E Point Perfect – Interesting and beneficial content
Law \ Legal

OFAC Releases Preliminary Guidance on Implementation of the Russian Oil Price Cap


The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) recently released preliminary guidance on the implementation of a price cap policy on Russian crude oil and petroleum products.  This policy has major implications for maritime service providers and maritime supply chains.

The price cap policy will be implemented by the United States, together with the G7 and the EU.  The policy has two components: (1) a ban on services related to the maritime transportation of Russian origin crude oil (effective December 5, 2022) and petroleum products (effective February 5, 2022) (collectively referred to as “seaborne Russian oil”), and (2) an exception for services related to shipments of seaborne Russian oil purchased at or below a price cap.  The U.S. ban on the importation of Russian crude oil, petroleum, and petroleum fuels, oils and products of their distillation into the United States will remain in place.

The level of the price cap has not yet been set.  It will be established by cooperating countries via a consultative process.  OFAC anticipates publishing additional, detailed guidance regarding the price cap plan closer to the implementation dates.


Russia’s invasion of Ukraine has disrupted global energy markets and contributed significantly to driving up oil prices.  Higher oil prices are helping Russia resist pressure to withdraw from Ukraine – Russia continues to generate huge revenues from its energy exports – while at the same time hurting energy-importing countries, particularly EU Member States and the UK.  The price cap is intended to reduce upward pressure on global oil prices and reduce Russia’s oil export revenues.

The G7 economies have been discussing ways to reduce Russia’s revenues from oil and oil products for months and recently settled on imposing a price cap in the form of a services ban with an exception for the purchase of seaborne Russian oil at or below the cap.

The G7 released a statement announcing the proposed price cap policy on September 2, 2022.  Like the preliminary OFAC guidance, the G7 statement did not specify the level of the price cap.

It is widely reported that the level of the price cap will be set above Russia’s cost of production and below the world price. The theory behind this approach is that a price below the world price and above Russia’s very low cost of production would encourage economies that have not banned Russian oil imports (including major customers such as China, India, and Indonesia) to support the proposal because they will benefit from cheaper imports.  A price below the world price and above Russia’s cost of production also makes it more likely that Russia will cooperate, as reduced profits may be more appealing than a potential total embargo by additional countries.


The price cap will be effectuated by prohibiting services, including insurance, trade finance, and other financial services related to the maritime transportation of seaborne Russian oil, with an exception for services provided in relation to seaborne Russian oil purchased at or below the price cap.  In the United States, the price cap will be implemented through OFAC’s issuance of a “determination” pursuant to Executive Order 14071, Prohibiting New Investment In And Certain Services To The Russian Federation in Response to Continued Russian Federation Aggression, prohibiting “the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of services related to the maritime transportation of seaborne Russian oil,” with an exception that will apply if the seaborne Russian oil is purchased at or below the price cap.

The price cap will be implemented via a recordkeeping and attestation process.  The recommended risk-based practices for recordkeeping and attestations vary depending on where a service provider is situated in the supply/value chain and the type of information to which it regularly has access.  The guidance notes that “U.S. persons will be required to reject participating in an evasive transaction or a transaction that violates the maritime services policy and price exception, and report such a transaction to OFAC.”

The OFAC guidance distinguishes between Tier 1, 2, and 3 Actors.  Tier 1 Actors include refiners, importers, commodities brokers, traders, customs brokers, and others that “regularly have direct access to price information in the ordinary course of business.”  As these actors are closest to the purchase price, the guidance states that they “should retain and share, as needed,” documents (e.g., invoices, contracts, receipts/proof of accounts payable) with Tier 2 or Tier 3 Actors demonstrating that the shipment of seaborne Russian oil falls within the scope of the exception, i.e., the purchase price of the oil is at or below the price cap.

OFAC recommends Tier 1 Actors “[u]pdat[e] terms and conditions of contracts,” and “updat[e] invoice structure to include itemized price for oil purchase (excluding shipping, freight, and customs costs).”

Tier 2 Actors include shippers, financial institutions providing trade finance, and others “who are sometimes able to request and receive price information from their customers in the ordinary course of business.”  As these actors are at least somewhat removed from direct knowledge of the purchase price, the guidance states they “should, when practicable,” request, retain and share price information (e.g., invoices, contracts, receipts/proof of accounts payable) from Tier 1 Actors demonstrating that the shipment of Russian oil falls within the scope of the exception, i.e., the purchase price of the oil is at or below the price cap.  When doing so is not practicable, OFAC recommends that customer attestations “in which the customer commits to not purchase seaborne Russian oil above the price cap” be requested.

