On 2 September 2022, the Group of Seven (G7) finance ministers issued a statement confirming the future implementation of a price cap on crude oil and petroleum products of Russian origin (the price cap). Under the proposed measure, the provision of services related to maritime transportation of crude oil and petroleum products of Russian origin is prohibited unless purchased at or below a certain price (to be determined).
Although all 27 EU member states have yet to unanimously agree on the measures, the price cap has the support of the European Commission. On 20 September 2022, Australia announced its support for a price cap.
How does a price cap work in practice?
This price cap is intended to establish a basis for the export of crude oil and petroleum products of Russian origin by sea under limited prices and (as OFAC now points out) accomplish the following three objectives: “(i) maintain a reliable supply of Russian oil by sea to the global market; (ii) reduce pressure on fuel prices; and (iii) the Russian Federation will reduce its oil revenues after its own war of choice in Ukraine drives up global energy prices.
If crude oil and petroleum products of Russian origin are purchased above the price ceiling, individuals and entities from G7 countries (and sign-up union countries) will be prohibited from providing services in connection with the sea transportation of such products. . Purchases are still allowed, just not the corresponding G7 services.
Although currently unconfirmed, the list of services is expected to include technical assistance, broking, insurance, reinsurance and financing. This has a significant impact, especially as it is estimated that 90 per cent of marine insurance is linked to the EU or the United Kingdom.
From the OFAC guidance, it appears that the price cap relies on a recordkeeping and verification process that allows each party in the supply chain of offshore Russian-origin crude oil or petroleum products to demonstrate or confirm that oil or petroleum products have been purchased. At or below the price limit price.
Who signs the price cap?
In the first instance, the price cap was signed by the G7 countries: Canada France, Germany, Italy, Japan, the United Kingdom and the United States.
As proposed, the rest of the EU member states are also invited to support the price cap but Australia has already announced its support.
When will the price cap come into effect?
OFAC confirmed that the price cap will take effect on December 5, 2022 for crude oil and February 5, 2023 for petroleum products. This is in coordination with the EU’s Russian oil embargo, which will take effect on the same dates.
What is the price ceiling level?
The price cap level has not been announced yet. However, on 8 September 2022, US Deputy Treasury Secretary Wally Adeyemo announced that the price ceiling would be set “above the cost of production”. Furthermore, on 9 September 2022, Elizabeth Rosenberg (US Treasury Department Assistant Secretary for Terrorist Financing and Financial Crimes) told Reuters that “the price ceiling price … should be consistent with or consistent with historical prices accepted by the Russian market.”
OFAC also confirmed that countries that agree to implement a price cap will be able to participate directly in setting the actual price through a collaborative consultation process.
What will affect financing and insurance?
As indicated above, the ban on services related to maritime transportation of crude oil and petroleum products of Russian origin includes the provision of financing, insurance and reinsurance services. This means that financial institutions and insurers in G7 countries (including the United Kingdom) are prohibited from providing financing and insurance for maritime shipments of crude oil and petroleum products originating in Russia.
The majority of marine insurers are located in G7 states, which makes it difficult for related parties to obtain insurance for shipments of crude oil and petroleum products of Russian origin purchased above the price threshold.
How is the price cap enforced?
Seaborne is eligible for maritime services where price caps are enforced by organizations in coalition countries if they purchase crude oil and petroleum products of Russian origin at or below a price ceiling price. Service providers for offshore Russian-sourced crude oil and petroleum products will not face sanctions enforcement action if they obtain certain documents or confirmations that the purchase price of oil or petroleum products is at or below the price ceiling price.
As OFAC notes, service providers without direct access to pricing information that reasonably rely on customer authentication cannot hold service providers liable for potential sanctions violations because they acted in bad faith in an attempt to induce pricing violations. Limit or evade restrictions.
US Senator Chris Van Hollen said at a recent US Senate committee hearing, “The idea behind this legislation is to provide a worldwide uniform backstop and tell any financial institution thinking of financing or participating in a transaction to buy Russian oil above the price limit. Set by the G7 – [you] should face fines.”
It was subsequently argued that such enforcement powers were unnecessary because the prospect of Russian oil cuts would strongly induce third countries to participate in price capping anyway.
Rosenberg told the same Senate committee that “buyers have an enormous financial incentive to buy under the price ceiling so they can engage in these [G7] Service provider. It is cheaper and less risky to transport Russian oil cargo this way.
How will this affect the planned EU oil embargo?
If EU member states sign up to the G7’s price cap scheme, an EU-wide ban on the provision of services to oil exporters of Russian origin seems inevitable (Articles 3m(2) and 3n of Regulation (EU) 833/2014 ) subject to a price cap at which Russian exporters sell their oil. Amended in favor of trying to limit the price that can be made.
Essentially, the EU’s current sanctions aim to ban EU banks and insurers from financing or insuring oil exports of Russian origin to any country, along with a flat ban on imports to the EU, in hopes of severely curtailing Russian oil production.
However, the effect of such sanctions is contrary to the G7 approach, which hopes to achieve the opposite: ensuring a stable supply of low-cost energy to developing countries will help stabilize global oil prices, which has a major impact on inflation currently being experienced. from several advanced economies.
Impact on the private sector
The US Treasury has indicated that G7 trade bodies, banks and insurers are heavily involved during the design of the price cap policy and that consultations are ongoing as the price cap mechanism is being fine-tuned. Since the successful implementation of the price cap depends on accurate declarations throughout the entire supply chain, it makes sense that the price cap policy is driven by this collaboration.
Source: Reed Smith (