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US Treasury warns of Russian crude price cap evasion, beefs up sanctions enforcement


US entities may have unknowingly violated oil price cap

Treasury sends officials to Europe, Asia to counter evasion

Heightened enforcement seen as potentially bullish for oil market

  • Author
  • Jasmin Melvin
  • Editor
  • Valarie Jackson
  • Commodity
  • Oil Shipping
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  • United States Western Europe

The US Treasury Department warned April 17 of possible deceptive practices taking place to evade the price cap on Russian crude and instructed US maritime service providers as well as commodities brokers and oil traders on how to ensure price cap compliance.

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The alert, from Treasury's Office of Foreign Assets Control, comes as the department is stepping up efforts to counter sanctions evasion and combat Russia's ability to supply its war against Ukraine. But the new focus on sanctions monitoring and enforcement could further tighten global oil markets as major OPEC+ producers plan to cut supplies.

Price caps were devised as a carve out for EU and G7 maritime service providers to continue aiding with the seaborne transport of Russian fuels as long as they are sold at or below cap levels.

A $60/b cap on seaborne Russia-origin crude oil has been in place since Dec. 5, while a $100/b cap on imports of Russian refined products that typically trade at a premium to crude, such as diesel, kerosene and gasoline, and a $45/b cap on products like fuel oil that generally trade at a discount to crude went into effect Feb. 5.

OPEC as a catalyst

Eastern European countries and other critics have argued that the price caps are too accommodative and pushed for downward revisions to the thresholds and strengthened compliance.

"Given that Washington and Western Europe have seemed unwilling to make downward revisions to the thresholds despite price prints in the low $50s/b range, the [roughly] 1.16 million b/d OPEC+ cut April 2 may have functioned as something of a catalyst for Treasury intervention," analysts at ClearView Energy Partners said in an April 17 note, adding that Treasury's likely preference is "to clamp down enforcement instead of ramping down caps."

With attention and bandwidth focused on refining the price cap mechanism, "price strength from the April 2 OPEC+ action threatens to only make the task more difficult (politically and practically) as successful enforcement could fuel further upside to crude," the analysts said. "Indeed, we would not rule out a scenario where—if prices rise enough—the coalition might seek to raise its cap thresholds (if sellers' cartels can loosen and tighten, buyers' cartels theoretically can, too)."

Ben Salisbury, director of research and head energy policy analyst at Height Capital Markets, on a recent episode of S&P Global Commodity Insights' Capitol Crude podcast, was optimistic that the price cap on Russian oil could withstand any coming supply constraints as he likened sanctions to spinning plates that must constantly be adjusted and are always adapting.

"There's not a crisp and clean version of sanctions and the price cap is an especially messy version of sanctions," he said. "And so some plates are going to break, but that doesn't mean that they're going to stop spinning."

OFAC alert

Treasury April 17 flagged reports that oil exported through the Eastern Siberia Pacific Ocean pipeline and ports on Russia's eastern coast may be trading above the $60/b price cap, with US entities providing services for the maritime transport of that oil.

"These US service providers may be unaware that they are providing covered services involving Russian oil purchased above the price cap, as the non-US persons involved in the exports may have provided incomplete or false documentation or used other deceptive practices," the OFAC alert said.

OFAC said that US entities should consider practices such as "spoofing," the manipulation of a tanker's Automatic Identification Systems to disguise which ports the vessel has visited, as evidence of possible evasion of the price cap. "Spoofing can also be used to mask ship-to-ship transfers carried out to disguise the origin of Russian oil," the alert said.

Treasury assured that good-faith actors with the proper recordkeeping and attestations would be afforded safe harbor from OFAC enforcement if others' deceptive actions cause them to inadvertently violate the price cap.

But at the same time, Treasury told shipowners, protection and indemnity clubs, flagging registries, and other US service providers to "be mindful of the risk of evasion" and to "take appropriate due diligence measures, such as disseminating [OFAC's] alert to counterparties or members [and] using maritime intelligence services to improve detection of AIS manipulation."

The alert also warned commodities brokers and oil traders to be vigilant of opaque shipping costs. Because the price cap does not factor in shipping, freight, customs and insurance costs, failing to itemize those costs "can be used to obfuscate the fact that Russian oil was purchased above the price cap," the alert said.

OFAC recommended that traders retain documents such as invoices and contracts showing that Russian crude was purchased at or below the price cap, and ensure that shipping, freight, customs and insurance costs are invoiced separately from the purchase price of Russian oil and are in line with commercially reasonable rates.

"A refusal by a counterparty to provide [such] documentation ... should be considered a red flag for possible evasion of the price cap," the alert said.

Enforcement-related travel

In recent months, Treasury officials have promised a redoubling of efforts to disrupt Russian sanctions evasion, focused on continuing close ties with allies and partners; identifying and shutting down specific channels attempting to help equip and fund Russia's military, including a crackdown on "shadowy intermediaries" aiding Russia's efforts to get around the price caps; and ratcheting up pressure on companies and countries that are allowing or facilitating evasion.

In addition to the new alert, Treasury last week targeted sanctions evasion networks and facilitators in more than 20 jurisdictions, imposing new sanctions on 25 individuals and 29 entities.

In line with these efforts, the department announced April 16 that senior Treasury officials would spend the next two weeks travelling across central Europe and central Asia "to seek ways to collaborate more closely, share information, and discuss trade trends and enforcement priorities at all levels of the supply chain."

Treasury Under Secretary for Terrorism and Financial Intelligence Brian Nelson will meet with government officials, financial institutions, manufacturers and others in Switzerland, Italy, Austria, and Germany April 16-22. Then, Treasury Assistant Secretary for Terrorist Financing and Financial Crimes Elizabeth Rosenberg will join EU, UK, and Commerce Department officials for meetings with government officials and businesses in Kazakhstan and Kyrgyzstan April 23-28.

The key message will be "remain connected to the global economy or provide material support to Russia's war and be denied access to the world's most important markets."