Russian Price Cap Coalition: How to Avoid Sanctions Breaches

The Price Cap Coalition governing the price cap on Russia's crude and refined product exports has issued guidance on how to comply with the measure. File Image / Pixabay

The Price Cap Coalition governing the price cap on Russia's crude and refined product exports in response to the war in Ukraine has issued guidance on how to comply with the measure.

The G7 countries, the European Union and Australia imposed a price cap of $60/bl on Russian crude exports in December 2022, banning companies from providing services like insurance to tankers carrying Russian cargoes traded at higher price levels. A similar scheme was introduced for refined products exports in February.

On Thursday the US Treasury Department's Office of Foreign Assets Control (OFAC) imposed sanctions on two companies for carrying Russian crude cargoes priced above the cap.

The new guidance was also published on Thursday, seeking to set out how to avoid inadvertent breaches of the rules.

"The Price Cap Coalition is issuing this advisory to provide recommendations concerning specific best practices in the maritime oil industry," the organisation said in the advisory.

"This advisory reflects our efforts to promote responsible practices in the industry to prevent and disrupt sanctioned trade, and enhance compliance with the price caps on crude oil and petroleum products of Russian Federation origin."

The document makes the following seven recommendations:

• Recommendation 1: Require appropriately capitalized P&I insurance. The shadow trade involves ships that may rely on unknown, untested, sporadic, or fraudulent insurance. Without legitimate, continuous insurance coverage, these ships may be unable to pay the costs of accidents in which they are involved, including oil spills, which entail tremendous environmental damage and safety risks and associated costs. The Coalition encourages industry stakeholders to require that vessels have continuous and appropriate maritime insurance coverage for the entirety of their voyages. The Coalition further recommends that industry stakeholders require vessels to be insured by legitimate insurance providers with sufficient coverage for CLC9 liabilities. If an industry participant is engaging with a ship that is not insured by such a legitimate insurance provider, the industry participant should conduct sufficient due diligence to ensure that the insurer can cover all relevant risks. Such due diligence could include, as feasible, a review of an insurer's financial soundness, track record, regulatory record, and/or ownership structure.
• Recommendation 2: Receive classification from an International Association of Classification Societies10 member society. The information gathered by classification societies is useful in enabling insurers, port states, and other industry stakeholders to make informed decisions about the seaworthiness of vessels. Some ships involved in the shadow trade have shifted away from industry standard classification societies, and instead use societies that are not a part of, or have been removed from, the International Association of Classification Societies. The Coalition encourages11 industry stakeholders to ensure counterparties receive classification from IACS member classification societies to ensure vessels are fit for the service intended.
• Recommendation 3: Best-practice use of Automatic Identification Systems ("AIS"). Consistent with the International Convention for the Safety of Life at Sea ("SOLAS"), industry stakeholders should promote the continuous broadcasting of AIS throughout the lifetime of a voyage. If a ship needs to disable its AIS in response to a legitimate safety concern, the ship should document the circumstances that necessitated disablement. Industry stakeholders should also vigilantly monitor irregular AIS patterns or data that are inconsistent with actual ship locations. By requiring that ships with which they engage use AIS in accordance with the SOLAS, industry stakeholders will improve their understanding of vessels' activities, and reduce their exposure to criminal actors and associated risks. If accessible, complement AIS Tracking with Long-Range Identification and Tracking ("LRIT"). In instances of AIS outages or suspected AIS manipulation, industry stakeholders such as flagging registries that have access to LRIT should use it to determine the true location of vessels, including, where feasible, those leased to third parties. For those industry stakeholders who have access to LRIT, combining AIS and LRIT is a best practice for mitigating risk.
• Recommendation 4: Monitor high-risk ship-to-ship transfers. While ship-to-ship (STS) transfers (the transfer of cargo between ships at sea) are often conducted for legitimate purposes, such transfers can also be used to conceal the origin or destination of cargo in circumvention of sanctions or other regulations. Furthermore, STS transfers of crude oil or petroleum products outside of safe and sheltered waters entail heightened environmental and safety risks. Industry stakeholders should recognize these enhanced risks and, as appropriate to their role, conduct enhanced due diligence in the context of STS transfers, including the notification of STS oil cargo transfers as required by Annex I of the International Convention for the Prevention of Pollution from Ships ("MARPOL"), especially in areas at higher risk for illicit trading activity or AIS manipulation. It is also recommended that industry stakeholders verify oil record logs to hold accountable record of cargo movements aboard vessels.
• Recommendation 5: Request associated shipping and ancillary costs. The inflation of shipping and ancillary costs (e.g., freight, customs, insurance), or the bundling of such costs, are tactics that may be used to conceal that Russian oil was purchased above the price cap. The billing of commercially unreasonable or opaque shipping and ancillary costs should be viewed as a sign of potential price cap evasion. Shipping, freight, customs, and insurance costs are not included in the price caps and must be invoiced separately and at commercially reasonable rates. Industry stakeholders involved in the Russian oil trade that use "Cost, Insurance, Freight" contracts or whose counterparts use such agreements should require an itemized breakdown of all costs to determine the price paid for oil or petroleum products. This may require that industry stakeholders update contractual terms and conditions with sellers or counterparts or adjust invoicing models to show the price of the oil until the port of loading and the price for transportation and other services separately.
• Recommendation 6: Undertake appropriate due diligence. Industry stakeholders should carry out appropriate due diligence. Heightened diligence may be appropriate for ships that have undergone numerous administrative changes (e.g., re-flagging). Industry stakeholders may also wish to conduct increased diligence when dealing with intermediary companies (e.g., management companies, traders, brokerages, etc.) that conceal their beneficial ownership or otherwise engage in unusually opaque practices. Such companies may be more likely to engage in deceptive practices and expose counterparties to heightened risks. Industry stakeholders' due diligence should be calibrated according to the specificities of their business and the related risk exposure. Due diligence is especially important where market assessments indicate that Russian oil prices exceed the price cap, and Coalition services are being used or sought.
• Recommendation 7: Report ships that trigger concerns. If an industry participant is aware of potentially illicit or unsafe maritime oil trade, including suspected breaches of the oil price cap, they should report this to relevant authorities. By reporting these concerning behaviors, industry stakeholders can collectively help protect the trade from malign activity, while promoting safety and integrity across the market.