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Global Jurisdictions Implement Russian Oil Ban And Price Cap Policy—New Compliance Expectations For Industries Involved In Global Oil Trade – Export Controls & Trade & Investment Sanctions


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A ban on services related to the maritime transport of
Russian-origin crude oil sold above a pre-determined price cap of
$60 per barrel began on December 5, 2022, with a similar price cap
ban related to other Russian-origin petroleum products expected to
begin February 5, 2023, with a yet-to-be-determined price level.
The United States, G7, the European Union and Australia
(collectively, the Price Cap Coalition)
this extraordinary measure to limit global revenues
flowing to the Russian Federation following Russia’s invasion
of Ukraine in 2022, while still maintaining the Russian supply of
oil to global markets.

The new price cap policy will create complex new sanctions
compliance and recordkeeping obligations for global industries
involved (directly or indirectly) in Russian energy trade,
including the insurance, trade finance, banking, brokering,
navigation, shipping and refinery industries. The price cap at $60
per barrel is below the Brent international index for crude oil,
which has been
trading at
about $87 per barrel (though the price for Urals
has been trading
below $80 since early November). The Price Cap
Coalition reportedly will review the price cap regularly, with the
intent to keep the cap at least 5 percent below the market

Members of the Price Cap Coalition have previously announced
outright bans with various effective dates on the import of
Russian-origin crude oil and petroleum into their jurisdictions
(unless otherwise authorized). The United States banned the import
of each category by Executive Order in March 2022; the EU’s and
UK’s respective bans on crude oil imports become fully
effective on December 5, 2022, and their bans on petroleum imports,
on February 5, 2023. Accordingly, the new price cap policy will
complement the existing outright import bans in these
jurisdictions. It will allow persons from the Price Cap Coalition
member countries to provide certain covered services in support of
global Russian crude trade destined for export to third countries
only when such exports are priced at or below the price cap. As
such, the price cap is intended
to provide sufficient incentive for Russian producers to continue
to sell oil to the global market, especially to low- and
middle-income countries. Meanwhile, Russia has
that it will “not accept” the cap.

The price cap announcement underscores the extremely coordinated
approach among the US, the EU, the UK and other allied governments
on Russia sanctions measures, resulting in severe prohibitions or
restrictions on trade in Russian energy products but stopping short
of imposing full blocking sanctions against Russia’s largest
energy giants.

This Client Alert provides an overview of these regulatory
developments in the United States, the European Union and the
United Kingdom.

US Russian Crude Oil Price Cap Implementation

Oil Price Cap – A Ban With
On November 22, 2022, the US Department
of the Treasury’s Office of Foreign Assets Control (OFAC)
Final Guidance
(OFAC Guidance) interpreting certain
prohibitions under E.O.
(“Prohibiting New Investment in and Certain Services
to the Russian Federation in Response to Continued Russian
Federation Aggression”) and a subsequent
of November 21, 2022, under the E.O. that
prohibits certain services related to the maritime transport of
Russian crude oil, unless it is conducted at or below the price
cap. OFAC released an additional
on December 5, 2022, setting the price cap at $60
(collectively, the Determinations).

Effective at 12:01 a.m. on December 5, 2022, the Determinations
prohibit the “exportation, reexportation, sale, or
supply” from the United States or by a US person of a list of
“Covered Services” relating to the maritime transport of
crude oil to “any person located in the Russian
Federation.” The Determinations also include a general
authorization permitting the export of Covered Services if the
seaborne Russian oil is purchased at or below the price cap. Such
services are prohibited if the seaborne Russian oil is purchased
above the price cap. The Covered Services subject to the
Determinations are:

  • Trading/commodities brokering

  • Financing

  • Shipping

  • Insurance, including reinsurance and protection and

  • Flagging

  • Customs brokering

The Determinations and
related FAQs
also clarify that certain Russian oil trade is
exempted from the price cap when such crude oil is loaded onto a
vessel at the port of loading prior to 12:01 a.m. Eastern Standard
Time on December 5, 2022, and unloaded at the port of destination
prior to 12:01 a.m. Eastern Standard Time on January 19, 2023.

The OFAC Guidance provides additional clarity on the scope of
the prohibitions defined in the Determination. First, it notes that
the price cap does not include the cost of shipping, freight,
customs or insurance, which instead must be invoiced separately and
at commercially reasonable rates; OFAC explicitly views the billing
of any commercially unreasonable costs as a sign of evasion of the
price cap.

