The US has envisaged a complex yet loose regulatory regime for imposing caps on Russian crude and petroleum products prices, which will center around shipping services providers like tanker operators and marine insurers.
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Register NowG7 countries agreed in principle on Sept. 2 to cap the prices of seaborne Russian oil cargoes in a bid to hamper Moscow's ability to fund its war in Ukraine, while calling on other nations to join the initiative.
The proposal under discussion is to set one cap for Russian crude, one for products generally sold at a premium to crude, and one for products sold at discounts, regardless of the grades.
Just one week after the agreement, the US Department of the Treasury published preliminary rules for the price caps, which aim to restrict companies from providing maritime services to Russian oil buyers.
S&P Global Commodity Insights understands from the Treasury that the guidance only applies to US-based services providers, and that each participating country in the price cap will have its own enforcement rules.
This is a significant shift from the US sanctions regimes against Iran and Venezuela, which effectively target any company in the world involved in buying and shipping oil from those two countries.
The regulatory design is aimed at maintaining Russian seaborne crude and products supply, which averaged 5.50 million b/d in the first half of September, while achieving the goal of reducing Russia's oil revenue.
"The G7 appears to be increasingly pragmatic and is now looking to reduce Russia's revenues rather than strangling its production and exports," shipbroker BRS said in a recent note.
Among the G7 members, Canada and the US banned Russian oil imports shortly after the country invaded Ukraine on Feb. 24, while the UK will phase out imports by the end of December. Japanese refiners have not taken Russian barrels for two months even though Tokyo has yet to enact a formal ban.
France, Italy and Germany are member states of the EU, which will ban seaborne imports of Russian crude from Dec. 5 and products from Feb. 5.
New weapon
The EU already has a services ban scheduled to kick in on the same dates, and its executive arm, the European Commission, plans to work with member states to exempt Russian oil sold at or below the price caps.
The alignment could be critical as G7- and EU-based marine insurers provide protection and indemnity coverage to 95% of the world's ocean-going tankers.
Julian Clark, senior global partner at law firm Ince, told S&P Global that the price cap is "another weapon in the economic war armory" in what is effectively an "economic war that is being waged by the West."
The US's vision is for the price caps to take effect alongside the EU's embargo dates, and any existing cargo ban won't be affected, a Treasury official said.
The incentive for any country to join the G7 initiative would be to jointly establish the price caps, the official added. Select Asian buyers expect the crude cap to be around $48-$55/b, representing a discount of around $40/b to recent Platts Cash Dubai assessments.
Moreover, the US expects some countries to use the price caps to gain bargaining power without formally participating in the G7-led coalition.
Companies based in non-coalition countries can still access G7 maritime services when their purchase prices do not exceed the caps, the official said. The companies can use non-G7 services otherwise. There is currently no plan to sanction Russian oil buyers and associated services providers in those cases.
Tiered system
Market participants are still debating how effective the caps are likely to be. Russia has vowed not to sell any oil to countries joining the scheme.
However, some observers suggested the G7 will likely prefer leniency over tough caps, based on the Treasury guidance, given the persistent inflation worries.
While detailed regulations are still evolving in other jurisdictions, US-based tanker firms and trade financiers will only need to get attestations from Russian oil buyers that their cargoes were purchased at no more than the cap if invoices cannot be obtained.
Marine underwriters, reinsurers and P&I Clubs will only be required to receive customers' attestations when agreeing to provide their periodic coverage.
The Treasury expects all the relevant records to be kept for five years.
Tanker firms and marine insurers that receive falsified documentation will likely not be a target for sanctions enforcement, Seward & Kissel's partner Bruce Paulsen said.
"G7 countries are balancing their enforcement priorities to implement the price cap on the one hand, but refrain from a blanket ban on the Russian seaborne oil trade on the other -- which could lead to unwanted price shocks," Paulsen added.
Ami Daniel, CEO of Windward, a data-led risk manager, said the regulatory regime may seem complicated but companies may find it easier to comply with than the Iranian and Venezuelan schemes.
"Tracking the flow and origin of cargoes is quite complicated... The new regulation merely requires everyone to document the pricing of cargo and services," Daniel said.