G7 nations Impose Price Cap Policies for Maritime Transport of Russian-Origin Crude Oil

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(www.MaritimeCyprus.com) A coalition of countries, including the G7 nations (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States), the European Union, and Australia (the “Price Cap Coalition”), have recently released policies prohibiting a broad range of services related to the maritime transportation of Russian-origin crude oil sold above a soon-to-be established price cap.

The price cap – which comes on top of the EU import ban on Russian seaborne crude oil and oil products, and the corresponding bans of other G7 partners – will further reduce the revenues Russia earns from oil. The oil price cap [60 USD per barrel for crude oil] will also serve to stabilise global energy prices which Moscow's illegal war on Ukraine has inflated.

It will help address inflation and keep energy costs stable at a time when high costs – particularly elevated fuel prices – are a great concern to all Europeans.

How has the cap been set?

The price cap rate has been set in legislation by the Council and agreed by the international Price Cap Coalition. This Price Cap Coalition conducted a technical exercise and reached consensus on the appropriate level at which to fix the price cap rate. This rate is a price per barrel.

The price cap rate has been approved by a unanimous decision of the Council. This decision will introduce the price cap in Annex XI to Decision 2014/512/CFSP. In accordance with this Decision, the price cap has been inserted into EU law by an amendment of Annex XXVIII to Regulation (EU) 833/2014 via a Commission Implementing Act. Any subsequent changes would require the same procedure i.e. a Council Decision and a Commission Implementing Act.

This information will be published in the Official Journal of the EU.

Is the cap set in stone?

No. The price cap is fixed for now but adjustable over time. After the initial cap has been set, the price may be amended in the future to reflect market developments and technical changes, as agreed by the Price Cap Coalition. This review should take into account a variety of factors, which can include the effectiveness of the measure, its implementation, international adherence and alignment, the potential impact on coalition members and partners, and market developments.

What sort of exceptions have been agreed?

The price cap does not affect in any way the full EU import ban on Russian crude and petroleum products and the specific exceptions and derogations thereunder which were already agreed in previous sanctions packages. These exceptions and derogations allow certain Member States to continue importing crude oil and petroleum products from Russia due to their specific situation or to import seaborne crude oil from Russia if the supply of crude oil by pipeline from Russia is interrupted for reasons beyond their control.

Specific projects which are essential for the energy security of certain third countries may be exempted from the price cap. The current list of exempted projects referred to in Article 3n(6)(c) are contained in Annex XXIX.

Are there any transition periods provided for the transport of Russian oil?

The price cap enters into force as of 5 December 2022 for crude oil and as of 5 February 2023 for petroleum products [the price for refined products will be finalised in due course]. These measures apply to Russian crude oil falling under CN code 2709 00 and Russian petroleum products falling under CN code 2710. There is a 45-day wind-down period for seaborne Russian crude oil purchased above the price cap, provided it is loaded onto a vessel at the port of loading prior to 5 December 2022 and unloaded at the final port of destination prior to 19 January 2023. Maritime-related services and maritime transport can be provided during this period.  There is no equivalent provision for petroleum products.

After the initial price cap has been set, the price may be amended by the Price Cap Coalition. Where this occurs and the price in Annex XXVIII is changed, there is wind-down period of ninety days (90) for the maritime related services and maritime transport of Russian crude oil (and petroleum products).

What happens if a ship disrespects the price cap?

If a third country flagged vessel intentionally carries Russian oil above the price cap, EU operators will be prohibited from insuring, financing and servicing this vessel for the transport of Russian oil or petroleum products for 90 days after the cargo purchased above the price cap has been unloaded.

If an EU vessel, such as an EU flagged vessel, violates the price cap, it will be subject to the consequences that follow under each Member State's national legislation.

Which countries have agreed to this oil price cap?

G7 members and other participating countries (‘Price Cap Coalition'), such as Australia.

What about the risk of circumvention? Surely shipping companies will just reflag?

