Key Takeaways:

• G7 Nations have agreed to a price cap of $60 per barrel on Russian-origin oil
• The U.S., EU, and the UK ban the provision of certain services related to the transport of Russian oil at or above the price cap
• These bans contain safe harbor provisions, requiring recordkeeping and/or attestations to avoid liability under the price cap policies
• All three jurisdictions have provided some guidance regarding the implementation of their respective price cap policies

Following the initial announcement in September 2022 by the Group of Seven Nations (“G7”) that they would set a price cap on Russian-origin oil and petroleum products, the U.S., the EU, and the UK have moved to implement the price cap. All three have similar policies restricting the provision of certain services related to the maritime transport of oil originating in Russia when the price of that oil is at or above $60 per barrel (“Price Cap”). These policies provide for a safe harbor process and some limited authorizations, enabling parties to avoid liability by complying with certain recordkeeping and attestation requirements. All three jurisdictions have provided guidance with respect to the implementation of their respective policies. Each policy is described further below.

U.S. Price Cap Policy

On November 22, 2022, the U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”) released a determination implementing a ban on various services relating to the maritime transport of crude oil of Russian Federation origin (“Russian Oil”) when the price of the Russian Oil is at or above $60 per barrel (“Price Cap Policy”). The services at issue are specifically defined by OFAC (“Covered Services”). They include the following: 

• Trading/commodities brokering
• Financing
• Shipping
• Insurance (including reinsurance and protection and indemnity)
• Flagging
• Customs brokering

As of 12:01AM EST on December 5, 2022, the activities mentioned below are prohibited (unless otherwise authorized by law or OFAC):

the exportation, reexportation, 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.

Notably, however, OFAC authorizes the Covered Services when the price of the Russian Oil does not exceed the Price Cap, as confirmed on December 5, 2022, by the Department of Treasury. Likewise, this determination permits Covered Services with respect to Russian Oil when such oil was loaded onto a vessel at the port of loading before 12:01 AM EST, on December 5, 2022, and is unloaded at the port of destination prior to 12:01AM EST on January 19, 2023.

Also on November 22, 2022 —following-up on preliminary guidance (addressed in our prior publication) released in early September 2022—OFAC provided additional Guidance on Implementation of the Price Cap Policy for Crude Oil of Russian Federation Origin (“Additional Guidance”). Below is a summary of what the prohibitions entail, who needs to comply with them, and what OFAC expects in terms of compliance.

The Additional Guidance makes clear that the following services are not covered by this ban: medical evacuation or other emergency services for crew members; health, travel, or liability insurance for crew members; and classification, inspection, bunkering, and pilotage.

When applicable, the ban affects all parties in the supply chain for seaborne Russian oil, including (among others): insurance brokers, hull and machinery insurers, reinsurers, P&I Clubs, importers, refiners, traders, commodities brokers, financial institutions providing trade finance, shippers, and customs brokers. Under the new Price Cap Policy, U.S. parties could be held liable for providing, approving, guaranteeing, or facilitating the Covered Services when the Price Cap is exceeded. In addition, foreign parties may be penalized, for causing—or attempting to cause—U.S. parties to engage in these activities.
 
Moreover, the Additional Guidance establishes a safe harbor process, by which entities (and individuals) can provide the Covered Services without being penalized for inadvertently violating the Price Cap Policy. In particular, the Additional Guidance directs parties to determine the price at which the Russian Oil was purchased through specified due diligence, attestation, and recordkeeping procedures. OFAC expects affected parties to maintain records documenting their compliance process for five years. Also, notwithstanding the typical strict liability standard applied to violations of U.S. sanctions, parties who comply with the safe harbor procedures (and document their compliance) will avoid liability for erroneously providing Covered Services—as long as the party was not aware that the oil being transported exceeded the Price Cap.

The Additional Guidance also indicates that the level of diligence parties must perform depends on the nature of the service provider and the provider’s access to price information in the ordinary course of business. Specifically, it establishes three tiers of compliance summarized in the following table: 
 

OFAC has warned that parties seeking to take advantage of the safe harbor process should be aware of certain red flags tending to show a price cap breach or evasion of sanctions—including, to name a few, prices that are significantly below the Price Cap, parties making exception requests or being reluctant to share price information, documentation, or attestations, as well as the involvement of newly formed entities in high-risk jurisdictions.