Second, for the Covered Service of “Financing,” the
OFAC Guidance clarifies a variety of specific requirements for the
financial services industry. The prohibition on financial
transactions above the price cap is broad, covering “a
commitment for the provision or disbursement of any debt, equity,
funds, or economic resources, including grants, loans, guarantees,
suretyships, bonds, letters of credit, supplier credits, buyer
credits, and import or export advances.” However, this
definition excludes the “processing, clearing, or sending of
payments by banks” where the bank (1) is operating solely as
an intermediary and (2) does not have any direct relationship with
the person providing services related to the maritime transport of
Russian oil as it relates to the transaction. Similarly, services
with respect to “foreign exchange transactions and the
clearing of commodities futures contracts” also fall outside
the scope of Financing. Financial institutions must also undertake
specific due diligence efforts to benefit from the compliance
“safe harbor,” as described below.

Third, the OFAC Guidance details when the ban “starts”
and “stops” for various Russian oil transport scenarios.
It applies from the moment oil is sold by a Russian entity for
maritime transport and continues until the oil has first cleared
customs in a jurisdiction other than the Russian Federation. After
the Russian oil has cleared customs, the price cap no longer
applies to further onshore sale. Once the Russian-origin oil is
“substantially transformed”—meaning, is refined or
otherwise processed such that it “loses its identity and is
transformed into a new product having a new name, character, and
use”—it is no longer considered to be Russian-origin
oil; it is thus not subject to the price cap and may be transported
by sea again. However, if Russian-origin oil exits a jurisdiction
via maritime transport after having cleared customs and without
“substantial transformation,” then the price cap would
continue to apply. Persons assessing whether crude oil is of
Russian origin may rely on a certificate of origin but should
exercise caution if they have reason to believe that such
certificate has been falsified or is otherwise erroneous.

Fourth, the OFAC Guidance clarifies that “crude oil”
covers all articles defined under subheading 2709.00 of the
Harmonized Tariff Schedule of the United States (Chapter 27).

Fifth, the OFAC Guidance clarifies that three sets of services
are excluded from the scope of Covered Services: (1) medical
evacuation or other emergency services for crew members; (2)
health, travel or liability insurance for crew members; and (3)
classification, inspection, bunkering and pilotage. We recommend
that companies exercise caution when considering the provision of
other categories of services that are neither specifically listed
as Covered Services nor excluded under this provision.

Sixth, E.O. 14071 contains an express prohibition on
“facilitation” by a United States person, wherever
located, of a transaction by a foreign person where the transaction
by that foreign person would be prohibited if performed by a US
person or within the United States. In other words, a US person
cannot take behind-the-scenes actions, such as approving, financing
or guaranteeing, that would assist a non-US person in undertaking
actions prohibited by the relevant regulations

Compliance Safe Harbor. Anticipating
the compliance challenges for US persons engaged in the provision
of Covered Services for the trade of Russian crude at or below the
price cap, the OFAC Guidance sets forth an elaborate recordkeeping
and attestation framework that creates a “safe harbor”
from enforcement for US persons demonstrating adherence to the
policy. Under this framework, each party in the supply chain of
Russian oil shipped via maritime transport must demonstrate or
confirm that the Russian oil has been purchased at or below the
price cap in order to be shielded from strict liability for
sanctions breaches where the providers inadvertently deal in the
purchase of Russian oil sold above the price cap due to falsified
or erroneous records provided to them by others.

The guidance divides service providers into three tiers based on
the directness of their involvement:

  • Tier 1 – Commodities brokers and
    traders, as well as any other actors with direct access to price
    information, must maintain and retain price information (e.g.,
    invoices, contracts, receipts, proofs of accounts payable)
    indicating that Russian oil for maritime transport was purchased at
    or below the price cap. Moreover, Tier 1 actors may also need to
    provide attestation to lower-tier actors that such oil is in
    compliance with the price cap.

  • Tier 2 – Financial institutions, ship
    and vessel agents, commodities brokers, and others who
    “sometimes are able to request and receive price information
    from their customers” are required to request and retain price
    information from their customers, including Tier 1 actors, to the
    extent practicable, or a signed attestation from their customers
    when a direct receipt of price information is not practicable. In
    particular, the safe harbor requirements for “financial
    institutions” depend on whether “transaction
    specific” or “general” financing is provided in
    connection with a particular transaction.

  • Tier 3 – Shipowners and carriers,
    flagging registries, insurers (including reinsurers and protection
    and indemnity (P&I) clubs), and others “who do not
    regularly have direct access to price information” can receive
    safe harbor using sanctions exclusions clauses in policies or
    contracts or signed attestations from higher-tier customers.

A customer’s or counterparty’s refusal or reluctance to
provide the necessary documentation or attestation should be
considered a red flag. The availability of the safe harbor also
requires service providers to retain relevant records for five
years, in accordance with
31 C.F.R. § 501.601
, in addition to complying with the
ordinary requirements of OFAC’s risk-based due diligence

Click here to continue reading .
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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.


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