Challenges of the Russian Oil Price Cap Regimes

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The Russian oil price cap regime that came into effect on Dec. 5 is possibly the most ambitious and sophisticated sanctions regime ever contemplated. It has been agreed by the G7 and EU, but while it is intended to be seamless and uniform, it has been implemented by separate legislative packages from each of the US, UK, EU and the rest of the G7 members plus Australia. This, in itself, has given rise to some inconsistencies, and therefore challenges, which the maritime industry will face in playing its part in implementing it. This article does not summarize the regimes but highlights their complex and unique features, and the challenges they may pose for the maritime sector in attempting to comply.

Previous sanctions have targeted (1) individuals, entities or groups, where all activity with or relating to them is prohibited; (2) occasionally, whole countries or governments, again prohibiting all activity with them; or (3) specific activities under limited “sectoral” sanctions involving relevant persons or trading in certain goods or sectors. Where the latter have applied, they have generally involved a complete prohibition on trading in the relevant goods. For example, it has previously been prohibited to supply certain energy-related goods to Russia, but the prohibition was not varied by reference to some condition such as the price of the goods and, accordingly, compliance or noncompliance was comparatively straightforward to determine.

In the current case, the ambitious objective of the relevant authorities is to deprive Russia of access to excess oil revenues by constraining its ability to sell at global market prices (themselves inflated by the war in Ukraine), while still enabling Russian oil to flow to those countries needing it. Trade in specified Russian oil products is to be sanctioned but not completely prohibited. This objective is to be achieved by prohibiting the maritime transport of the relevant Russian oil products, and finance, insurance and other specified services relating to it, except where the relevant Russian oil products are sold at or below the specified cap.

Unlike in previous sanctions regimes, it is not the parties, goods or activities themselves which are sanctioned, but the price at which the trade is effected. Seeking to ensure compliance with such a regime will require a new and different scope of due diligence.

Shipping and Insurance

It is no surprise that these measures focus on the maritime industry and related insurance. Policymakers have long recognized the central role of shipping in international trade and the crucial role of insurance in shipping. They have therefore sanctioned shipping activities to limit or control the trade and targeted the related marine insurance as one of the most effective ways of stopping shipping activity in breach of the sanctions.

This methodology goes back at least to the Iran sanctions implemented in the early 2010s, and led insurance companies to develop sanctions limitations clauses providing that they would not provide cover or be liable to pay where such would be in breach of sanctions.

It therefore came as no surprise that a little over a week on from the new measures coming into force, the first challenge posed by the new regime related to the tension between the insurance cover required by the Turkish authorities and that which the P&I clubs were prepared to provide, as evidenced by the early logjam of tankers at the Bosporus and Hellespont straits.

Tiering System

In order to implement the regime, parties in the oil supply chain are divided into three tiers, with Tier 1 being closest to the actual trade and Tiers 2 and 3 getting progressively more remote. The different tiers have differing levels of obligations. These obligations relate to price paid, information to be obtained, reporting and record-keeping. Crucially, those in Tiers 2 and 3 (charterers, shipowners, insurers and financiers etc.) are likely to be only indirectly involved in the trade, making compliance increasingly challenging.

The tiering system is not straightforward. There are ambiguities and issues of interpretation in relation to the three tiers announced by each of the US, UK and EU authorities. Perhaps unavoidably, although the sanctions regimes are intended to be seamless across jurisdictions, there are potential differences between the regimes as regards who is in which tier and what they are required to do in order to comply.

Due Diligence and Documentation Requirements

It is clear that each of the US, UK and EU regimes will require additional due diligence measures and documentation. In some senses, the documentation required to evidence or support compliance with the price cap will drive due diligence, while some of it may be independent.

New provisions will be required in both financing and chartering documents. Existing sanctions compliance clauses are unlikely to be regarded as sufficient because of the specific requirements of the regimes as they apply to parties in the three tiers.

A party wishing to secure compliance should include appropriate language in new agreements.

Getting new language into existing deals will be more of a challenge if counterparties interpret the requirements differently and resist. One of the difficult areas where there are issues of interpretation is which tier vessel financiers fall into under the different regimes and the treatment of existing, as opposed to new, financings.

Where there are differences, or differences of interpretation, between the regimes, the most restrictive position will likely be determinative for most parties.

The closer a party is to an actual oil trade, the more active due diligence is required. Conversely, parties such as vessel financiers (whether lenders or lessors) and even owners letting out ships on time or voyage charter are further removed and less may be required. There will be difficult judgement calls on which some market consensus will likely emerge, informed by legal advice and, hopefully, further guidance from the regulators.

Vessel Tracking — Russian Ports

It seems inevitable that for all parties (whichever tier they may fall into), due diligence will be required in respect of tankers trading to Russian ports. Vessel tracking by finance parties is not new in a sanctions context and views have differed as to whether it is appropriate or advisable. It may well be considered necessary in response to the oil price cap. A trade to a Russian port by a tanker leads straight to further enquiry regarding compliance with the price cap.

Non-Russian Ports and Ship-to-Ship Transfers

A more difficult judgement call arises in relation to the lifting of oil and oil products from non-Russian ports. None of the regimes put any express limit on how far back in a contractual chain (or in time) parties have to go to be satisfied that a particular cargo is not of Russian origin. Ship-to-ship transfers (STSs) give rise to two further issues in this context: Russian and non-Russian oil can be commingled; and it is common knowledge that regulators are concerned that some STSs have in the past been used for sanctions evasion.

There are not going to be easy answers to many of the issues raised by the oil price cap. It is to be hoped that through discussions between industry players — owners, financiers, charterers, insurers and legal advisers and, where practicable, with regulators — some consensus of approach soon emerges so problems can be ironed out.

For more coverage of the Ukraine crisis, visit Ukraine Crisis: Energy Impact >

This article was authored by Watson Farley & Williams’ Sanctions Group, comprising senior lawyers David Osborne and Simon Kavanagh in London, Daniel Pilarski in New York, and Christine Bader and Max Boemke in Hamburg. The views expressed in this article are those of the authors. 

Oil Tankers, Sanctions, Ukraine Crisis
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