In determining whether crude oil originated in the Russian Federation, OFAC has indicated that a U.S. party may reasonably rely upon a certificate of origin, “but should exercise caution if they have reason to believe such certificate has been falsified or is otherwise erroneous.” OFAC provided express assurance that oil in the following two common scenarios would not be considered Russian Oil. First, crude oil that transits through a pipeline located in the Russian Federation that is loaded and certified with a certificate of origin verifying that the crude is of non-Russian origin would not be considered of Russian origin and thus would not be subject to the determination. Second, when crude oil contains a de minimis amount of Russian Oil left over in a tank or container (e.g., oil that cannot be extracted without damaging its receptacle), it will not be considered Russian Oil.

With respect to the scope of the Price Cap, “shipping, freight, customs, and insurance costs are not included . . . and must be invoiced separately and at commercially reasonable rates.” Importantly, OFAC considers excessive charges for these aspects of the transaction “as a sign of potential evasion of the price cap.” Additionally, if OFAC sets a new price cap, it will publish a new determination, including an authorization to complete services related to oil purchased under the former Price Cap. Once the crude oil clears customs in jurisdictions other than Russia, the Price Cap (and Covered Services ban) is inapplicable. But it will reattach if the oil is made seaborne without any substantial transformation (i.e., refined or otherwise converted—mere blending is insufficient—into a different product with a new name, properties, and use).

In addition to the exceptions listed above, OFAC announced several general licenses. General License 55 authorizes, until 12:01AM EST on September 30, 2023, transactions related to the maritime transport of crude oil stemming from the Sakhalin-2 project, strictly for imports into Japan. Moreover, General License 56 authorizes certain transactions connected to imports into Bulgaria, Croatia, and landlocked EU countries, to align with EU law.

Finally, General License 57 “authorizes transactions ordinarily incident and necessary to address vessel emergencies related to the health or safety of the crew or environmental protection, including safe docking or anchoring, emergency repairs, or salvage operations.” However, General License 57 it does not authorize any sale of Russian oil that violates the ban and only authorizes offloading such oil if is ordinarily incident and necessary to address the vessel emergencies.

EU Price Cap Policy

In early October 2022, as part of its eighth sanctions package against Russia, the EU introduced legislation setting out the mechanisms for implementing an oil price cap. After the EU Council unanimously decided  to establish a price cap of $60 per barrel, on December 3, 2022 (“EU Decision”), per the procedures established in October 2022, the EU’s policy was triggered. As a result, effective December 5, 2022, EU operators are prohibited from transporting to third countries Russian Oil (with CN code 2710), and petroleum products (with CN code 2709 00), beginning on February 5, 2022, when the price per barrel of the seaborne products is at or above the Price Cap.

Specifically, the new measures ban the provision of “technical assistance, brokering services or financing or financial assistance, related to the transport, including through ship-to-ship transfers, to third countries of crude oil or petroleum products . . . which originate in Russia or which have been exported from Russia,” unless they are purchased below the Price Cap. These services are further defined in updated guidance shared by the EU on December 3, 2022. In the guidance, the EU clarifies that “[s]hipping, freight, customs, and insurance costs are not included in the price cap and must be invoiced separately and at commercially reasonable rates.” Separately, the regulations also bar the provision of services relating to the transportation of crude oil or petroleum when the vessel handling the transport has previously transported such items while their purchase price exceeded the Price Cap.

This legislation, however, contains several exceptions (similar to the ones made available by OFAC), which may help EU operators avoid liability for transporting Russian Oil that may have been purchased above the Price Cap. First, according to the updated guidance, the EU Council has enacted a safe harbor process, like the provision described in the OFAC Additional Guidance above. This procedure relies “on a recordkeeping and attestation process that allows each party in the supply chain of seaborne Russian oil to demonstrate or confirm that oil has been purchased at or below the price cap.” EU operators are expected to retain relevant records for a minimum of five  years from the date of transport. The EU also outlines a tiered attestation process similar to the U.S. safe harbor process outlined above.. EU operators are expected to retain relevant records for a minimum of five  years from the date of transport.

