As the Russian invasion of Ukraine continues, so too does Russia’s isolation from the West.[1] Member nations of the Group of Seven (G7)—the United States (U.S.), Canada, France, Germany, Italy, Japan, and the United Kingdom (UK)—and Australia continue to wage an unprecedented multilateral economic pressure campaign that is marked by broad sanctions to punish Russia’s government and restrict its access to global markets, technology, and financial sources, ultimately for purposes of weakening Russia’s ability and will to continue its war of aggression in Ukraine.

The latest tool of economic coercion is a newly created price cap on the importation of seaborne Russian-origin oil which became effective on 5 December 2022. According to the G7, “[t]he price cap is specifically designed to reduce Russian revenues and Russia’s ability to fund its war of aggression whilst limiting the impact of Russia’s war on global energy prices, particularly for low and middle-income countries, by only permitting service providers to continue to do business related to Russian seaborne oil and petroleum products sold at or below the price cap.”[2] Oil and gas exports are forecasted to be 42% of Russia’s revenues in 2022, up from 36% in 2021, according to Russia’s finance ministry.[3] Russia received significantly higher revenues due to the spikes in global oil prices following its invasion of Ukraine. The price cap aims to correct this and reduce Russia’s ability to finance the war while minimizing disruption to global markets. The G7 countries and Australia agreed to implement a similar price cap mechanism for Russian-origin petroleum products, to become effective on 5 February 2023.

Overview of the Price Cap

Generally, the price cap prohibits dealings in seaborne Russian oil and certain petroleum products—including activities such as shipping, insuring, and financing—unless the sale price was at or below the cap amount. Russia relies upon services provided by Western countries such as Greece for shipping vessels and the UK for insurance to support the complex logistics associated with moving the commodity across the globe, which would compel parties participating in the global trade of Russian oil to comply.[4]

The price cap is set by a Price Cap Coalition comprised of the G7, European Union (EU), and Australia.[5] On 2 December 2022, the EU announced that the price cap will be set to USD 60.00 per barrel.[6] It costs approximately USD 20.00 for Russia to produce a barrel, and Russian oil was trading at approximately USD 63.50.[7]

The Russian oil price cap is not the first prohibition implemented by governments related to the importation of Russian oil and other energy resources. The U.S.,[8] UK,[9] EU,[10] and Canada[11] announced bans against the importation of Russian oil, oil products, and other commodities into their jurisdictions. The price cap on imports of seaborne Russian oil and petroleum products thus would primarily impact third countries that continue to purchase oil from Russia. The U.S., UK, and EU have issued initial guidance as discussed below.

U.S.

The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued preliminary guidance in September 2022[12] that was followed by final guidance in November 2022.[13] The November guidance coincided with the issuance of a determination pursuant to section 1(a)(ii) of Executive Order 14071 of 6 April 2022 (“Prohibiting New Investment in and Certain Services to the Russian Federation in Response to Continued Russian Federation Aggression”) effectively establishing the oil price cap mechanism in the U.S.[14] Namely, the determination prohibits “the exportation, re-exportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of any of the Covered Services to any person located in the Russian Federation.”[15] Covered Services are defined as those related to the maritime transport of crude oil of Russian origin but not yet any other Russian-origin petroleum product. Covered Services include trading/commodities brokering; financing; shipping; insurance, including reinsurance and protection and indemnity (P&I); flagging; and customs brokering.[16] The determination goes on to authorize Covered Services when the price of the crude oil of Russian Federation origin does not exceed the price cap amount.[17] The U.S. Department of the Treasury apparently considers that the provision of Covered Services related to seaborne Russian oil to parties outside of the Russian Federation would indirectly benefit a person in the Russian Federation and as such is covered by the prohibition. The prohibition took effect on 5 December 2022 with an exception for Russian crude oil loaded on a vessel at port prior to 12:01 a.m. Eastern Standard Time (EST) on 5 December 2022 and unloaded at the port of destination prior to 12:01 a.m. EST on 19 January 2023.[18]

UK

In anticipation of the effective date of the relevant prohibitions introduced in the Russia (Sanctions) (EU Exit) (Amendment) (No. 16) Regulations 2022 in the UK, HM Treasury has likewise issued the Maritime Services Prohibition and Oil Price Cap Guidance[19] on 14 November 2022. The guidance clarifies the Russia (Sanctions) (EU Exit) (Amendment) (No. 16) Regulations 2022 that went into effect on 5 December 2022 and do the following:

