In this blog post, we update our earlier post regarding OFAC’s determination and guidance on implementing the price cap policy for Russian crude oil (see link), by incorporating the recently released determinations regarding the price cap policy for Russian petroleum products and the updated guidance on implementing the price cap policy for Russian-origin crude oil and petroleum products.
On November 22, 2022, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) published a determination targeting Russian-origin crude oil pursuant to section 1(a)(ii) of Executive Order 14071 (EO 14071), and guidance on the implementation of the price cap policy for Russian-origin crude oil. These followed OFAC’s preliminary guidance released on September 9 (see Steptoe’s earlier blog post here).
Further, on February 3, 2023, OFAC published a determination targeting Russian-origin petroleum products pursuant to section 1(a)(ii) of EO 14071, and updated guidance on the implementation of the price cap policy for Russian-origin crude oil and petroleum products (the Updated Guidance).
The two determinations (the Determinations) set forth the categories of services relating to the maritime transport of Russian-origin crude oil and petroleum products (Covered Services) that US persons are prohibited from providing directly or indirectly to a person located in Russia, unless these items are purchased at or below relevant price cap. The Updated Guidance addresses issues relating to the implementation of the price cap policy for Russian-origin crude oil and petroleum products.
Current Selected Levels for Caps on Price
On February 3, 2023, OFAC published a similar determination to set the cap for “Discount to Crude” petroleum products at USD 45 per barrel, and the cap for “Premium to Crude” petroleum products at USD 100 per barrel. Discount to Crude products include naphtha, residual fuel oil, and waste oils; Premium to Crude products include gasoline, motor fuel blending stock, gasoil and diesel fuel, kerosene and kerosene-type jet fuel, and vacuum gas oil.
OFAC lists the specific articles of petroleum products in its Updated Guidance. Articles defined at the following subheading/suffixes in the Harmonized Tariff Schedule of the United States are subject to the Premium to Crude price cap:
All other articles defined at 2710 are subject to the Discount to Crude price cap.
The Determinations Pursuant to Section 1(a)(ii) of EO 14071
The Determinations prohibit the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a US person, wherever located, of any of the Covered Services to any person located in Russia, unless licensed or authorized by OFAC. The Covered Services are: (i) trading/commodities brokering, (ii) financing, (iii) shipping, (iv) insurance, including reinsurance and protection and indemnity, (v) flagging, and (vi) customs brokering. The Determinations state that Covered Services are authorized if the Russian crude oil or petroleum product is purchased at or below the price cap.
The prohibitions on Covered Services in the Determinations became effective at 12:01 a.m. EST on December 5, 2022, for crude oil and at the same time on February 5, 2023, for petroleum products. Consistent with OFAC FAQs 1094 and 1109, the Determinations exclude Covered Services with respect to Russian-origin crude oil that is loaded onto a vessel at the port of loading prior to 12:01 a.m. EST, December 5, 2022, and unloaded at the port of destination prior to 12:01 a.m. EST, January 19, 2023, and Russian-origin petroleum products that are loaded onto a vessel at the port of loading prior to 12:01 a.m. EST, February 5, 2023, and unloaded at the port of destination prior to 12:01 a.m. EST, April 1, 2023. In other words, within those time and date parameters, US service providers can continue to provide the otherwise prohibited Covered Services relating to the maritime transport of Russia-origin crude oil or petroleum products, regardless of its purchase price.
The Updated Guidance
- Covered Services
The Updated Guidance includes definitions for crude oil and petroleum products, as well as each type of Covered Service. Of note, one of the covered services, “financing,” does not include the processing, clearing, or sending of payments by banks that are operating solely as intermediaries that do not have any direct relationship with the persons providing services related to the maritime transport of the Russian oil or Russian petroleum products in the underlying transaction, i.e., the person is a non-account party. The term “financing” also does not include services with respect to foreign exchange transactions and the clearing of commodities futures contracts either.
In practical terms, this means that US intermediary banks could process payments for the purchase of Russian crude oil or petroleum products under a letter of credit issued by a non-US bank, even if the purchase price was above the price cap, provided that the US intermediary bank has no direct relationship with the person providing services related to the maritime transport of the Russian oil or petroleum products. However, the Updated Guidance indicates that the US intermediary bank could not have any role in the underlying trade finance transaction as an issuing, advising, or negotiating bank.
