US to protect Russian oil trade P&I providers

Providers of insurance and financial services that facilitate trade and transportation of Russian oil will be largely shielded from sanctions risks so long as they attest that the contracts they underwrite abide by a price cap, the US Treasury Department says.

Treasury's sanctions enforcement arm, the Office of Foreign Assets Control (OFAC), late on 9 September issued preliminary guidance laying out the plan to impose price caps on Russian seaborne oil exports to destinations outside North America and Europe after 5 December. The EU ban on seaborne crude imports from Russia comes into effect on 5 December, but the US is keen to ensure that Russian supply continues to reach destinations outside of the G7.

The plan offers importers from non-G7 countries the chance to continue using insurance and finance services that facilitate trade and transportation of Russian oil, as long as market participants agree to be bound by the price cap. The EU and the UK together account for 90pc of maritime protection and indemnity (P&I) services globally.

Financial and P&I firms that provide services for transporting Russian oil would be required to obtain attestation from their customers that the transactions being underwritten are set at or below the price cap. The attestation process provides a so-called "safe harbor" for service providers - protection from liability for breach of sanctions in cases where seaborne Russian oil deals were falsified to conceal the price.

Sanctions enforcement under the price cap thus represents a major departure from the US sanctions regime used against Iran and Venezuela, where all market participants can be found liable if any party in the long chain of trading falsifies records. That stringent approach led financial companies globally to exit the Iran trade.

Expectations of a similar enforcement method against Russia was behind self-sanctioning by major western trading companies and service providers, which wound down business with Russia - a process that Treasury hopes to reverse. The OFAC guidance is meant to reassure service providers to continue facilitating maritime transportation of Russian oil.

The primary responsibility - and potential sanctions liability - for ensuring that Russian oil continues to trade at or below the price cap would lie with market participants that have direct access to price information, such as commodities brokers, traders, customs brokers and refiners, OFAC said. These market participants would be expected to retain and share documentation such as invoices, contracts, receipts and proof of accounts payable.

After 5 December, G7-based financial companies and P&I providers would be allowed to provide services to transport oil only if the contracts are set at or below the price cap.

The yet-to-be determined crude price cap is intended to be at a fixed level, with the Russian break-even budget price of $44.20/bl - in lieu of a cost of production - as a price floor, with transport and trading costs then tacked on to that figure. There will be two, separate price caps for yet-undetermined categories of products, to go into effect after 5 February.

The US, UK and EU will continue to ban imports of Russian crude after 5 December, so the price cap affects only buyers in third countries.

OFAC said it would still expect service providers to conduct due diligence and report any suspicious activity, such as ship-to-ship transfers, refusal to provide price information or opaque payment mechanisms.

OFAC is expected to issue additional guidance and set price cap levels in advance of the 5 December deadline.

Implementing the price cap mechanism requires a change to the already enacted blanket EU ban for provision of services enabling transportation of Russian oil after 5 December, to specifically exclude deals under the price cap. The European Commission would have to enact the change by a unanimous agreement of all EU members.

Moscow has threatened to stop oil deliveries to any customer that agrees to comply with the G7-imposed price cap.

By Haik Gugarats

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