The US Department of the Treasury’s Office of Foreign Assets Control issued a Determination on December 5 implementing a $60 “price cap” on Russian crude oil, pursuant to which US persons are authorized to provide otherwise prohibited services. The waiver applies only to the maritime transit of Russian oil purchased at or below the price cap.
The Office of Foreign Assets Control’s (OFAC) Determination was issued pursuant to Section 1(a)(ii) of Executive Order (EO) 14071.
Since April 22, 2022, the United States has prohibited the import of most petroleum products from Russia. However, the prohibition on imports included in EO 14066 does not restrict US persons from arranging or otherwise facilitating the transport of Russian oil into jurisdictions that have not themselves prohibited the import of Russian oil.
In an effort to further limit Russia’s oil revenues without imposing additional secondary sanctions, and while simultaneously trying to stabilize global energy supply, the United States instituted the price cap. As part of a more coordinated multilateral approach to sanctions, the G7 (the United States, Canada, France, Germany, Italy, Japan, and the United Kingdom) and Australia agreed to adopt the $60 per barrel cap proposed by the European Union. The countries that agreed to the price cap have either already banned the import of Russian oil or have committed to prohibiting or phasing out such imports. The policy aims to strike a balance between maintaining a reliable global supply of oil and hindering Russia’s oil revenues. OFAC expects the price cap to be particularly relevant to emerging markets and low-income economies that are susceptible to rising energy prices.
The scope of the Determination’s prohibited actions is broad and applies to the following services (collectively, Covered Services):
As of December 5, 2022, “the exportation, reexportation, sale or supply, directly or indirectly, from the United States, or by a United States person . . . of any Covered Services to any person located in the Russian Federation” is prohibited unless the relevant crude oil is priced at $60 per barrel or below at the time of purchase. Shipping, freight, customs, and insurance costs are not included in the price cap.
The Determination excludes Covered Services relating to Russian-origin crude oil that was “loaded” prior to 12:01 am EST on December 5, 2022, and “unloaded” at the port of destination prior to 12:01 am EST on January 19, 2023. See OFAC FAQ 1094.
According to guidance OFAC released in connection with the Determination (the Guidance), the price cap applies from the time the crude oil (defined at Harmonized Tariff Schedule of the United States subheading 2709.00) is sold by a Russian entity for maritime transport to when the oil clears customs in a new jurisdiction. If the oil is taken back out on the water without being substantially transformed, the price cap still applies. The maritime transport limitation means oil delivered by pipelines would not be covered (including pipelines that might be in or under water, presumably). Once the oil is substantially transformed, or once it is sold again onshore, the cap does not apply because the oil is no longer considered oil of Russian origin.
It should be noted that EO 14071 and the Determination speak to the provision of Covered Services to persons “in the Russian Federation” while the Guidance does not contain that limiting language. This raises the question how broadly OFAC will interpret that limitation when deciding whether to pursue an enforcement action. Limiting Covered Services based on the location of the receiving entity aligns with other Russia sanctions, which include similar limitations. See. e.g., Determination Pursuant to Section 1(a)(ii) of EO 14071 (May 8, 2022).
Understanding that business operations require time to comply with new restrictions, OFAC has established a “safe harbor” for US persons providing Covered Services if the US persons maintain certain records and meet specific attestation requirements.
The safe harbor applies across three “tiers” of actors throughout the oil supply chain and the safe harbor requirements differ between tiers. The tiers operate on a sliding scale: the more direct access to price information a US person has, the greater the diligence requirements that apply to verify that the price is at or below the cap.
The tiers are as follows:
If Covered Service providers comply with these processes and neither know nor have reason to know that they are violating the Determination, then OFAC is unlikely to pursue enforcement actions against them. As a general matter, and consistent with past OFAC policies, the agency suggests that it does not intend to enforce against persons who act in good faith but nevertheless violate the Determination as a result of falsified or erroneous records.
In conjunction with the issuance of the Determination and the Guidance, OFAC issued three new general licenses authorizing US persons to engage in services related to Russian oil even where the price cap has not been satisfied.
The Determination implementing the price cap took effect December 5, 2022. This policy parallels the Biden administration’s decision to waive certain oil-related sanctions on Venezuela and allow Chevron to restart limited production in that country. While the administration has denied it, these policies could be seen as a tandem effort to reduce oil prices globally while having the simultaneous benefit of limiting Russia’s influence over Venezuela.
The situation remains fluid and evolving. Russia has indicated that it will not sell oil subject to the price cap. Meanwhile, OFAC also announced it would institute a similar price cap on Russian-origin petroleum products starting February 5, 2023. Compliance obligations will need to be updated in tandem with those changes.
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