- The Price Caps
How are they set and what is included in the price?
The price caps for Russian oil and petroleum products were set by the Price Cap Coalition, an international coalition that includes the Group of Seven (G7), the European Union, and Australia. The caps are subject to change based on the Coalition’s objectives and market fundamentals. Shipping, freight, customs, and insurance costs are not included in the price cap and must be invoiced separately and at commercially reasonable rates.
When does it start and stop?
The Updated Guidance addresses the question of when a price cap “starts” and “stops.” It notes that a price cap “applies from the embarkment of maritime transport,” i.e., when the Russian-origin crude oil or petroleum products are sold for maritime transport, through the first landed sale outside Russia through customs clearance. Once the oil or petroleum products have cleared customs in a place other than Russia, the price cap does not apply to any further onshore sale.
However, if the Russian oil or Russian petroleum products are using maritime transport again after clearing customs without being substantially transformed outside of Russia, the price cap will still apply, meaning that US persons can only provide the otherwise prohibited Covered Services in relation to such Russian oil or Russian petroleum products if the oil or petroleum products are sold at or below the price cap. In short, according to the Updated Guidance, the price cap will apply as long as the oil or petroleum products are seaborne, regardless of the number of sales at sea until it is substantially transformed after a landed sale, or it clears through customs with no more maritime transport.
OFAC explains that crude oil is considered to be “substantially transformed” if it “is refined or undergoes other substantial transformation such that the product loses its identity and is transformed into a new product having a new name, character, and use.” OFAC notes that blending of crude oil alone is not a substantial transformation. As to petroleum products, OFAC explains that blending is only considered to be substantial transformation if it results in a tariff shift of the Russian petroleum product (e.g., a change in the applicable Harmonized Tariff code). Once crude oil or petroleum products are substantially transformed in a jurisdiction other than Russia, OFAC no longer considers it to be of Russian origin, so the price cap no longer applies (and Covered Services that would otherwise be prohibited may be provided) even if the substantially transformed oil or petroleum products are further exported using maritime transport.
De Minimis Blending
OFAC also notes that it will not consider crude oil or petroleum products to be of Russian origin solely because such articles contain a de minimis amount of Russian-origin crude oil or petroleum products left over from a container or tank (e.g., an unpumpable amount that cannot be removed from the container without causing damage to the container). Also, OFAC does not consider as Russian-origin any crude oil that transits through a pipeline in Russia that is loaded and certified with a certificate of origin verifying its non-Russia origin.
- “Safe Harbor” for Good Faith Compliance
The Updated Guidance establishes a “safe harbor” for US service providers complying in good faith. It allows US service providers following the safe harbor’s recordkeeping and attestation process to provide Covered Services without concern that they will be penalized for “inadvertently deal[ing] in the purchase of Russian oil or Russian petroleum products sold above the relevant price cap owing to falsified or erroneous records provided by those who act in bad faith or make material misrepresentations.” This recordkeeping and attestation process requires each party in the supply chain of Russian oil or Russian petroleum products shipped via maritime transport to demonstrate or confirm that the Russian oil or Russian petroleum products have been purchased at or below the price cap and retain relevant records for five years, in addition to standard due diligence.
The Updated Guidance sets forth specific process requirements for actors in each of the three “tiers” to qualify for the safe harbor.
Tier 1 Actors are those who regularly have direct access to price information in the ordinary course of business. These actors include commodities brokers and traders. To be afforded the safe harbor, Tier 1 Actors must retain price information such as invoices, contracts, receipts, and proof of payments, and provide information/attestation to Tier 2 or Tier 3 Actors, as needed.
Tier 2 Actors include financial institutions, ship/vessel agents, and customs brokers. These actors are those who are sometimes able to request and receive price information from their customers in the ordinary course of business. To be afforded the safe harbor, Tier 2 Actors must (i) request and retain price information (to the extent practicable), or (ii) obtain and retain a signed attestation from Tier 1 Actors or the customer/counterparty (when direct receipt of price information is not practicable). As a result, in addition to standard due diligence, financial institutions providing transaction-specific trade finance should request documentation from their customers such as invoices and contracts to show the origin, date, and unit price. Where obtaining such information is not practicable for transaction-specific financing, or when a financial institution is providing general financing, the financial institution should obtain and retain signed attestations from downstream customers or subcontractors.
