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Russian oil price cap: Complexity, disruption and unintended consequences

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On Monday, December 5 the European Union banned all seaborne Russian crude oil imports into the 27-member bloc. A ban on refined products follows on February 5, 2023. Marine service providers in the EU, US and UK are also prohibited from providing financing, brokerage, shipping and insurance services to ship Russian oil elsewhere unless the crude was bought at or below a price cap of $60 a barrel. 

The oil price cap is the latest in a series of escalating sanctions against the Russian Federation, implemented by mainly Western nations to punish the Kremlin for its invasion of Ukraine in February 2022. 

The most significant developments over the course of the year are highlighted in the timeline published below this article, with links to the relevant Lloyd’s List insight and analysis every step of the way. For a full explainer on the Russian oil price cap, please download our in depth guide.

The cap in practice

The oil price cap intends to reduce the revenue Russia earns from oil, weaken its economy and starve funding for its war in Ukraine. Those who intentionally engage in the seaborne transport of Russian crude oil will face penalties. For example, UK-based marine service providers who “knew or had reasonable cause to suspect” that oil was purchased above the oil price cap face a maximum penalty of $1.2m, considerably more than the US equivalent maximum penalty of $330,947. 

It is unclear whether importing countries have to be members of the Price Cap Coalition so that maritime businesses can provide services for cargoes sold at or below the oil price cap. The European Commission’s wording defines countries who do not join the coalition as those that purchase oil above the price cap. It does not state what this means for buyers whose countries have not agreed to join, but purchase oil at or below the cap anyway.

China, Türkiye and India are the main buyers of Russian crude, and their governments have not stated their support or otherwise for the oil price cap, even though current prices suggest they are obtaining oil at the lower cost. 

Compliance complications 

Overlapping sanctions regimes have become increasingly complex in nature and more onerous for industry players to follow, with even recently expanded guidance from the UK’s Office of Financial Sanctions Implementation and US Treasury’s Office of Foreign Assets Control falling short of providing clarity for the industry. 

As Daniel Martin, partner at law firm HFW says: "Given the clear focus on shipping, compliance and risk professionals in the sector will need to understand not only the specific restrictions, as well as their company's role in the relevant transactions, but also the extent of due diligence which is expected of them. 

"They need to be able to identify any trade or transport activities which related to oil or petroleum products which originate in Russia, even if a vessel has loaded elsewhere. 

"They need to identify whether their company falls within Tier 1, Tier 2 or Tier 3 pursuant to the UK guidance, and they need to understand what the consequence is for them, in terms of ensuring compliance with the price cap. If they are in Tier 2 or Tier 3 they need to carefully assess attestations provided by Tier 1 actors, in order to satisfy themselves, of the reliability and accuracy of that information. 

"Finally, they need to be aware of their reporting obligations where they become aware of a sanctions violation."

Insurance in the front line

Marine insurance and P&I clubs in particular are expected to play a leading role in the enforcement of the price cap on exports of crude and the sector has already found itself at the centre of the geopolitical fallout within days of its implementation. 

Türkiye issued a requirement that from December 2 all ships transiting or entering Turkish waters have to provide letters of confirmation from the shipowner’s P&I Club attesting that cover will remain in place under any circumstances throughout the duration of the transit. The International Group of P&I Clubs has said that its clubs should not issue such a letter to their owner or charterer members on the grounds that it would breach the sanction regulations now in place.

Türkiye’s requirements mean that a P&I Club must confirm that cover will not be prejudiced under any circumstances, including where there is a sanctions breach, whether knowingly and intentionally or unknowingly and unintentionally. 

Issuing a confirmatory letter under these circumstances would expose the club to a breach of sanctions under EU, UK and US law, according to the International Group. 

The stand-off is directly linked to Türkiye’s interpretation of the price cap regulations. Although those rules exclude non-Russian origin oil shipped from Russian ports, it has led to a growing tanker tailback in the Black Sea at the mouth of the Bosphorus, largely comprising vessels shipping Kazakh origin crude loaded at the CPC terminal in Novorossiysk. 

Direct talks between Türkiye and US and EU officials has not resolved the issue. As of December 8, Lloyd’s List Intelligence tracking data showed 25 tankers caught up in the disruption.

US Deputy Secretary of the Treasury Wally Adeyemo suggested in a call with Turkish deputy foreign minister Sedat Onal that they have a shared interest in creating a “simple compliance regime” that would permit seaborne oil trade and keep global energy markets well-stocked. 

Thus far, simplicity and clarity are two important elements distinctly missing from the price cap formula.  

Expert insight from Lloyd’s List keeps 20,000 professionals in maritime operations, risk identification, and compliance well informed of the constantly changing industry and what it means to businesses and markets around the globe.