The EU and US impose a price cap on Russian petroleum products

Following a decision by The Price Cap Coalition of the G7, the European Union and Australia, the European Union introduced a price cap on Russian petroleum products on 4 February 2023.¹ The United States (“US”) issued its own guidance documents on the price cap on Russian petroleum products on 3 February 2023.² This price cap entered into force on 5 February 2023 covering specific petroleum products traded at a discount or at premium to crude oil, such as jet fuel, petroleum and diesel. A price cap for petroleum products will apply in addition to the existing price cap for Russian crude oil in place since 5 December 2022.³

Background

EU

On 3 June 2022 the EU prohibited technical assistance, brokering services, financing or financial assistance, related to the transport of crude oil falling under CN code 2709 00 or petroleum products falling under CN code 2710 originating or exported from Russia to third countries.⁴ On 6 October 2022 the prohibition was extended to the maritime transportation of crude oil and petroleum products to third countries.⁵ At the same time, Council Decision (CFSP) 2022/1909⁶ introduced an exemption from the prohibition to provide maritime transport and services related to the maritime transport to third countries of crude oil or petroleum products which originate in or are exported from Russia, when such products are purchased at or below the price cap. Such exemption and a related price cap for crude oil entered into force for crude oil on 5 December 2022.⁷ On 4 February 2023, in light of the effectiveness of the price cap for crude oil, the EU decided that it is appropriate to apply a similar price cap for petroleum products. The price cap for petroleum products is harmonized between the G7 states, the European Union and Australia, which form the Price Cap Coalition.

US

Similar to the EU’s price cap, the US price cap on Russian-origin crude oil entered into force on December 5, 2022.⁸ The crude oil price cap banned the trading/commodities brokering, financing, shipping, insuring (including reinsurance and indemnity), flagging, and customs brokering for Russian-origin crude oil purchased at a price above the cap.

The US price cap was implemented through two Determinations Pursuant to Executive Order 14071, which permits the Secretary of the Treasury to restrict US persons from transacting with certain designated sectors of the Russian economy. The first Determination, Pursuant to Section 1(a)(ii) of Executive Order 14071, outlines the services, listed above, that US persons may not engage in with respect to Russian crude oil.⁹ A second Determination, this one Pursuant to Section 1(a)(ii), 1(b), and 5 of Executive Order 14071, set the price cap at USD 60 per barrel.¹⁰

In addition to these Determinations, the Treasury Department issued general licenses for activity that would ordinarily be impacted by the price ban, but is otherwise permissible. General License 56 permits transactions related to the import of crude oil to Bulgaria, Croatia, and other landlocked European states as permitted under Council Regulation 2022/879.¹¹ General License 57 authorized the provision of services necessary to prevent “vessel emergencies related to the health or safety of the crew or environmental protection,” regardless of whether the vessel involved is carrying oil sold at a price above the relevant cap.¹²

The mechanism of the price cap for petroleum products

EU

The price cap for petroleum products operates in the same way as the price cap already in existence for crude oil.  Transportation of petroleum products to third countries (including ship-to-ship transfers) as well as technical assistance, brokering services, financing or financial assistance related to transportation of the covered petroleum products are banned, unless the purchase price of petroleum products is equal to or below the price cap. To that end, Annex XXVIII of Regulation No 833/2014¹³ provides different price caps for a list of petroleum products classified under CN heading 2710 depending on whether they are traded at a premium or at a discount to crude oil price. The price cap for the products trading at a premium (e.g. jet fuel) is fixed at the level of USD 100 per barrel, while the price cap for those trading at a discount (e.g. naphtha) is USD 45 per barrel.

A 55-day wind-down period is provided as long as the pertinent petroleum products which were purchased above the price cap were loaded onto a vessel at the port of loading prior to 5 February 2023 and unloaded at the final port of destination prior to 1 April 2023, making them exempt from prohibition resulting from exceeding the price cap.¹⁴

The review of the price cap mechanisms applicable to both crude oil and petroleum products shall be made by mid-March 2023 and every 2 months thereafter.¹⁵ The review might result in amendment of the price caps, which shall be at least 5% below the average market price for Russian oil and petroleum products. If the price caps are lowered, the companies will enjoy a 90 days transitional period for the contracts concluded before the price revision at the price not exceeding the pre-existing caps.

US

Much like the EU price cap, the US price cap on Russian petroleum products follows a similar mechanism to the one in place for crude oil. The Treasury Department issued two Declarations pursuant to Executive Order 14071, one prohibiting the same list of services from the crude oil price cap for transactions related to petroleum products sold above the relevant price cap, and another setting the USD 45 and USD 60 per barrel price caps for petroleum products sold below and above the price of crude oil, respectively.¹⁶ The Treasury Department separately published a guidance document listing the 33 products trading above the price of crude oil by Harmonized Tariff Schedule number, and subject to the USD 60 per barrel cap.¹⁷

The Treasury Department also provided exceptions to the price cap in the form of separate Frequently Asked Questions and licenses. The Department confirmed that it has the same 55-day safe harbor period for petroleum products purchased above the cap and loaded onto a ship prior to February 5, 2023.¹⁸ In addition, the Department updated General Licenses 56 and 57, applicable to the crude oil price cap, to also include emergency operations and sales to landlocked EU countries for petroleum products.¹⁹

Other

On a separate note, Russia imposed countermeasures against companies complying with the price cap.²⁰ Russian legislation prohibits sale of Russian crude oil and petroleum products to foreign companies and individuals if the sales contracts directly or indirectly imply the use of price cap. The prohibition entered into force from 1 February 2023 in respect to crude oil and will be extended to petroleum products from the date to be specified by the Russian government.

Application of the price cap for petroleum products

The Commission’s guidelines issued together with the decision to introduce the price cap for petroleum products provide a valuable insight in the practicalities of its application. Thus, the new price cap does not cover petroleum products which were substantially transformed in a third country, e.g. products manufactured from Russian crude oil released for free circulation in a third country. This exemption will not apply, however, in case of simple blending without a change of customs classification of the feedstock and resulting petroleum product.²¹

Furthermore, the price cap exempts petroleum products originating in third countries and owned by non-Russian owners, which are only loaded in, departing from or transiting through Russia.²² Equally, certain exemptions apply for reasons of maritime safety, for prevention or mitigation of incidents having effect on human health and safety or the environment, or as a response to natural disasters.²³ The Treasury Department’s guidance and licenses are also consistent on these points from the US perspective.²⁴

In terms of price calculations, ancillary costs such as shipping, freight, customs, and insurance costs are not covered for the purpose of establishing compliance with the price cap. They shall be properly itemized, documented and invoiced separately at commercially reasonable rates.²⁵

Compliance with the price cap shall be based on due diligence processes tailored to the specificities of each business, in particular, their risk exposure and the information they have access to. The EU guidance on the price caps recommends that EU operators rely on an attestation process that enables operators along the supply chain of Russian oil and petroleum products to demonstrate that they have been purchased at or below the price cap.²⁶

Takeaways

The price cap on Russian petroleum products complements the existing price cap on Russian crude oil. The established mechanism bans transportation to third countries, as well as technical assistance, brokering services, financing or financial assistance related to transportation, if the transported petroleum products were purchased at the price exceeding the cap (USD 100 or USD 45 depending on the product type). Market operators shall exercise proper due diligence regarding transactions, which involve oil and petroleum products of Russian origin.

Mayer Brown has extensive experience helping EU and non-EU companies navigate EU sanctions. We stand ready to help our clients to assess the impact of the price cap on their business.