Second, the EU provides for a “transition period of 45 days for vessels carrying crude oil originating in Russia, purchased and loaded onto the vessel prior to 5 December 2022 and unloaded at the final port of destination prior to 19 January 2023.” Parties transporting Russian Oil meeting this criteria will avoid liability.

Third, when the oil or petroleum products are not of Russian origin and are simply being loaded in, leaving from, or moving through Russia, and do not have a Russian owner,  the Price Cap is inapplicable. Likewise, if seaborne Russian Oil is “substantially transformed”, meaning it is converted “into a good such that the product then comes under a different HS [commodity] code” (blending is insufficient), it will not be subject to the Price Cap—nor will oil or petroleum products of non-Russian origin that contain a de minimis amount of Russian Oil in the tank or container.

Fourth, the EU Council included an “emergency clause.” This clause permits the maritime transport of Russian Oil or the provision of the otherwise prohibited services listed above, even if the Russian Oil is purchased above the Price Cap, when it is required to mitigate or prevent an urgent event that is likely to have a substantial effect on “human health and safety or the environment” or in response to natural disasters. The new legislation also contains a Sakhalin-2 project exemption, which is similar to OFAC’s General License 55.

UK Price Cap Policy

The UK has implemented the Price Cap through Russia (Sanctions) (EU Exit) (Amendment) (No. 16) Regulations 2022. While a ban on transactions connected to UK imports of Russian Oil (and oil products) was originally set to go into force on December 31, 2022, this amendment now puts the ban into effect as of December 5, 2022. This amendment also provides for new limitations with respect to transporting seaborne oil between third countries and in connection with the provision of the following associated services: (1) provisions of financial services or funds (including insurance-related and banking services) and (2) provision of brokering services, including “(a) the selection or introduction of persons as parties or potential parties to the arrangement; (b) the negotiation of the arrangement; (c) the facilitation of anything that enables the arrangement to be entered into; and (d) the provision of any assistance that in any way promotes or facilitates the arrangement.” Moreover, these new seaborne Russian Oil restrictions apply to parties who are explicitly involved in the transportation activity as well as those who own, control, charter, or operate a sea vessel used for such transportation.

All the limitations mentioned above came into effect December 5, 2022, as to oil and oil products that fall under Harmonized System (“HS”) commodity code 2709 and that originated in, or were delivered from, Russia. However, for Russian Oil that falls under HS commodity code 2710, the restrictions will not come into force until February 5, 2023. The UK will determine whether oil “originates” in Russia according to standard rules of origin, under its customs laws.

Additionally, the UK plans to introduce a Price Cap General License, which will authorize the transfer of Russian Oil between third countries, as long as certain pre-conditions are met and the price of the oil is at or below the Price Cap. But, notably, importation of Russian Oil into the UK is still banned and this General License will not override “any prohibitions enacted by third countries on the import of Russian oil and/or oil products into their own jurisdictions.”

The UK HM Treasury’s Office of Financial Sanctions Implementation (“OFSI”) released guidance relating to the UK implementation of the price cap (“OFSI Guidance”), which helps shed light on the UK’s implementation of the Price Cap. After the Price Cap General License goes into effect, the cap will apply from when the cargo on a ship is received until it passes through customs in a third country (other than the UK, Russia, and the Isle of Man) or until the Russian Oil is “substantially transformed” into a product that falls under a different HS commodity code. The OFSI Guidance notes “[b]lending alone does not count as substantial transformation.” The OFSI Guidance also outlines a tiered attestation process similar to the U.S. safe harbor process outlined above.

Further, under the OFSI Guidance, any actor involved in either the provision of restricted financial services or brokering services related to Russian Oil or the supply or delivery of Russian Oil, is considered an “involved person.” As such, these “involved persons” are required to report to OFSI as soon as they become aware, or have reasonable cause to believe, that a breach related to the seaborne or associated services provisions outlined above has occurred.

Regarding enforcement, OFSI released a statement announcing the creation of a new unit tasked with enforcing the Price Cap and handling the associated licenses.

Foley Hoag will continue to provide updates as the situation with respect to Ukraine develops. 

Law Clerk Nicholas Bergara co-authored this alert.