Tier 3 Actors include insurers, reinsurers, P&I clubs, ship owners/carriers, and flagging registries. These actors are those who do not regularly have direct access to price information in the ordinary course of business. To be afforded the safe harbor, Tier 3 Actors must obtain and retain attestations from Tier 1, Tier 2, or the customer/counterparty. In the insurance sector, this can be done by using existing standard sanctions exclusion clauses, or by incorporating new clauses to exclude coverage for activities related to the maritime transport of Russian oil or petroleum products purchased above the price cap.
OFAC has also issued three general licenses related to the price caps on Russian-origin crude oil and petroleum products:
- GL 55 authorizes transactions related to the maritime transport of crude oil originating from the Sakhalin-2 project (Sakhalin-2 byproduct), if the Sakhalin-2 byproduct is solely for importation into Japan, through September 30, 2023.
- GL 56A authorizes transactions related to the importation of Russian-origin crude oil or petroleum products into the Republic of Bulgaria, the Republic of Croatia, or landlocked EU member states as described in Council Regulation (EU) 2022/879 of June 3, 2022. GL 56A replaced and superseded GL 56 dated November 22, 2022.
- GL 57A authorizes transactions ordinarily incident and necessary to addressing vessel emergencies related to the health or safety of the crew or environmental protection, including safe docking or anchoring, emergency repairs, and salvage operations. This authorization includes the offloading of Russian-origin crude oil or petroleum products if that offloading is ordinarily incident and necessary to address such vessel emergencies. GL 57A replaced and superseded GL 57 dated November 22, 2022.
US persons that seek to continue to provide Covered Services prohibited by the Determinations should contact OFAC and request a specific license.
OFAC notes that it intends to focus its enforcement actions on actors who “willfully violate or evade” the price cap. In the Updated Guidance, OFAC makes it clear that it will not pursue a penalty against a US service provider that reasonably relies on the documentation or attestations as described in the Updated Guidance, unless the US provider “knew or had reason to know” that such documentation was falsified or erroneous or that the Russian oil or petroleum products were purchased above the relevant price cap. For example, if the US service provider did not have direct access to the price information and reasonably relied in good faith on a customer attestation, OFAC will not penalize the service provider for the violations attributable to the conduct of an actor who caused that US person to unknowingly violate the Determinations.
Persons that make purchases of Russian oil or petroleum products above the price cap and that knowingly rely on US service providers who provide Covered Services; persons that knowingly provide false information, documentation, or attestations to such a service provider; and persons using side deals to obfuscate the “real” purchase price paid by an intermediary or the ultimate consignee may be deemed to have violated the Determinations, and may become the targets of OFAC enforcement actions or criminal enforcement actions.
With respect to evasion, OFAC notes that shipping, freight, customs, and insurance costs are not included in the price caps and must be invoiced separately at “commercially reasonable rates.” OFAC would view commercially unreasonable shipping, freight, customs, or insurance costs as a sign of potential evasion of a price cap.
- Reporting Requirement for US Persons
US persons providing Covered Services are required to reject participating in an evasive transaction or a transaction that violates the Determinations, and report such a transaction to OFAC in accordance with 31 CFR § 501.604, which sets forth the types of information to be submitted in a report. Reports must be filed within 10 business days of the rejected transaction and be submitted to OFAC via email, mail, or any other official electronic reporting option specified on OFAC’s website.
- Applicability to Covered Services Provided to Non-Russian Persons
Of note, the Updated Guidance does not refer to the fact that the Determinations prohibit the direct or indirect provision of Covered Services “to any person located in the Russian Federation,” even though this language is included both in EO 14071 and in the Determinations. The Updated Guidance’s lack of reference to that limiting language, and the descriptions of the Covered Services in the Updated Guidance, appear to suggest that OFAC may be adopting a broader interpretation of when a service is covered by the prohibition. Indeed, the Updated Guidance appears to embody an unstated (and debatable) assumption that any provision of a Covered Service is ultimately to “a person located in the Russian Federation” if the service relates to Russian-origin oil or petroleum products, even if the direct counterparty receiving the service is from a third country.
For assistance in understanding how the price cap policy may apply to your business, contact any of the authors.