The Office of Foreign Assets Control (OFAC) of the US Treasury Department has issued its eagerly awaited guidance on the mechanisms of its “maritime services” policy and “price cap exception” for the global transport of seaborne Russian oil (collectively, the Price Cap Policy). This update describes the contours of that Policy and is a follow up to our alert of September 12, 2022 regarding OFAC’s preliminary guidance on the Policy.
The Price Cap Policy guidance implements the US Treasury Department’s (Treasury) determination that the United States is to ban certain “Covered Services” related to the maritime transport of Russian oil, except in transactions that adhere to the price cap exception. Treasury made the determination pursuant to Executive Order 14071, which generally prohibits US persons from making new investment in, and providing certain services to, Russia. The ban on Covered Services will apply to loadings of Russian oil on or after December 5 and/or unloaded at the port of discharge after January 19, 2023.
- Scope of Banned Covered Services
Covered Services relate to the seaborne transportation of Russian oil that is produced in Russia (i.e. Russian-origin oil), and which has not been substantially transformed outside of Russia.1 For example, the ban will not apply to the seaborne transportation of diesel that is refined outside of Russia.
Covered Services include:
- Trading/commodities brokering;
- Insurance, including reinsurance and protection and indemnity;
- Flagging; and
- Customs brokering.
Any Covered Services provided from the United States or by a US person2 will be subject to the Price Cap Policy. However, there are a few notable exceptions:
- US dollar clearing of Russian-origin seaborne oil transactions does not fall under the Covered Service of “financing.” If a purchaser of Russian-origin oil does not hold a US account, it can remit a US dollar denominated payment from a third‑country bank for such Russian oil. Financial services related to foreign exchange transactions and the clearing of commodities futures contracts are also outside the scope of “financing.”
- OFAC issued General License 55 to authorize Covered Services related to Russian-origin oil originating from the Sakhalin-2 project for the sole purpose of importation into Japan.
- OFAC issued General License 56 to authorize Covered Services related to the importation of Russian-origin oil into Bulgaria, Croatia, and certain landlocked EU member states.
- Compliance with the Price Cap Policy
The Price Cap Policy will be triggered when maritime transport of Russian oil embarks (e.g., when Russian oil is sold by a Russian entity for maritime transport), and will apply to the Russian-origin oil until its first landed sale (e.g., through customs clearance) in a jurisdiction other than Russia. The policy will not apply to subsequent sales of the oil unless it is taken back out to sea, and becomes seaborne again without having been substantially transformed. The Price Cap Policy will apply to the price paid for the Russian-origin oil itself, independent of other charges.
In particular, the price cap will not cover the costs of certain services (e.g. shipping, freight, customs, and insurance), which must be invoiced separately at commercially reasonable rates—so as to prevent a mechanism for selling and purchasing Russian oil above the price cap. OFAC will view the “commercially unreasonable” billing of such services as a potential indicator of price cap evasion. OFAC’s guidance confirms that Covered Service providers must reject taking part in an evasive transaction, and must report these transactions to OFAC.
The Price Cap Policy contains a “safe harbor” provision to shield Covered Service providers from liability for inadvertent dealings in Russian oil purchased above the price cap. A US person Covered Service provider may avail itself of the safe harbor if it meets the following conditions:
- Demonstrate “good faith” compliance and reasonable reliance on required documentation (e.g. certificate of origin) and attestations, which demonstrate that the Russian oil was purchased at or below the price cap;
- Retain relevant records and documentation for five years; and
- Continue performance of customary compliance and due diligence practices, in addition to the new documentation and attestation requirements.
OFAC confirmed that it will target its price cap enforcement efforts at those who provide false pricing information or attestations rather than those who rely on false attestations.
- Final Takeaways
The United States, G7, European Union, and other participating countries have—as of the date of this alert—not provided the actual price cap amount. As a result, it remains practically impossible for parties engaged in the authorized trade in Russian oil to negotiate new trades at this point.
Note, Treasury’s determination and OFAC’s guidance only concern Covered Services in relation to Russian crude oil. The Price Cap Policy relating to Russian petroleum products will come into effect on February 5, 2023, and we anticipate additional OFAC guidance in advance of that date.