• Amend the start date for the prohibitions on the import of all Russian oil and oil products into the UK from 31 December 2022 to 5 December 2022 (import ban);
• Prohibit the supply or delivery by ship of Russian-origin oil and oil products, regardless of whether the delivery is from Russia to a third country or from one third country to another (maritime transport ban); and
• Prohibit provision of funds, brokering or financial services, including insurance, linked to such supply or delivery.[20]

Similar to the United States, the UK introduced a winddown period for Russian-origin oil loaded on ships prior to 5 December through 19 January 2023.[21]

To implement a price cap exception for Russian oil and oil products purchased at or below a set price, the Office of Financial Sanctions Implementation (OFSI) issued a general license, which authorizes services related to Russian oil when the unit price of Russian oil is at or below the price cap amount.[22]

EU

In early June 2022, the EU Council banned the importation of Russian seaborne crude oil and certain petroleum products into the Union under Regulation 2022/879.[23] The Regulation contained an exception for one-off transactions that expired on 5 December.

On 6 October 2022, the EU Council adopted Regulation 2022/1904 to introduce the Union’s framework for the implementation of the price cap mechanism for Russian-origin crude oil and petroleum products. Specifically, the EU Regulations prohibit the following:

• the maritime transport to third countries of crude oil or petroleum products, which originate in or are exported from Russia; and[24]
• the provision of technical assistance, brokering services, or financing or financial assistance, related to such maritime transport.[25]

On 3 December 2022, the EU Council adopted Regulations 2022/2367 and 2368 which provided further clarity on the scope of the novel prohibitions and established a USD 60.00 price cap, respectively.[26]

The effective dates of the bans are the same as agreed upon by G7, i.e., 5 December 2022 for the oil ban and 5 February 2023 for the ban on other petroleum products.[27] The EU Regulations, however, allow such activities to proceed after these dates if the purchase price per barrel of such products does not exceed the price indicated in the relevant annex (i.e., USD 60.00).[28]

The EU Commission issued several frequently asked questions related to the oil price cap and clarifying some provisions of relevant regulations.[29]

U.S., UK, and EU Recordkeeping and Attestation Processes

OFAC, OFSI, and the EU have issued guidance directed at all types of global oil trade participants that outlines their respective obligations to collect and maintain price information or attestations regarding the sale price of seaborne Russian oil. The guidance places market participants into three categories (i.e., Tier 1, Tier 2, and Tier 3) based on their respective proximity to price information. A summary of the types of counterparties and their expected compliance obligations is outlined in the table below.

Key Implications for the Private Sector

While the guidance provided to date provides details regarding the administration of price cap obligations, there are outstanding questions and considerations for parties engaged in services related to the sale of seaborne Russian oil.

Challenges of Implementing a New Category of Sanctions Prohibition

As with the administration of any novel sanctions prohibition, there will be uncertainty regarding best compliance practices. Narrowly focused sanctions that prohibit specific activities are aimed at minimizing negative externalities, but at the same time usually present additional compliance challenges for the private sector. In this case, the global oil trading industry, as a whole, will be unable to rely on traditional sanctions screening solutions alone to interdict transactions linked to sales of Russian-origin oil. Understanding your customer, their business, and their counterparties will become increasingly critical elements of compliance.

What the Price Cap Means for Banks

The U.S., EU, and UK all place banks in the Tier 2 category. Trade finance transactions routinely involve the collection of documentation related to the underlying sale and thus appear to fall into cases where it is “practicable” for the bank to request documentation providing the price of oil. Other activity, however, may be more attenuated and may require the collection of an attestation from the Tier 1 counterparty. OFAC recognizes this, by noting that, “[t]he processing, clearing, or sending of payments by banks is not included in the definition of ‘financing’ . . . [i.e., a Covered Service] where the bank (1) is operating solely as an intermediary and (2) . . . the person [providing Covered Services] is a non-account party . . . . Thus, the determination does not impose any new prohibitions or requirements related to the processing, clearing, or sending of payments by intermediary banks.”[30]

Applicability of the Price Cap

The guidance issued by the U.S., UK, and EU seeks to clarify when the price cap no longer applies. They all indicated that once the oil has cleared customs in a jurisdiction other than Russia or has been substantially transformed into a different product in a jurisdiction other than Russia, the price cap restrictions would be lifted. There will likely be questions regarding “substantial transformation” that will need to be clarified by governments administering the price cap as situations arise. Furthermore, the guidance issued by the U.S., UK, and EU indicates blending non-Russian origin oil with Russian-origin oil is not considered transformation. As such, the price cap applies to the Russian-origin portion in a blend.

