They claim that it is impossible to have your cake and eat it too. The G7 nations, led by the United States, believe they can. In order to prevent fuel costs in their own nations from skyrocketing, they seek to maintain the flow of Russian crude oil and refined product exports while simultaneously reducing Russia’s revenues from its own exports.
Limited time
Buy-in for tanker transportation will be essential to success or failure. The G7 plan would impose U.S. sanctions on corporations that transport Russian petroleum priced higher than the cap and cap the price of Russian exports. Even if—and this is a huge if—Russia is ready to sell its exports at or below a price set by its geopolitical rivals, the scheme won’t be successful without the participation of enough tanker owners.
Time is limited. On December 5, the price cap will become effective. Cargoes for October loadings are already being negotiated by tanker owners. The Office of Foreign Assets Control (OFAC), the U.S. agency responsible for enforcing sanctions, issued preliminary guidelines on Friday, although it was lacking in specifics.
The odds are against us. If the G7 plan fails, there will be less crude and diesel on the market, fuel prices will increase, and there will be fewer tanker cargoes available.
Shipping businesses all across the world are currently perplexed by this, according to Bruce Paulsen, a sanctions specialist and partner at renowned maritime law firm Seward & Kissel. He told American Shipper in an interview that “it’s unclear from the preliminary announcement how all this is going to operate.”
“Governments will have to work hard to build the [plan] structure on a global scale, and the tanker industry will need to swiftly catch up. If not, I believe there is a very significant risk” of declining Russian energy exports.
New document trail
The coalition’s members, including the G7, would decide on the price caps. After December 5 or after February 5, 2023, a cargo shipper must submit a written attestation to maritime service providers guaranteeing that the oil cargo is being sold at a price at or below the cap in order to transport Russian crude or products.
The shipbroker and the ship operator would presumably receive such attestations from the cargo shipper, and service providers to ship operators, like insurance companies, would obtain written guarantees from ship operator clients that the vessels are not transporting cargo that is priced above the cap.
“Everybody’s going to want to be safe,” said Paulsen.
“Perhaps a completely new set of shipping documentation will be included here. There is also the issue of what will transpire in terms of the shipowner’s disclosure obligations moving up the chain. Will the lenders want representations and guarantees that any seaborne cargo from Russia is below the cap?”
Due diligence also required
OFAC stressed: “Service providers for seaborne Russian oil will not face an OFAC sanctions enforcement action, provided [they] obtain certain documentation or attestations.”
Sounds clear. But elsewhere in the same OFAC guidance, there’s a conflicting statement: Record-keeping and attestations are “in addition to standard due diligence … for sanctions risk, including the risk of violation … through evasion.”
OFAC listed standard red flags for evasion, including ship-to-ship transfers and “unusually inflated payment terms” — i.e., the ship operator is getting a lot more than usual to move cargo.
“In the world of sanctions, you really have to know your counterparty,” said Paulsen. “OFAC does not look kindly at shipping players who are sloppy about knowing their customers.”
“In terms of favourable payment terms, risky business always pays. That’s why people want to do it. If you get 1.5 times the usual freight, OK, that is a red flag. You really have to dig down and do your due diligence and see if it’s permissible. You had better do the spade work on who you’re doing business with and what they’re putting aboard your ship.”
In other words, for tankers to move cargo under the G7 price-cap plan, they will not only need to follow a new attestation documentation protocol, but they will also need to do their own investigations.
“I think the due diligence for this type of cargo is going to be substantial,” warned Paulsen.
Self-sanctioning
According to Lloyd’s List, half of the Russian oil exports are being carried by private Greek shipowners.
Many other tanker owners intentionally avoid the trade.
There’s nothing illegal about transporting Russian crude and products.
Could the price-cap plan bring some self-sanctioning owners back into the fold?
After all, if they’re moving oil under the cap, they’re providing energy to the world while participating in a plan that reduces money flows to Putin.
“So, I think there are a lot of owners who are not going to want to touch this.”
OFAC’s ‘tradition of vagueness’
Tanker owners can opt to load cargoes elsewhere and avoid the complications of the Russian trade. Non-Russian cargoes promise less paperwork, less due diligence and less reputational risk. There’s also another negative to participating in the G7 plan: long-standing shipowner uncertainty over OFAC enforcement.
The whole point of the G7 plan is to keep Russian volumes flowing while simultaneously reducing Russian income. The best way to keep volumes flowing is for sanctions risk to be crystal clear. Historically, however, OFAC has a reputation of being intentionally unclear.
“Clarity would be a good thing, but OFAC’s stock in trade is ambiguity,” said Paulsen. “Ambiguity keeps people on their toes and prevents people from taking risks,” he said, citing “OFAC’s tradition of vagueness.”
“[In the past], when OFAC used terms like ‘substantial transaction,’ one former head of OFAC said at a conference, in public, that a substantial transaction is whatever the head of OFAC says it is. I think that policy is still present here. What is the proper attestation? They want people to be worried. At the same time, there’s a difference here, because they want people trading under the cap.”
“Sanctions are a blunt instrument and [with the G7 plan] they are very much trying to thread the needle. There’s a desire to permit trading under the cap. At the same time, there’s a desire to not have people cheat. These countervailing policy incentives make threading the needle very tough to do in a sensible way.”
Geopolitical risks
The G7 plan could still work despite these challenges.
Private tanker owners that currently carry Russian exports and don’t shy away from risk could accept added compliance complexity, given highly profitable rates, assuming their insurance providers and all their other service partners approve — and all parties in both the public and private sectors move fast enough to meet the looming deadline.
But this assumes Russia will sell exports at or below a G7-imposed cap.
Putin has said of the countries participating in the plan: “We will not supply gas, oil, coal or fuel oil.
This is another stupidity, another nonmarket decision that has no prospects.”
There are far too few of these shadow tankers to maintain Russian diesel exports, as American Shipper has previously reported, and there are not enough to sustain current Russian oil shipments.
Putin’s approach also raises the risk of new geopolitical repercussions in the event that the United States applies penalties against foreign firms engaged in unrestricted trade. Foreign refiners were expressly mentioned in OFAC instructions as prospective targets.
What if OFAC discovered evidence that a significant Chinese or Indian refiner had breached the sanctions regime and Russia exclusively sold to countries that weren’t a part of the G7 plan? What are you going to do about that, U.S. government asked Paulsen. “That turns becomes a political issue.”
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Source: American Shipper