EU sanctions apply within the jurisdiction (territory) of the EU, to EU nationals in any location, to companies and organisations incorporated under the law of a Member State – including branches of EU companies in third countries, as well as on board aircraft or vessels under Member States´ jurisdiction.

The prohibition to transport Russian seaborne oil applies to all EU vessels, i.e. EU flagged vessels, and also vessels that are owned, chartered and/or operated by EU companies or nationals. This would also cover agents acting on their behalf. The EU refrains from adopting sanctions having extra-territorial application in breach of international law. For the oil price cap, all countries are currently being invited by the G7 to join the Price Cap Coalition.

If they agree to join, this means they agree to purchase oil at or below the price cap. This will allow them to benefit from transport and other related services (insurance and financing) provided by EU operators, and a lower price.

If they do not join the Coalition, meaning that they purchase the oil above the price cap, EU operators will not be able to transport such oil to those countries, nor provide financing or insurance to them.

The goal of the price cap is thus two-fold: to keep low-priced Russian oil flowing onto global markets and to reduce the Russia's revenues to be able to wage war.

With the price cap, there are clear incentives for Russia, oil importing countries and market participants to maintain the flow of Russian oil. This will achieve both objectives at the same time.

The United States, the EU, and other G7 countries have already committed to phasing out imports of Russian oil. That will not change. Instead, the price cap allows our service providers to support shipments of Russian oil to other countries, if purchased below the price cap. This means that the main beneficiaries of this lower-priced oil will be third countries, including developing countries in Africa, Asia, and Latin America, which in turn serves global market stability.

Does this involve a weakening of EU sanctions?

No. The price cap does not change our EU oil import ban. It involves amending EU sanctions (the maritime services ban) to allow the provision of these services under the strict condition that the Russian oil is purchased below the cap. Services for transport and transport above the cap remain fully sanctioned. This amendment will actually help strengthen the overall impact of global sanctions against Russia, by creating incentives for a coalition of third countries to trade at or below the cap, thereby pushing down prices and reducing Russia's revenues.

What does this mean for the maritime industries of certain Member States?

The full import ban into Union of Russian crude oil and refined petroleum products, already agreed by the Council in June, is not affected – so nothing changes for Member States on this front.

As regards maritime services and maritime transport by Member States' providers covering Russian oil, there is no impact as long as the trades concerned remain at or under the set cap.

The Commission will continuously monitor the possible broader economic impact on Member States and will, together with allies, continue to strive for the largest possible price capping coalition, to render this system as effective as possible.

General

What is the rationale of imposing such sanctions?

Sanctions are targeted at the Kremlin. They aim to weaken the Russian government's ability to finance its aggression against Ukraine and are calibrated in order to minimise the negative consequences on the Russian population.

Sanctions are imposing a direct cost on Russia for its war of aggression and damaging Russia's industrial and economic ability to wage war, manufacture more weapons, and repair existing weapons systems. The sanctions also deprive the Russian army and its suppliers of the goods and equipment needed to wage its war on sovereign Ukrainian territory.

In addition, sanctions are designed to maximise the negative impact for the Russian economy, while limiting the consequences for EU businesses and citizens. We welcome EU companies' diligence in complying with the sanctions framework in place.

Ensuring an effective and diligent implementation of sanctions is key to prevent circumvention. This is primarily the responsibility of Member States.

In this process, the European Commission is fully committed to assisting them and ensuring a consistent implementation across the Union.

Are EU sanctions causing a food crisis?

No. It is Russia's unprovoked invasion of Ukraine and Russia's deliberate actions - such as blocking grain exports from Ukraine, burning crops and silos, stealing Ukrainian cereals, and complicating trade - that is provoking a global food crisis.

None of the EU's sanctions adopted against Russia prevent the supply of agri-food, medical equipment or medicines for the general population.