Enforcement

OFAC’s November 2022 guidance sets out a safe harbor process, i.e., the tiered process outlined above, whereby U.S. service providers can rely upon a “good faith” recordkeeping and attestation process to ensure they are not facilitating purchases and sales above the oil price cap.[31] The novel safe harbor approach outlined by the U.S. indicates that policy makers do not want market participants to exit the business of providing services related to the sale of oil. OFAC’s guidance takes a forward-leaning approach and states the following, “OFAC would not pursue a penalty against a U.S. service provider that reasonably relies on the documentation or attestations described above, unless the U.S. provider knew or had reason to know that such documentation was falsified or erroneous or that the Russian oil was purchased above the relevant price cap . . . . OFAC intends to focus its enforcement responses on those actors who willfully violate or evade the price cap.”[32]

Despite such representations, however, some market participants may stop dealing altogether with Russian seaborne oil, for example, due to the additional resources needed to gather and retain necessary information and/or attestations. On the other hand, the market may also see the influx of bad actors willing to set up side arrangements with Russia, without giving much consideration to the enforcement risks.

The success of the price cap will depend upon broad adoption of the requirements. The more parties that adhere to the obligations, the more difficult it becomes to evade or avoid the price cap. As with any other sanctions program, there is no central enforcement mechanism to enforce the requirements globally. Russia is expected to work to circumvent the prohibitions. The U.S., the UK, and the respective EU sanctions authorities will likely use their powers to impose sanctions on parties working to evade the price cap.  This may implicitly lead to greater reliance on financial institutions and other vulnerable industries to understand and address Russian sanctions evasion scenarios related to the price cap.

[1] “Setbacks in Ukraine war diminish Russia’s clout with regional allies.” Washington Post. 30 November 2022. https://www.washingtonpost.com/world/2022/11/30/russia-kazakhstan-regional-neighbors-ukraine/.

[2] G7 Finance Ministers´ Statement on the united response to Russia’s war of aggression against Ukraine. 2 September 2022. https://www.bundesfinanzministerium.de/Content/DE/Downloads/Internationales-Finanzmarkt/G7/2022-09-02-erklaerung-der-g7-finanzminister.pdf?__blob=publicationFile&v=11.

[3] “Proposed G7 oil price cap to have little immediate impact on Russian revenue.” Reuters. 23 November 2022. https://www.reuters.com/business/energy/proposed-g7-oil-price-cap-have-little-immediate-impact-russian-revenue-2022-11-23/.

[4] “E.U. diplomats meet again on a plan to cap the price of Russian oil but can’t strike a deal.” New York Times. 28 November 2022. https://www.nytimes.com/live/2022/11/28/world/russia-ukraine-war-news?#ukraines-allies-are-resuming-talks-about-a-plan-to-curb-russias-oil-revenue-eu-diplomats-say.

[5] “Factbox: Western governments struggle to agree on Russian oil price cap.” Reuters. 29 November 2022. https://www.reuters.com/business/energy/western-governments-struggle-agree-russian-oil-price-cap-2022-11-29/.

[6] “European Union officials set Russian oil price cap at $60 a barrel.” CNBC. 2 December 2022. https://www.cnbc.com/2022/12/02/russia-oil-price-cap-g-7-outline-how-it-is-going-to-work.html.

[7] “Factbox: Western governments struggle to agree on Russian oil price cap.” Reuters. 29 November 2022. https://www.reuters.com/business/energy/western-governments-struggle-agree-russian-oil-price-cap-2022-11-29/.

[8] Prohibiting Certain Imports and New Investments With Respect to Continued Russian Federation Efforts To Undermine the Sovereignty and Territorial Integrity of Ukraine. 8 March 2022. https://home.treasury.gov/system/files/126/eo_14066.pdf.

[9] UK ban on Russian oil and oil products. UK Department for Business, Energy & Industrial Strategy. 21 November 2022. https://www.gov.uk/government/publications/uk-ban-on-russian-oil-and-oil-products/uk-ban-on-russian-oil-and-oil-products.

[10] Russia’s aggression against Ukraine: EU adopts sixth package of sanctions. Council of the EU Press Release. 3 June 2022. https://www.consilium.europa.eu/en/press/press-releases/2022/06/03/russia-s-aggression-against-ukraine-eu-adopts-sixth-package-of-sanctions/.

