisted for not complying with the price cap.
e) All documents and records of attestation need to be kept for 5 years. We note that the guidance also suggests ‘updating bill of lading templates to include attestations.’ Care should be taken if considering this option because putting price information in a bill of lading renders it an ad valorem bill. This could prejudice or limit P&I Cover for cargo claims and so owners should consult their P&I Club before taking any such steps.
The Preliminary Guidance also stresses that the compliance in relation to the price cap is an extra layer of compliance, and parties still need to undertake their usual sanctions compliance due diligence.
Finally, the EU has also indicated that in enforcing circumvention, vessels in breach of the price cap could be de-flagged and prohibited from receiving technical assistance, brokering services, financing, or financial assistance (including insurance), related to any transport in the future.
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Nordisk sanctions updates are intended to provide the reader with information on material developments in the specific sanctions program implemented by the UN, US, EU, UK and Norway.
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