On December 2, 2022, the G7, EU, and Australia (Price Cap Coalition) jointly agreed upon a cap on the price of seaborne Russian-origin crude oil at USD 60 per barrel as of December 5, 2022. The cap is subject to change based on the Coalition’s objectives and market fundamentals.
Upon reaching this consensus, the Treasury Department released a fact sheet on the same day providing additional details on the price cap policy, including its goals, how it works, and the compliance framework for the policy (the Fact Sheet). Most information has been previously discussed in the guidance released on November 22 (see our prior blog post at link). On December 5, the Treasury Department issued a Determination (the December Determination) pursuant to Executive Order 14071 and the prior Determination dated November 22 (the November Determination), to set the cap at USD 60 per barrel formally and to implement the policy.
Fact Sheet
The Fact Sheet noted that while maintaining a reliable supply of oil into global markets, the price cap will be of particular benefit to emerging markets and low-income economies, by helping to stabilize global oil prices. The Fact Sheet indicated that the G7, EU, and Australia are “already committed to prohibiting or phasing out imports of Russian oil and will not directly benefit from a lower price.”
The Fact Sheet also noted that the Price Cap Coalition will review and adjust the price cap level based on Coalition objectives and market fundamentals, if necessary, to make sure the price cap level and policy are practical to implement. The price cap level for the maritime transport of Russian-origin petroleum products will be announced before February 5, 2023, when the ban on services for those petroleum products comes into effect.
Observations
According to OFAC’s guidance on the price cap (the Guidance), “[t]he 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).” (Emphasis added.) The Guidance further states that “once the Russian oil has cleared customs in a jurisdiction other than the Russian Federation, the price cap does not apply to any further onshore sale.”
OFAC has not defined the terms “through the first landed sale” or “customs clearance.” However, from the below example in the Guidance, it appears that OFAC takes the position that the price cap must apply to the sale from an intermediary trading company to a refiner:
“A U.S. trading company purchases Russian oil at or below the price cap from a Russian Federation company. The trading company arranges for maritime transport of that Russian oil to a refiner in a jurisdiction that has not prohibited the importation of Russian oil. The trading company prepares and maintains documentation showing that the Russian oil was purchased at or below the price cap and which lists separate and commercially reasonable shipping, freight, customs, and insurance costs. The refiner pays the trading company a total price not to exceed the price cap price plus the shipping, freight, customs, and insurance costs. To be afforded the ‘safe harbor,’ the U.S. trading company retains the records related to this transaction for a period of five years.” (Emphasis added.)
From this example, it is not clear whether the sale from the trading company to the refiner happened on land or at sea. It would be helpful for OFAC to issue further guidance on this issue.
Lastly, on December 5, Senators Chris Van Hollen (D-MD) and Pat Toomey (R-PA) called on Congress to enact their legislation authorizing the imposition of secondary sanctions on foreign entities involved in the purchase of Russian seaborne petroleum and petroleum products at a price above the cap, despite US Deputy Treasury Secretary Wally Adeyemo’s earlier statements in September that the US government would not impose secondary sanctions on purchasers of Russian oil. Their proposed legislation, which would also decrease the price cap over the period of three years to “steadily deprive Russia of its oil profits,” was filed as an amendment to the Fiscal Year 2023 National Defense Authorization Act (NDAA), but was not included in the compromise NDAA language that has been approved in the House of Representatives and is expected to be approved in the Senate. If enacted in its current form, the Van Hollen-Toomey proposal would have a major impact on countries such as India and China, whose purchase of Russian-origin oil has increased this year. Presumably, the legislation will be reintroduced next year if it is not approved before the current Congress closes on January 3, 2023 – but without Senator Toomey being a sponsor as he did not stand for reelection in the midterms.
