On December 5, 2022, the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) announced a $60 per barrel price cap on maritime transfers of Russian-origin crude oil. The final cap level is being implemented multilaterally by the Price Cap Coalition, which include the Group of 7 (G7) nations and Australia.
The system to enforce the price cap under U.S. law was finalized through a November 22, 2022, determination (Determination) issued by OFAC pursuant to Section 1(a)(ii) of Executive Order 14071, which prohibits certain services related to the maritime transfer of Russian-origin crude oil. Concurrently with the Determination, OFAC issued updated guidance (Guidance) providing further details on implementation. The price cap applies to “crude oil” as defined at Harmonized Tariff Schedule of the United States (HTSUS) subheading 2709.00.
A related cap level will be announced soon on petroleum-based products, which will go into effect on February 5, 2023. OFAC stated that it anticipates publishing preliminary guidance related to these products in the near future.
The Determination implementing the price cap for Russian-origin oil prohibits the exportation, reexportation, sale, or supply, indirectly or directly, from the United States or by a U.S. person, wherever located, of select services as they relate to the maritime transport of crude oil of Russian origin purchased at or below the $60 price cap. The Guidance describes the prohibited services as follows:
- Trading/commodities brokering: Buying, selling, or trading commodities and/or brokering the sale, purchase, or trade of commodities on behalf of other buyers or sellers.
- Financing: 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.
- Shipping: Owning or operating a ship for the purpose of carrying or delivering cargo and/or freight transportation; chartering or sub-chartering ships to deliver cargo or transport freight; brokering between shipowners and charterers; and serving as a shipping/vessel agent.
- Insurance: The provision of insurance, reinsurance, or protection and indemnity (P&I) services; satisfying claims related to underwriting insurance policies that protect policyholders against losses that may occur as a result of property damage or liability; assuming all or part of the risk associated with existing insurance policies originally underwritten by other insurance carriers, including the reinsurance of a non-U.S. insurance carrier by a U.S. person; and liability insurance for maritime liability risks associated with the operation of a vessel, including cargo, hull, vessel, P&I, and charterer’s liability.
- Flagging: Registering or maintaining the registration of a vessel with a country’s national registry of vessels. This definition does not include the deflagging of vessels transporting Russian oil sold above the price cap.
- Customs brokering: Assisting importers and exporters in meeting requirements governing imports and exports. This definition does not include legal services or assisting importers and exporters in meeting the requirements of U.S. sanctions.
The prohibition on financing is relatively narrow and the Guidance seeks to clarify what is and is not prohibited for banks. Financing does not include processing, clearing, or sending payments by intermediary banks when the bank (a) is operating exclusively as an intermediary and (b) does not maintain a direct relationship with the party providing the prohibited services. However, rules prohibiting facilitation continue to apply and financial institutions may face situations where they are not providing financing under the Directive, but their services are nonetheless prohibited.
Additional Services Not Included
Shipping, freight, customs, and insurance costs are not included in the price cap and must be invoiced separately and at commercially reasonable rates. Commercially unreasonable billing in these categories may be seen by OFAC and other regulators as a sign of potential evasion.
Scope of the Price Cap
The Guidance clarifies that the price cap exclusively applies to sales related to the first point of transfer of maritime oil to land. Subsequent sales on land, or sales of Russian oil and petroleum products that are transported exclusively by pipeline, are not subject to the cap but may be subject to other import bans. If the Russian oil is shipped via maritime transport without being substantially transformed outside of the Russian Federation, the price cap will still apply. However, once the oil is “substantially transformed” in a jurisdiction outside the Russian Federation, it is no longer considered Russian Federation origin and is no longer subject to the cap.
Safe Harbor and Compliance
The Guidance explains that OFAC will provide a “safe harbor” for service providers who comply in good faith with a recordkeeping and attestation process. This process was described in our prior post. The Guidance states that service providers must retain relevant records for five years. It also provides a sample attestation for service providers who seek to avail themselves of the harbor.
The Guidance clarifies that OFAC will not pursue a penalty against a U.S. service provider that reasonably relies on the documentation or attestations described in the Guidance. Instead, OFAC states that it will focus its enforcement response on actors who willfully violate or evade the price cap.
Finally, the Guidance states that if a U.S. person becomes aware of violations relating to the price cap, they should stop providing associated services and report the suspicion to OFAC.
OFAC concurrently issued the following three general licenses. This includes:
- General License 55, which authorizes transactions related to the maritime transport of crude oil originating from the Sakhalin-2 project through September 30, 2023, provided the Sakhalin-2 byproduct is solely for importation into Japan.
- General License 56, which authorizes transactions related to the importation of crude oil into Bulgaria, Croatia, or landlocked EU member states if the supply of crude oil by pipeline is interrupted for reasons outside the control of that EU member state, as described in Council Regulation (EU) 2022/879.
- General License 57, which authorizes transactions that are ordinarily incident and necessary to addressing vessel emergencies related to health and safety of the crew or environmental protection.
Specific licenses may be available on a case-by-case basis.
Individual members of the Price Cap Coalition have issued country specific guidance for the implementation of the cap. These guidelines should be additionally consulted for entities operating in the relevant jurisdictions.