Russian Oil Product Price Cap – What will it look like?

On 30 December 2022, US Treasury’s OFAC quietly released their preliminary guidance for the forthcoming price cap for the provision of services related to the maritime transport of Russian oil products. The cap is scheduled to be implemented by 5 February 2023 by the EU, G7 members and Australia. Much as with the crude oil price cap implemented in December, there are several takeaways and questions that remain from this guidance, both on ensuring compliance with the measure and on the practical impact of measure on the ability of Putin to continue waging war in Ukraine.

Compliance Takeaways

Multiple Caps: Despite what the title suggests and consistent with how officials across both sides of the Atlantic have been discussing in private, we are likely to see multiple price caps for different products. The guidance states “As with the crude oil determination, OFAC anticipates issuing a separate determination to set the price caps for Russian petroleum products.” The guidance also does not provide any indication of what the price could be, and as with the crude price cap it is the internal EU negotiations that are driving the discussions, it is quite possible that we see 3 or more caps with multiple reference prices when the political dust settles from any final agreement.

The “attestation model” continues: Companies will still be able to rely on attestations to meet their compliance obligations when it is appropriate. However, with multiple price caps for different products companies will still need to understand and apply substantial administrative resources to tracking the individual product and applicable price cap at a very detailed level to gain the appropriate verification or attestation.

Same “start” and “stop” as with the crude oil price cap in that once petroleum products are offloaded on land and used or substantially changed then the price caps will no longer apply. If the products are reloaded on to ships without a substantial transformation then the caps will apply again.

There is a similar wind down period as the crude oil price cap such that products loaded onto vessels by 1201 eastern standard time (0601 Central European Time) on 5 February 2023, will not be subject to service restrictions under the price caps until 1201 eastern standard time (0601 Central European Time) on 1 April 2023. This forward leaning guidance is a practical consideration given that, much like with the crude oil price cap, it could take right until the 5 February deadline for countries to agree on the products price caps.

Looking Forward – Policy Questions

In reviewing this guidance and seeing the limited impact on Russian finances from the substantial compliance effort with the crude price cap, it is helpful to take a step back and question what is the true aim of this entire exercise? Is the price cap policy truly about restraining the resources of Putin? Or are we seeing an elaborate effort to save face and enact a long ago announced policy that is being structured to purposefully have as little impact on energy trades, and thus Russian finances, as possible while imposing tremendous compliance costs on firms?

In a forthcoming post we will examine the policy dynamics at play with the price cap to help Nordic firms better understand the overall trajectory of G7+ sanctions policy.