None of the sanctions adopted by the EU in view of Russia's war of aggression in Ukraine target the trade in agricultural and food products, including cereals and fertilisers, between third countries and Russia.

If third countries wish to buy Russian fertilisers, there are no EU sanctions that would prohibit this.

On 19 September 2022, the EU issued updated guidance to clarify the situation in which EU operators transport a sanctioned item to a third country. It makes it clear that the transfer of Russian fertilisers to third countries via the EU is permitted.

In a very challenging environment with rising production costs for farmers, we need to become less dependent on inputs for fertilisers production from unreliable trade partners. We must diversify our sources of supply. The Commission proposed legislation for this diversification, notably the suspension of import tariffs on fertilisers inputs that originate in countries other than Russia or Belarus.

Recap:

Below is an initial summary and a preliminary analysis of the main elements as provided for by the European Community Shipowners Associations (ECSA) Secretariat.

Entry into force:

  • The ban on transport to third countries of Russian oil enters into force on 5 December for crude products and on 5 February 2023 for petroleum products, unless the products are purchased under the cap (FAQ 9).

Transitional period (wind-down):

  • Initial wind-down (FAQ 11, 12, 30): a 45-day wind down period (until 19 January 2023) applies for Russian oil already at sea on 5 December 2022. This period can be extended if proven reasons of force majeure prevent a vessels from reaching its destination by 19 January.
  • Amendments (FAQ 13, 30): for any subsequent amendments of the price cap, a wind-down period of 90 days will apply.

Scope of application:

  • Operators (FAQ 27): The price cap provisions apply to “all EU vessels, i.e. EU flagged vessels, and also vessels that are owned, chartered and/or operated by EU companies or nationals. This would also cover agents acting on their behalf”.  This is in accordance to the overall scope of the Sanction Regulation, article 13.
  • Products (FAQ 8): The price cap applies at the set level for crude products (CN 2709 00 as of 5 December 2022) and petroleum products (CN code 2710 as of 5 February 2023) of Russian origin, with the caveat that the cap only applies after the adoption of the Council Decision establishing the price cap. Due diligence must be exercised in order to reasonably determine the origin of the oil.  In case the product is transported in mixed fashion with products of other origin, a dedicated attestation for the proportion of Russian oil must be provided.
  • Services:
    • The prohibition to provide services (art. 3n para 1) to maritime transport of Russian oil applies to technical assistance, brokering services or financing or financial assistance, unless the oil is transported in compliance with the price cap (FAQ 20). Class services are not covered by the ban (FAQ 21).
    • The prohibition on brokering services should be understood as covering  “all related brokering services such as commodities brokering, insurance brokering, customs brokering, ship brokering” (FAQ 19), including insurance brokering (FAQ 22).
    • Flagging and registration services as well as chartering and sub-chartering of vessels for the transport of Russian oil are also prohibited (FAQ 23 and 26) unless the transport is in compliance with the cap.
    • Processing of payments by a bank or financial institution is not included in the EU definition of financial assistance (FAQ 24). However, letters of guarantee/credit involving the issuer’s own resources are prohibited.
    • The maritime service ban does not apply to the bunkering of Russian oil (supply of fuel) (FAQ 25).

Recordkeeping and Attestation process:

