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Trade Compliance Flash: Rough Seas Ahead: U.S. Imposes Restrictions on Services Related to Maritime Shipments of Russian Crude Oil, Following G7 Price Cap

International Alert

On November 22, 2022, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) issued a new determination that imposes restrictions on the exportation, reexportation, sale, or supply of the certain covered services related to the maritime transport of Russian-origin crude oil, to any person located in Russia. This development is in connection with a new price cap imposed by the United States and the other G7 countries, the European Union, and Australia (collectively, the Price Cap Coalition) on Russian-origin crude oil. These restrictions, which are being imposed under Executive Order (E.O.) 14071, expand upon previous measures by the United States to ban the importation of Russian petroleum products into the U.S., and they have been coordinated with similar restrictions being imposed concurrently by other Price Cap Coalition members. 

As a result, beginning December 5, 2022, the following services, as they relate to the maritime transport of Russian-origin crude oil, may not be provided from the U.S., or by a U.S. person, wherever located to any person located in Russia, unless the purchase price of Russian-origin crude oil is at or below the established price cap of $60 per barrel, a price the U.S. Treasury Secretary announced in a December 5, 2022 determination issued under E.O. 14071:

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

According to OFAC, with the price cap in place, "any importer of Russian oil that pays a price above the cap will have to do so using services exclusively from companies outside the Coalition — which represent only a fraction of the market and are often more expensive and less reliable." The Price Cap Coalition will review the price cap at least every two months and can make adjustments as necessary. 

Under the new price cap rules, which operate as an exception because these services now are generally prohibited in connection with Russian-origin oil, U.S. persons are authorized to provide the Covered Services (listed in the bullets above) for the maritime transport of Russian-origin crude oil, provided the oil was purchased at or below the established price cap. OFAC also excludes from this prohibition Covered Services for Russian-origin crude oil that was loaded onto a vessel at the port of loading prior to December 5, 2022, provided that the crude oil is unloaded at the destination by 12:01 a.m. eastern standard time on January 19, 2023.

On the same day that it issued this determination, OFAC published its Guidance on Implementation of the Price Cap Policy for Crude Oil of Russian Federation Origin (Guidance) on the implementation of the price cap and related restrictions on Covered Services that:

  • Explains that the price cap applies "when the crude oil is sold by a Russian entity for maritime transport through the first landed sale in a jurisdiction other than the Russian Federation (through customs clearance)" and notes that "once the Russian oil has cleared customs in a jurisdiction other than the Russian Federation, the price cap does not apply to any further onshore sale."
  • Provides descriptions of what kinds of services fall within the scope of the various Covered Services.
  • Provides clarifications regarding how it will determine whether crude oil (HTSUS subheading 2709.00) is considered "Russian-origin."
  • Establishes a safe harbor from enforcement for companies that comply with certain recordkeeping, attestation, and due diligence requirements which is meant "to shield such service providers from strict liability for breach of sanctions in cases where service providers inadvertently deal in the purchase of Russian oil sold above the relevant price cap owing to falsified or erroneous records provided by those who act in bad faith or make material misrepresentations." 
  • Sets out OFAC's enforcement policy and standards for imposing penalties on U.S. service providers and non-U.S. actors that rely on U.S. service providers, stating that "OFAC would not pursue a penalty against a U.S. service provider that reasonably relies on the documentation or attestations [that satisfy the safe harbor provisions] 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."
  • Notes the currently applicable general licenses (GL 55, GL 56, and GL 57) that authorize U.S. persons to participate in certain transactions involving Russian-origin crude oil, including certain dealings involving the Sakhalin-2 project; transactions related the import of crude oil into Bulgaria, the Republic of Croatia, or landlocked European Union member states; and activities to respond to vessel incidents related to health or safety of the crew or environmental protection.
  • Directs U.S. persons to stop providing Covered Services and contact OFAC if they become aware that they are providing services related to Russian-origin crude oil purchased above the price cap and notes that specific licenses may be available in certain cases. 

Takeaways

  • The restrictions on the Covered Services imposed under the new price cap scheme aim to limit Russia's ability to profit off of the sale of crude oil, whose price has risen in response to the Russian military's invasion of Ukraine, while not disrupting global markets by entirely prohibiting Russian oil sales. The restrictions also reflect a strategy by the Price Cap Coalition to leverage the fact that critical segments of the maritime shipping industries, including insurance and related financial services, are dominated by G7 countries and well-accustomed to sanctions compliance, given OFAC's prior focus on these industries. This is discussed in OFAC's Fact Sheet discussing the new restrictions published on December 2, 2022. Russia, for its part has thus far signaled that it will not accept the price cap or sell to countries abiding by the price cap. 
  • A major challenge for complying with the new restrictions is preventing and detecting evasion. OFAC's Guidance notes that companies providing Covered Services will need to be vigilant for attempts by intermediary companies to falsify price information or country of origin certificates or engage in "side deals" to obfuscate the "real" price paid for Russian-origin crude oil. Such side deals might consist of companies agreeing to pay at or below the price cap for Russian-origin crude oil but overpaying for other goods not covered by the cap. Other evasion tactics will likely arise as the price caps continue to take hold.
  • The safe harbor, while theoretically providing a great deal of enforcement risk mitigation for companies operating in this space, has demanding requirements. The recordkeeping, attestation, and due diligence measures that must be undertaken to utilize the safe harbor vary according to what "tier" a company operates in within the crude oil supply chain and the access the company has to price information. 
  • Companies operating in the broader maritime shipping industry (including those involved in financing and providing insurance for this industry) would be wise to determine their own exposure to these new restrictions and determine the feasibility of taking advantage of the safe harbor provided by OFAC. For some companies, taking advantage of OFAC's safe harbor policies will require a new level of Know Your Customer (KYC) and other transaction reviews, recordkeeping, and due diligence that they may not be accustomed to. 

For more information, please contact:

Timothy P. O'Toole, totoole@milchev.com, 202-626-5552

Christopher Stagg, cstagg@milchev.com, 202-626-5931

Caroline J. Watson, cwatson@milchev.com, 202-626-6083

Manuel Levitt, mlevitt@milchev.com, 202-626-5921



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