Non-US financial institutions could face the wrath of Washington’s sanctions enforcers if they facilitate the purchase of Russian oil above a looming price cap, under plans released by two US senators this week.
A mechanism being designed by G7 countries and the EU will prohibit so-called service providers — including traders, trade finance banks and insurers — from facilitating the trade of Russian oil above a yet-to-be-determined price cap, but it does not contain provision for penalties for non-compliance by financial institutions and insurance providers.
The finance ministers of the G7 — comprising Canada, France, Germany, Italy, Japan, the UK and the US — announced the price ceiling policy on September 2. The policy also has the support of the European Commission although all 27 EU member states are yet to unanimously agree to the plans.
Senators Chris Van Hollen, a Democrat, and Pat Toomey, a Republican, say in a joint statement that Congress should grant the Biden administration “the tools needed to hold accountable the financial institutions supporting those countries involved in rampant war profiteering from Russian exports”.
Van Hollen said at a US Senate committee hearing on Tuesday that “the idea behind this legislation is to provide a uniform backstop worldwide and say to any financial institution that’s thinking about financing or participating in a transaction to purchase Russian oil above the price cap set by the G7 — [you] will face penalties.”
The duo proposed a framework for legislation that would impose secondary sanctions on “any foreign entity involved in the trade finance, insurance, reinsurance, and brokerage of Russian oil and petroleum products transactions”.
Secondary sanctions apply to entities that are not under Washington’s direct jurisdiction and include the termination of correspondent accounts held with US banks, a heavy blow to any large financial institution because it effectively throttles their ability to do business in US dollars.
US officials argue that such enforcement capabilities are unnecessary because the prospect of cut-price Russian oil strongly incentivises third countries to participate in the price cap system.
Speaking to GTR, a US Treasury official added that while financing for a trade above the price cap could be provided by a non-G7 lender, payments for such trades are overwhelmingly completed in US dollars, which would bring the transactions back into the US’ orbit through the need to use correspondent banking networks.
Elizabeth Rosenberg, assistant secretary for terrorist financing and financial crimes, told the Senate committee on Tuesday that “there is an overwhelming economic incentive for buyers to purchase under the price cap so they can engage these [G7] service providers. It will be cheaper and less risky to move Russian oil cargoes this way.”
The price cap is set to kick in on December 5 but the price has not yet been set.
If EU member states sign up to the G7’s price cap plan, the US Treasury official, who spoke on the condition of anonymity, says that a planned EU-wide ban on the provision of services to Russian oil exports would be dumped in favour of trying to limit the price at which Russian exporters can sell their oil.
In a tranche of sanctions unveiled in June, the EU plans to prohibit the bloc’s banks and insurers from financing or insuring Russian oil exports to any country, alongside a flat ban on imports to the EU, in the hope of severely curtailing Russian oil production.
But if those plans go into effect they would run counter to the G7 approach which hopes to achieve the opposite: ensuring a steady supply of cheap energy for developing countries while helping keeping a lid on global oil prices, a key influence on spiralling inflation being experienced by several advanced economies.
Criticism of the price cap has focused on whether it may simply perpetuate a two-tiered market for oil, with countries willing to import from Russia paying bargain prices while those opposed to President Vladimir Putin’s invasion of Ukraine continue to be stung by high prices.
The complexity of the global oil trading market will also offer opportunities for evasion, according to Ben Cahill, a senior fellow in the Energy Security and Climate Change Program at the Center for Strategic and International Studies.
“Refiners and other buyers will probably find ways to beat the proposed requirements for trading Russian oil,” Cahill wrote in a September 9 commentary. “They may seek letters of credit from multiple banks or use several subsidiaries to document deals at the approved price, while paying more in reality.”
“The oil market is full of clever, rapacious people with strong incentives to bend or break rules. If the price cap is imposed, economic theory will collide with the messy reality of the market.”
Banks ‘enormous partners’
The Treasury official says that trading firms, bank and insurers were engaged during the design of the policy and consultations are ongoing as the price cap mechanism is fine-tuned.
Andrew Adams, who heads the US government’s KleptoCapture task force, told the Senate committee hearing that “the private sector has been an enormous partner” to the administration’s sanctions campaign against Russia’s war effort.
“Working with the banking sector in my mind is not separate from working with the public sector law enforcement, it’s a symbiosis,” he said, adding that the government has adopted an approach of trying to disseminate its intelligence as quickly as possible across the financial sector in order to aid banks’ own compliance efforts.
“There’s clearly a drive to evade export controls in part given the stark deficiencies of the Russian military and its ability to arm itself. From a strategic standpoint we at the department [of justice] are looking at efforts to evade the financing of controlled exports and looking especially at new financiers and new shell companies, new financial services firms that are popping up essentially to play a shell game in order to hide that money.”
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