  • 3-tier system for attestation (FAQ 35): the guidance sets out a 3-tier system for attestation based on the level of access to price information, similar to the one applied at US level. A non-binding attestation model is provided as an example on page 19.
  • Obligations for shipowners: as advocated by ECSA, shipowners have been placed under TIER 3 (actors that do not have direct access to price information). “Tier 3 actors should obtain and retain customer attestations in which the customer commits to not purchase seaborne Russian oil above the price cap, for example as part of their annual insurance policy or ordinary business operations”.
    • Attestations shall be obtained from customers as a separate document or as an annex to the charterparty or bill of lading. Adjustments to sanction clauses are also possible, which would require an update to charterparties signed prior to the entry into force of the price cap (FAQ 38).
    • The shipowner is required to obtain attestation for any in-transit trade, including ship to ship transfer (FAQ 39).
    • The shipowner is required to keep record of the attestation for at least 5 years (FAQ 38, 43).
    • “EU operators should hold the necessary attestations at the moment they conclude their contracts in relation to the transport of Russian oil to third countries” (FAQ 42).
    • Documentation held by Tier 3 actor does not need to include price information - contrary to documents held by Tier 1 and when applicable Tier 2 actors (FAQ 41).
    • Importantly, recordkeeping and attestation should be conducted in addition to regular due diligence. Note that more details on due diligence practices are provided under FAQ 47.
  • Safe harbour clause”: FAQ 35 provides assurance as regards cases where a shipowner is found non-compliant even if the contract for transport was concluded in good faith:  “In cases when an EU operator without direct access to price information reasonably relies on an attestation, after performing appropriate due diligence, and such an attestation was falsified or provided by illegitimate actors, the EU operator would not be considered in breach of the price cap provided it has acted in good faith”.

Non-compliance by 3rd country-flagged vessels and provision of services (art 3n para 7)

  • Article 3n para 7 states that, in case a vessel is found transporting Russian oil over the price cap, it shall thereafter be prohibited for EU operators to provide services (e.g. brokering, insurance). This provision only applies to 3-country flagged vessels, in the event that they ”in the past transported such goods purchased above the price cap, provided the operator responsible for that transport knew or had reasonable cause to suspect that this was the case” (FAQ 32).
  • In this case, actors along the chain need to perform “appropriate due diligence calibrated according to the specificities of their business and the related risk exposure (eg, the tier they are in) to ensure compliance”. A tier 2 or 3 operator which has provided services after reasonably relying on an attestation and performing appropriate due diligence, would not be considered in breach of sanctions if the transport is later found to be non-compliant due to a falsified attestation (FAQ 32)
  • In case a third-country flagged vessels is found transporting Russian oil above the cap and is considered in breach of sanctions,  this will result in loss of EU services for 90 days following the date of unloading of the cargo purchased above the price cap (FAQ 34).
  • Importantly, the provision above applies to third-country flagged vessels. Enforcement of all other provisions under the sanctions regulation for EU-flagged vessels and other entities falling under the scope (vessels owned by EU companies or nationals – see FAQ 27) is ensured at Member State level – see below.

Enforcement:

  • Enforcement of sanctions remains in the hands of national authorities. Member States are responsible for assessing possible circumvention of the price cap in accordance with the principles provided by the guidance, including the different obligations imposed on operators under the tier system (FAQ 45, 46). FAQ 47 provides some examples of red flags.

Additional provisions:

  • Interaction with import ban (FAQ 17, 31): the application of the oil price cap has no impact on the ban on imports into the EU of Russian crude and petroleum products by sea transport, which continues to apply irrespectively. The obligations of EU port and custom authorities are laid out in FAQ 29.
  • Oil cap application and intermediary trade (FAQ 6, 39): the price cap starts applying from the moment cargo is received by a vessel for transport, meaning that all in-voyage intermediary trade (including ship-to-ship transfers) must occur at or below the price cap. Once the cargo is released for free circulation in a 3rd country, the cap ceases to apply.
  • Reporting obligations (FAQ 44): there are no reporting obligations for EU operators. EU operators are required to abide by the recordkeeping and attestation requirements.

Project exemptions (FAQ 48, 49): exemptions are provided for specific energy projects (Japan - Sakhalin-2) and possibly foreseen in the future if agreed at G7 level.

 

Further to the agreement on the price, the European Commission has also published its guidance on the application of the cap (attached). The document provides guidance to Member States as regards the implementation of the oil price cap, including the setting up of 3-tiered system for the attestation process that would allow operators to demonstrate their compliance with the cap.

You can download the European Commission guidance below (19 pages):

download

 

Source: EU and ECSA

 

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