Following Russia’s unprovoked invasion of Ukraine in February 2022, the United States imposed several measures against Russian oil products in an attempt to reduce the flow of oil revenues to Russia while also fighting rising energy prices worldwide. The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) previously banned the importation of Russian oil into the U.S. and prohibited investment in the Russian energy sector. On September 2, 2022, the United States, together with other G7 members — Canada, the European Union, France, Germany, Italy, Japan, and the United Kingdom — officially announced a plan to cap the price of Russian crude oil and petroleum products. Pursuant to this plan, the provision of services supporting maritime transportation of Russian oil and related products (“seaborne Russian oil”) will be permitted only where such products are sold at or below the price cap. According to the G7 finance ministers’ statement, the price cap is expected to build on and amplify the reach of existing sanctions coordinated among Western allies, including, most notably, the European Union’s (EU) June 2022 prohibition on insuring or financing the maritime transport of crude oil or petroleum products from Russia to third countries.
On September 9, 2022, OFAC issued “Preliminary Guidance on Implementation of a Maritime Services Policy and Related Price Exception for Seaborne Russian Oil” (Preliminary Guidance). The Preliminary Guidance provides that the ban (the “maritime services policy”) will cover a broad range of services (not yet defined) related to maritime transportation and will take effect on December 5, 2022, for maritime transportation of crude oil, and on February 23, 2023, for maritime transportation of petroleum products. The price cap for seaborne Russian oil has not yet been established and will be set by consensus among the coalition of countries implementing the policy.
In the U.S., the maritime services policy will be enacted pursuant to Executive Order (EO) 14071, which authorizes the prohibition of certain services to the Russian Federation by U.S. persons. Importantly, the existing U.S. prohibition on the importation of Russian crude oil and petroleum products (at any price) under EO 14066 will remain in place. The maritime services policy applies to the provision of services by U.S. persons related to the maritime transportation of seaborne Russian oil to countries other than the U.S.
Details on the U.S. Government’s Maritime Services Policy
The U.S. maritime services policy will affect both purchasers of seaborne Russian oil and service providers for maritime transportation. To be eligible to receive maritime services, purchasers must provide documentation or otherwise attest to service providers that the oil to be transported was purchased at or below the price cap. Service providers must require such records or attestation before providing maritime services for Russian seaborne oil, and all parties must retain such records for five years.
According to the Preliminary Guidance, service providers who inadvertently deal in seaborne Russian oil purchased above the price cap will not be liable for sanctions violations resulting from bad faith or misrepresentations by purchasers, pursuant to the “safe harbor” provided by the recordkeeping and attestation process. (The Preliminary Guidance provides additional detail regarding the type of information service providers must request from those seeking their services, depending on the level of price information available to them in the ordinary course of business.)
Finally, in addition to sanctions liability for service providers, purchasers of seaborne Russian oil are subject to sanctions enforcement actions by OFAC if they (a) make significant purchases above the price cap and knowingly rely on service providers subject to the maritime services policy or (2) knowingly provide false information to service providers.
Examples of Permitted vs. Prohibited Transactions Under the Maritime Services Policy
OFAC’s Preliminary Guidance offers examples of permissible versus prohibited transactions under the maritime services policy:
- A commodities broker/trader dealing in seaborne Russian oil certifies compliance with the price cap and provides a contract to a financial institution, which retains the documentation for five years. The financial institution conducts its own due diligence to determine that the oil was purchased at or below the price cap and provides financing to the customer for the transaction.
- A refiner purchases seaborne Russian oil below the price cap from a Russian oil exporter and passes along the relevant documentation; the refiner separately agrees to remit profits to the exporter, effectively raising the price above the price cap. The refiner is subject to sanctions enforcement.
- A commodities broker/trader purchases seaborne Russian oil above the price cap but falsifies the documentation given to service providers. The broker/trader is subject to sanctions enforcement.
Further Guidance on Sanctions Evasion Forthcoming From OFAC
The Preliminary Guidance states that U.S. persons will be required to reject and report transactions seeking to evade or violating the maritime services policy. OFAC anticipates publishing both further guidance on identification of transactions seeking to evade the price cap on seaborne Russian oil, and best practices for mitigating risk of sanctions violations. OFAC already notes that possible red flags for evasion of the maritime services policy include (i) evidence of deceptive shipping practices or manipulated shipping documentation; (ii) customer reluctance or refusal to provide price information; (iii) atypical transaction terms such as unusually favorable prices, inflated costs, or circuitous payment mechanisms; (iv) newly formed counterparties; and (v) abnormal shipping routes.
Existing Measures Enacted by G7 Members
The EU has already enacted restrictions on the provision of technical assistance, financial assistance, and brokering services (including insurance) related to the maritime transport to third countries of crude oil or petroleum products originating in or exported from Russia. There is a six-month wind-down period for contracts signed before June 4, 2022, i.e., until December 5, 2022. The purchase, import, or transfer into the EU of crude oil and petroleum products originating in, or exported from, Russia is also restricted.
The United Kingdom has imposed a blanket ban on the import of oil and oil products consigned from Russia where those imports are made on or after December 31, 2022. This includes items under commodity codes 2709–2715 (petroleum products), 2207 (varieties of ethyl alcohol), and 3826 (biodiesel oil and certain mixtures thereof). The prohibition also covers acquisition of oil and oil products originating in Russia or located in Russia with the intention of those goods’ entering the UK, supply or delivery of oil and oil products from Russia to the UK, and related services such as technical assistance, financial services, and brokering.
The U.S. maritime services policy — combining sanctions on the services sector with a price cap — is unprecedented in U.S. sanctions enforcement, and we thus expect there will be many questions as OFAC continues to provide guidance regarding administration and enforcement. We anticipate similar questions will arise as other members of the G7 provide details on their plans for implementing the price cap on seaborne Russian oil.