Why Russian Oil Price Cap will Pose Challenges to Maritime Industry
On 5 December 2022, the long-awaited Russian oil price cap measures and related sanctions came into effect. It is no surprise that these measures focus on the maritime industry and insurance. Policymakers have long recognised the central role of shipping in international trade and the crucial role of insurance in shipping, and therefore used sanctions affecting shipping and insurance when they wish to limit, or sanction, trade. However, none of this is likely to lessen some of the challenges posed by the regime, and, a little over week on from the measures coming into force, it seems clear that regulators, market participants and their advisers have already been grappling with some of the issues, the initial logjam of tankers at the Bosphorus Strait and the Hellespont Strait being early evidence of some of the difficulties.
This briefing is not intended to be a comprehensive summary of the price cap regimes, but rather highlights some of the challenges and risks that may be posed to the maritime industry in attempting to comply.
HIGHLY AMBITIOUS, COMPLEX AND CHALLENGING
The Russian oil price cap regime is possibly the most ambitious and sophisticated sanctions regime ever contemplated. It has been agreed by the Group of Seven (“G7” comprising Canada, France, Germany, Italy, Japan, the UK and US) plus the EU, but is implemented by separate legislative packages from the US, UK, EU and the rest of the G7 members plus Australia. This, in itself, has given rise to some of the challenges which the maritime industry will face in playing its part in implementing it.
Previous sanctions have variously targeted individuals, entities or groups, where all activity with or relating to them is prohibited. Occasionally whole countries or governments have been sanctioned. Limited “sectoral” sanctions have previously prohibited specific activities with relevant persons or trading in certain goods or sectors, but where the latter have applied, they have generally involved a complete prohibition. For example, it has previously been prohibited to supply certain energy-related goods to Russia, but the prohibition was not varied by reference to some condition such as the price of the goods and, accordingly, compliance or non-compliance was comparatively straightforward to determine.
In the current case, the ambitious objective was to deprive Russia of access to excess oil revenues by constraining its ability to sell at global market prices (themselves inflated by the war in Ukraine), whilst still enabling Russian oil to flow to those countries needing it. In other words, trade in specified Russian oil products is to be sanctioned but not completely prohibited and this is to be achieved by, in effect, prohibiting trade in, the maritime transport of, and finance, insurance and other specified services in respect of, the relevant Russian oil products, except where they are sold at or below the specified cap.
In order to implement the regime, parties in the oil supply chain are divided into three Tiers (1, 2 and 3) with Tier 1 being closest to the actual trade and Tiers 2 and 3 getting progressively more remote. The different Tiers have differing levels of obligations. These obligations relate to price paid, information to be obtained, reporting and record keeping. Crucially, those in Tiers 2 and 3 (charterers, shipowners, insurers, financiers etc.) are likely to be only indirectly involved in the trade, making compliance increasingly challenging.
THE TIERING SYSTEM
The tiering system is not straightforward. There are ambiguities and issues of interpretation in relation to the three Tiers announced by each of the US, UK and EU authorities. Perhaps unavoidably, although the sanctions regimes are intended to be seamless across jurisdictions, there are potential differences between the regimes as regards who is in which Tier and what they are required to do in order to comply.
NEW DUE DILIGENCE AND DOCUMENTATION REQUIREMENTS
It is clear that each of the US, UK and EU regimes will require additional due diligence measures and documentation. In some senses, the documentation required to evidence or support compliance with the price cap will drive due diligence, whilst some of it may be independent.
New provisions will be required in both financing and chartering documents. Existing sanctions compliance clauses are unlikely to be regarded as sufficient because of the specific requirements of the regimes as they apply to parties in the three Tiers.
A party wishing to secure compliance should include appropriate language in new agreements.
Getting new language into existing deals will be more of a challenge if counterparties interpret the requirements differently and resist. One of the difficult areas where there are issues of interpretation is which Tier vessel financiers fall into under the different regimes and the treatment of existing as opposed to new financings.
Where there are differences, or differences of interpretation, between the regimes, the most restrictive will likely be determinative for most parties.
The closer a party is to an actual oil trade, the more active due diligence is required. Conversely, parties such as vessel financiers (whether lenders or lessors) and even owners letting out ships on time or voyage charter are further removed and less may be required. There will be difficult judgment calls on which some market consensus will likely emerge, informed by legal advice and hopefully, further guidance from the regulators.
VESSEL TRACKING/DUE DILIGENCE – RUSSIAN PORTS
It seems inevitable that for all parties (whichever Tier they may fall into) due diligence will be required in respect of tankers trading to Russian ports. Vessel tracking by finance parties is not new in a sanctions context and views have differed as to whether it is appropriate or advisable. It is surely something to be seriously considered in response to the oil price cap. A trade to a Russian port by a tanker leads straight to further enquiry regarding compliance with the price cap.
NON-RUSSIAN PORTS AND SHIP-TO-SHIP TRANSFERS
A more difficult judgment call arises in relation to the lifting of oil and oil products from non-Russian ports. None of the regimes puts any express limit on how far back in a contractual chain (or in time) parties have to go to be satisfied that a particular cargo is not of Russian origin. Ship-to-ship transfers (“STSs”) give rise to two further issues in this context: Russian and non-Russian oil can be commingled; and it is common knowledge that regulators are concerned that some STSs have in the past been used for sanctions evasion.
There are not going to be easy answers to many of the issues raised by the oil price cap. It is to be hoped that through discussions between industry players – owners, financiers, charterers, insurers and legal advisors and, where practicable, with regulators – some consensus of approach soon emerges so problems start to be ironed out.
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