[11] Government of Canada Moves to Prohibit Import of Russian Oil. Natural Resources Canada. 28 February 2022. https://www.canada.ca/en/natural-resources-canada/news/2022/02/government-of-canada-moves-to-prohibit-import-of-russian-oil.html.

[12] Preliminary Guidance on Implementation of a Maritime Services Policy and Related Price Exception for Seaborne Russian Oil. The U.S. Department of the Treasury’s Office of Foreign Assets Control. 9 September 2022. https://home.treasury.gov/system/files/126/cap_guidance_20220909.pdf.

[13] OFAC Guidance on Implementation of the Price Cap Policy for Crude Oil of Russian Federation Origin. The U.S. Department of the Treasury’s Office of Foreign Assets Control. 22 November 2022. https://home.treasury.gov/system/files/126/price_cap_policy_guidance_11222022.pdf.

[14] Determination Pursuant to Section 1(a)(ii) of Executive Order 14071. U.S. Department of the Treasury’s Office of Foreign Assets Control. 22 November 2022. https://home.treasury.gov/system/files/126/determination_11222022_eo14071.pdf.

[15] OFAC Guidance on Implementation of the Price Cap Policy for Crude Oil of Russian Federation Origin. The U.S. Department of the Treasury’s Office of Foreign Assets Control. 22 November 2022. https://home.treasury.gov/system/files/126/price_cap_policy_guidance_11222022.pdf.

[16] Ibid.

[17] Determination Pursuant to Section 1(a)(ii) of Executive Order 14071. U.S. Department of the Treasury’s Office of Foreign Assets Control. 22 November 2022. https://home.treasury.gov/system/files/126/determination_11222022_eo14071.pdf.

[18] OFAC Guidance on Implementation of the Price Cap Policy for Crude Oil of Russian Federation Origin. The U.S. Department of the Treasury’s Office of Foreign Assets Control. 22 November 2022. https://home.treasury.gov/system/files/126/price_cap_policy_guidance_11222022.pdf.

[19] UK Maritime Services Prohibition and Oil Price Cap Guidance. HM Treasury. 4 December 2022. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1121744/Russian_Oil_Services_Ban_-_HMT_Industry_Guidance.pdf.

[20] The Russia (Sanctions) (EU Exit) (Amendment) (No. 16) Regulations 2022. 3 November 2022. https://www.legislation.gov.uk/uksi/2022/1122/contents/made.

[21] UK Maritime Services Prohibition and Oil Price Cap Guidance. HM Treasury. 4 December 2022. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1121744/Russian_Oil_Services_Ban_-_HMT_Industry_Guidance.pdf.

[22] GENERAL LICENCE – Oil Price Cap INT/2022/2469656. 4 December 2022. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1121742/2469656_OFSI_OPC_GL.pdf.

[23] Council Regulation (EU) 2022/879 of 3 June 2022 amending Regulation (EU) No 833/2014 concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine, Article 1 (7) inserting Article 3m (1), https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32022R0879.

[24] Council Regulation (EU) 2022/1904 of 3 June 2022 amending Regulation (EU) No 833/2014 concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine, Article 1 (8)(b)(4) and (5).

[25] Council Regulation (EU) 2022/879 of 3 June 2022 amending Regulation (EU) No 833/2014 concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine, Article 1 (7) inserting Article 5n (1), https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32022R0879.

[26] Official Journal of the European Union, L311I, Volume 65, 3 December 2022, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=OJ:L:2022:311I:TOC.

[27] Council Regulation (EU) No 833/2014 of 31 July 2014 concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine. Article 3n. 7 October 2022. https://eur-lex.europa.eu/eli/reg/2014/833/2022-10-07.

[28] Council Regulation (EU) No 833/2014 of 31 July 2014 concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine. ANNEX XXVIII. 7 October 2022. https://eur-lex.europa.eu/eli/reg/2014/833/2022-10-07.

[29] Guidance on oil price cap. The EU Commission. 3 December 2022. https://finance.ec.europa.eu/system/files/2022-12/guidance-russian-oil-price-cap_en_0.pdf.

[30] OFAC Guidance on Implementation of the Price Cap Policy for Crude Oil of Russian Federation Origin. The U.S. Department of the Treasury’s Office of Foreign Assets Control. 22 November 2022. https://home.treasury.gov/system/files/126/price_cap_policy_guidance_11222022.pdf.

[31] Ibid.

[32] Ibid.