The US Treasury has provided the first details on how trade finance banks will be required to implement a price cap on Russian seaborne oil exports currently being worked out by the G7.
The Office of Foreign Assets Control (OFAC) on September 9 published preliminary guidance on how the price cap will be maintained through the help of trading companies, financial institutions and insurers.
A system to keep a lid on prices Russia can fetch for its oil on the global market is still being fine-tuned by the G7, but the OFAC guidance suggests it will rely heavily on attestations provided by customers to their bankers and insurers that the price at which they are buying or selling does not exceed the cap.
The US, other G7 nations and the EU argue that limiting the price paid for Russian oil will dent Moscow’s ability to use export revenues to fund its invasion of Ukraine, while at the same time allowing lower-income countries struggling with spiralling costs to benefit from a cheap source of energy.
“What we want to do in this price cap policy is incentivise Russia to continue exporting under a cap while preventing Russia from profiting from these higher prices that they have imposed on the market with [the] war on Ukraine,” the US Treasury’s assistant secretary for terrorist financing and financial crimes Elizabeth Rosenberg told reporters last week.
“It is critical that we take this step to deny Russia the revenue they are using to pursue this brutal invasion while continuing our efforts to disrupt their critical supply chains and degrade their military-industrial complex,” deputy secretary of the Treasury Wally Adeyemo told an event hosted by US think-tank the Brookings Institution on September 9.
OFAC, the sanctions enforcement unit of the US Treasury, says it intends to issue a rule explicitly allowing the provision of services, such as financing and insurance, to Russian oil shipments as long as the price cap is observed.
Buying or selling oil above the price cap while relying on services subject to the sanctions regime or providing service providers with false information to evade the cap will become a potential sanctions violation.
Adeyemo says focusing on service providers is the most effective way to give the price gap global reach, because EU and G7 companies provide 90% of global shipping insurance and “the majority of financing and payments services for the oil trade”.
Secondary sanctions, which can be slapped on companies anywhere in the world, will not be part of the price ceiling mechanism, meaning enforcement action will only be taken against companies with exposure to the US, for example if US dollars are used to settle the trades.
The EU has announced a ban on Russian oil imports to the bloc – with some exceptions – which will take effect on December 5, and a ban on EU insurance companies, banks and some other service providers from facilitating the export of Russian oil to third countries.
Take my word for it
How companies are expected to comply with the price limit will depend on what level of access they have to oil price information, according to the OFAC guidance.
So-called first-tier companies, such as commodities traders, importers and refiners, “should retain and share, as needed, documents that show that seaborne Russian oil was purchased at or below the price cap”, OFAC says.
Financial institutions, who are deemed tier-two parties, should retain and share proof of trades below the price cap when they are able to request price information from their customers.
But if it is “not practicable” to receive such price information, banks should request attestations in which their customers vow not to purchase seaborne Russian oil above the price cap.
The guidance document says insurers and P&I clubs should also obtain customer attestations “for example as part of their annual insurance policy renewal process or updates to their insurance policy to comply with the price cap” and do not need to receive an attestation for each delivery.
The OFAC guidance suggests enforcement action against banks is unlikely, instead focusing on possible action against their customers – which can include commodities traders, brokers and refiners – if they provide false information to their lenders.
“Where a service provider without direct access to price information reasonably relies on a customer attestation, that service provider will not be held liable for potential sanctions breaches because of those acting in bad faith who seek to cause a violation of the maritime services policy or evade OFAC sanctions,” the guidance states.
OFAC says it expects to issue a tailored advisory on detecting attempts to evade the price cap, but says initial indicators of illicit activity could include a reluctance by customers to provide price information, use of deceptive shipping practices, unusual payment terms and manipulated trade documents.
The G7 countries and EU are still working out at what price to set the limit but Adeyemo told the Brookings Institution audience: “We intend to set the price cap above Russia’s marginal cost of production, at a level consistent with prices they have historically accepted.”
Officials are betting that Russia will continue selling oil at a steep discount instead of curtailing production because of the significant costs associated with stopping and later restarting wells. “Russia will be forced to continue selling or risk long-term degradation of its capacity to produce,” Adeyemo said.
The price cap policy does not change the US and EU’s current and forthcoming bans on the importation of Russian oil, according to Rosenberg.
Policymakers will be hoping for a similar success to that achieved by the grain export deal between Ukraine and Russia – brokered by Turkey – to allow grain exports from Ukraine’s Black Sea coast.
The UN said this week that there are signs the agreement has helped stabilise the cost of key agricultural commodities and dampened fears of widespread food insecurity crises in developing countries that had previously been major buyers of relatively cheaper agricultural exports from Ukraine and Russia.
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