OFAC Implements New Measures on the Price Cap Policy for Russian-Origin Petroleum Products
On February 3, 2023, the Office of Foreign Assets Control (OFAC) of the US Department of the Treasury published several new measures related to a recently implemented policy limiting the import of crude oil and petroleum products of Russian Federation origin, referred to as the “price cap policy.” The price cap policy stems from an agreement among several international constituents, including the G7, the European Union, and Australia, to impose restrictions on the import of Russian-origin oil and petroleum products (the Price Cap Coalition). OFAC’s most recent actions regarding the price cap policy follow a series of regulatory measures, issued by OFAC in the fall of 2022, establishing the bounds of the services ban and corresponding price cap exception.
The price cap is different for each of three categories of Russian-origin products: (1) Russian-origin crude oil; (2) Russian-origin petroleum products, Discount to Crude; or (3) Russian-origin petroleum products, Premium to Crude. As of the date of this Advisory, the price cap for Russian-origin crude oil is 60 USD per barrel, while the price cap for Russian-origin petroleum products is 45 USD per barrel for Discount to Crude petroleum products or 100 USD per barrel for Premium to Crude petroleum products. The recently published measures primarily concern Russian-origin petroleum products and include two determinations pursuant to Executive Order 14071 (EO 14071), updated guidance on the application of the policy to both Russian-origin crude oil and petroleum products, and two price-cap-related general licenses.
This Advisory first discusses the cap and associated guidance for Russian-origin crude oil, followed by the cap and guidance for Russian-origin petroleum products.
Prior OFAC Measures on Russian-Origin Crude Oil
OFAC first issued preliminary guidance on the price cap policy in September 2022, following the commitment made by the Price Cap Coalition to implement bans on the import of Russian-origin oil. That guidance specifically targeted services related to the maritime transportation of Russian-origin crude oil and clarified that the policy operates as a ban on services unless the oil is purchased at or below a certain price cap, which at the time remained undetermined. In November 2022, OFAC issued a determination pursuant to EO 14071 implementing the preliminary guidance.
Specifically, the determination prohibits “the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of any of the Covered Services to any person located in the Russian Federation.” The covered services falling under the prohibition include trading/commodities brokering, financing, shipping, insurance (including reinsurance, protection, and indemnity), flagging, and customs brokering. The determination authorizes those covered services when the price of the Russian-origin oil does not exceed the price cap. Following the determination, in December 2022, G7 members formally set the price cap on Russian-origin crude oil at 60 USD per barrel; OFAC subsequently published a determination pursuant to EO 14071 setting the price cap at the agreed-upon level.
OFAC’s compliance guidance for the crude oil ban explained certain applications of the price cap. First, OFAC noted that the price cap applies “from the embarkment of maritime transport of Russian oil (e.g., when the crude oil is sold by a Russian entity for maritime transport) through the first landed sale in a jurisdiction other than the Russian Federation (through customs clearance).” OFAC clarified that the price cap does not apply to any further onshore sale once the Russian oil has cleared customs in a jurisdiction other than the Russian Federation. The price cap still applies, however, if the Russian oil is taken back out on the water without being substantially transformed outside of Russia. Additionally, OFAC explained that the price cap no longer applies once the Russian oil is substantially transformed in a jurisdiction other than the Russian Federation.
Importantly, with respect to covered services, the guidance clarified that “financing” does not include the processing or clearing of payments by intermediary banks. The processing, clearing, or sending of payments by banks is not included in the definition of “financing” when the bank (1) is operating solely as an intermediary and (2) does not have any direct relationship with the person providing services related to the maritime transport of the Russian oil. Finally, the guidance provides for a safe harbor from OFAC enforcement for US service providers that comply, in good faith, with recordkeeping and attestation processes outlined in the guidance document. The guidance divides service providers by “tiers” of actors and describes standard due diligence practices for each tier.
New OFAC Measures on Russian-Origin Petroleum Products
OFAC’s prior actions have been largely directed at Russian-origin crude oil; it was not until December 30, 2022, that OFAC issued preliminary guidance on the application of the price cap policy to Russian-origin petroleum products. The latest measures published by OFAC this month implement that preliminary guidance and substantially mirror the regulatory framework already established for Russian-origin crude oil.
On February 3, 2023, OFAC published a determination implementing the price cap policy with respect to petroleum products, just as it did for Russian-origin crude oil. The determination prohibits the same covered services identified in the oil determination, including trading/commodities brokering, financing, shipping, insurance, flagging, and customs brokering, unless the price of petroleum products does not exceed the price cap.
A second determination, effective February 5, 2023, divides petroleum products into two categories and sets the price cap for each—the cap on Discount to Crude petroleum products is 45 USD per barrel and the cap on Premium to Crude petroleum products is 100 USD per barrel. Those price caps were agreed upon and implemented by other members of the Price Cap Coalition.
OFAC also published guidance on the application of the price cap policy to Russian-origin petroleum products. Again, the guidance in large part mirrors the guidance issued on Russian-origin crude oil, including the clarification on when the price cap starts and stops, the provision regarding intermediary banks, and similar safe harbor requirements. Further, the guidance specifies that “petroleum products,” for purposes of the determination, means articles defined at subheading 2710 of the Harmonized Tariff Schedule of the United States. Articles subject to the Premium to Crude price cap include gasoline, motor fuel blending stock, gasoil and diesel fuel, kerosene and kerosene-type jet fuel, and vacuum gas oil. Articles subject to the Discount to Crude price cap include naphtha, residual fuel oil, and waste oils.
Finally, that same day, OFAC issued two general licenses (GLs), GL 56A and GL 57A. GL 56A authorizes transactions related to the import of Russian-origin crude oil and petroleum products into Bulgaria, Croatia, or certain landlocked European Union Member States, as described in Council Regulation (EU) 2022/879 of June 3, 2022. GL 57A authorizes transactions that are “ordinarily incident and necessary to addressing vessel emergencies related to the health and safety of the crew or environmental protection, including safe docking or anchoring, emergency repairs, or salvage operations[.]” GL 57A does not authorize transactions related to the offloading of Russian crude oil or petroleum products unless the offloading is ordinarily incident and necessary to address vessel emergencies.
Pursuant to both the guidance and FAQ 1109, Russian petroleum products that were loaded onto a vessel at the port of loading prior to February 5, 2023, and unloaded at the port of destination prior to April 1, 2023, are not subject to the determination.
Companies and individuals dealing in Russian-origin crude oil and petroleum products should remain vigilant in the wake of OFAC’s services ban and in light of evolving guidance. Importantly, OFAC’s guidance provides that US persons may rely upon a certificate of origin to assess whether such products are of Russian origin but warns market participants to exercise caution if they have reason to believe such certificate has been falsified or is otherwise erroneous.
We will continue to monitor OFAC’s Russia-related measures, including sanctions and export controls restrictions, as they emerge.
© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.