OFAC recommends that Tier 2 Actors “[p]rovid[e] guidance to trade finance department / relationship managers / compliance staff,” “updat[e] requests for information (RFIs) or sanctions questionnaire templates,” and “update[e] bill of lading templates to include attestations.”

Tier 3 Actors include insurance brokers, cargo / Hull and Machinery (H&M) insurers, reinsurers, protection and indemnity (P&I) clubs, and others “who do not regularly have direct access to price information in the ordinary course of business.”  The OFAC guidance provides that such actors may rely on customer attestations from Tier 1 and Tier 2 Actors.  The guidance states that such attestations should be obtained and retained by the Tier 3 Actor, “for example as part of their annual insurance policy renewal process or updates to their insurance policy to comply with the price cap,” and may “cover the entire period a policy is in place, for example for the entire length of an annual policy,” rather than on a shipment-specific basis.

OFAC recommends that Tier 3 Actors “[u]pdat[e] policies and terms and conditions” and “provid[e] guidance to staff.”


Importantly, the oil price cap restrictions will not operate under a strict liability regime (unlike most OFAC sanctions).  The guidance explains that the recordkeeping and attestation process is intended to provide “a safe harbor … from liability for breach of sanctions in cases where service providers inadvertently deal in the purchase of seaborne Russian oil above the price cap due to falsified records provided by those who act in bad faith and make material misrepresentations.”  Persons that knowingly rely on a service provider subject to the services prohibition when making a significant purchase of seaborne Russian oil at a price above the cap and persons that knowingly provide falsified information to such a service provider may be targeted for sanctions enforcement.  The guidance includes samples of compliant and prohibited transactions.

All Actors are expected to retain the relevant records for 5 years.

The guidance includes a variety of red flags that industry should “be vigilant about.”  Examples of red flags, including, inter alia, refusal or reluctance to provide requested price information; unusually favorable payment terms, inflated costs, or insistence on using circuitous or opaque payment mechanisms; and abnormal shipping routes, are highlighted in the initial guidance.  The guidance indicates that OFAC will likely publish additional red flags in the future.

Implications for Industry

The insurance industry has expressed reservations about the workability of the proposal, noting their distance from price information and the difficulty of seeing through sophisticated deceptive conduct by state actors.  Providing a safe harbor for service providers who inadvertently rely on false information should alleviate some of the concerns regarding liability, but verifying and demonstrating compliance will still require insurers and others to incur additional costs.  In some cases, customers may be reluctant to provide attestations or may insist on renegotiating relevant contract provisions.  Tier 2 service providers in particular will need to evaluate when it is “practicable” to obtain price information.  All service providers without direct access to price information will need to consider in which circumstances it is “reasonable” to rely on a particular customer attestation.

At this point, it is unclear how effective the price cap policy will be in reducing Russia’s oil revenues or lowering global prices.  It depends in large part on whether Russia and its largest customers cooperate.  On the one hand, G7 countries continue to dominate global shipping insurance.  Russia may therefore find it difficult, at least in the near-term, to find enough tankers willing to carry its exports and may prefer reduced revenue over fewer export markets.  On the other hand, Russia has developed alternative export networks in response to the existing sanctions regime, and the portion of Russia’s production that can be exported without relying on Western shipping networks will continue to grow.

For now, Russia is responding with promises of retaliation and threats to cut off shipments to participating countries.  If it follows through, there will be further supply disruptions and increased upward pressure on prices.

Even if Russia were to cooperate, any dampening effect on global prices and reduction in Russia’s revenues will be limited if major importers such as China and India do not participate, both of whom may prefer the status quo for various reasons.

In any event, the price cap policy is on track to be implemented soon.  Maritime service providers should be carefully evaluating their existing sanctions-related and other contractual provisions, due diligence, and recordkeeping policies in light of the preliminary OFAC guidance, as well as ensuring they have clear lines of communication with their customers that can be used to obtain additional information as necessary.


Source link

Related posts

One last look at 2022’s Top Ten

It’s the 10th anniversary of the PCA indictment and the courts are still working on it

Talking Jury Selection With JurorSearch CEO Dan Johnson

Five Considerations for Chat and Collaboration App Discovery: eDiscovery Best Practices

Judge Engelmayer Dismisses Putative Securities Class Action Because Allegations Were Based On Unconfirmed Allegations in Short Seller’s Report

Final SEC Clawback Rules: Key Dates that Issuers Need to Know