EU expands sanctions against Russia, introduces oil price cap
The European Union is doubling down on its sanctions against Russia. The 27-strong bloc has introduced a price cap above which the seaborne transport of Russian crude to third countries is prohibited as of 5 December 2022 (A.), and has introduced a ninth package of sanctions, considerably expanding the purview of EU sectoral and personal sanctions (B.). Looking ahead, the price cap will apply to additional products beginning in February 2023, curtailing EU companies’ ability to ship these to third countries.
A. Price Cap for Seaborne Crude: Tightening the Screws on Shipping to Third Countries
As part of their coordinated approach towards sanctioning Russia, the G7 and Australia – the so-called Price Cap Coalition – have reached agreement on a price cap of USD 60 per barrel on Russian seaborne crude oil, prohibiting the shipping to third countries of Russian crude trading above the cap. The legal basis for the price cap had already been laid on 6 October 2022 with the EU’s eighth sanctions package against Russia (see our News alert here). The agreement on the price cap came just in time before the EU’s blanket ban on the seaborne transport to third countries of Russian crude came into effect on 5 December. European Commission President von der Leyen welcomed the agreement, noting the price cap would help stabilize global energy prices while cutting Russian revenue.
I. Key Provisions
The EU has implemented the agreement by amending its regulation governing sectoral sanctions against Russia (Council Regulation (EU) No 833/2014) effective 3 December 2022 (see here and here). As of 5 December, a price cap of USD 60 per barrel applies to crude oil and petroleum oils and oils obtained from bituminous minerals (CN code 2709 00) originating in or exported from Russia. Only oil purchased at or below this cap is exempt from the EU’s ban on shipping to third countries.
An initial 45-day transition period exempts vessels carrying Russian origin crude oil that was purchased and loaded before 5 December 2022, and is unloaded at the final port of destination before 19 January 2023. An emergency clause further allows the transport of oil above the price cap and the provision of related services (technical assistance, brokering services and financial assistance) whenever necessary to prevent or mitigate events likely to have a serious and significant impact on human health and safety or the environment, or to respond to natural disasters.
The price cap will be reviewed every two months to reflect market developments. It will be set at least 5 % below the average market price for Russian oil and petroleum products.
II. Amendments to Regulation (EU) 833/2014
The provisions outlined above were implemented by amending the EU regulation governing sectoral sanctions against Russia. Besides setting the initial oil price cap in Annex XXVIII to Regulation (EU) 833/2014 at USD 60 per barrel, the Council substantially amended Art. 3n, which governs the transport of crude oil and petroleum products to third countries:
- Beyond transport-related activities, the prohibition in Art. 3n para. 1 henceforth also applies to activities related to trading and brokering.
- Similarly, the ban in Art. 3n para. 4 was expanded to include trading and brokering.
- 3n para. 5 governs the entry into force of the prohibition in Art. 3n para. 4 and provides for a 90-day grace period after the entry into force of subsequent changes to the price cap for treaties concluded before the entry into force of the amended cap and respecting the price cap in force at the time.
- 3n para. 6 (d) introduces a 45-day transition period exempting from the prohibitions in paras 1 and 2 any seaborne crude originating in or exported from Russia that was purchased above the price cap, but is loaded prior to December 5, 2022, and unloaded at the final port of destination before 19 January 2023.
- 3n para. 7 as amended limits to 90 days the ban on the provision of the services listed in para. 1 to vessels that have transported Russian crude oil or petroleum products per para. 4 purchased above the price cap, provided the operator had knowledge thereof or reasonable cause to suspect it.
- The newly introduced 3n para. 9 codifies further exemptions e.g. for the mitigation of natural disasters.
B. Ninth Sanctions Package
On 16 December2022, the Council of the EU has consented to the ninth sanctions package against Russia, following a proposal by the European Commission. The ninth sanctions package amends Regulation (EU) No 833/2014 concerning restrictive measures in view of Russia’s actions destabilizing the situation in Ukraine (sectoral sanctions) and Regulation (EU) No 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine (here and here).
While 1241 individuals and 118 entities are currently subject to EU Russia sanctions, the new sanctions target about 200 additional individuals and entities.
In general, the new sanctions package merely extends and intensifies the existing restrictions, including the following additions:
- Further items which might contribute to Russia’s military and technological enhancement or the development of its defence and security sector are listed in Annex VII, including drone engines, further chemical and biological equipment, riot control, agents and electronic components, Article 2a and Annex VII of Regulation (EU) No 833/2014 as amended;
- the export ban covering goods and technology suited for use in aviation and the space industry has been extended by including aircraft engines and their parts, Article 3c and Annex XI of Regulation (EU) No 833/2014;
- further goods which could contribute to the enhancement of Russian industrial capacities have been sanctioned by including such items as generators, toy drones, laptops, hard drives, IT components, night-vision and radio-navigation equipment, cameras and lenses, Article 3k and Annex XXIII of Regulation (EU) No 833/2014 as amended;
- a prohibition to hold posts in governing bodies of legal persons or entities directly or indirectly controlled or with 50% public ownership; and
- the existing ban on the provision of certain services has also been extended by prohibiting the provision of advertising, market research and public opinion polling services, as well as product testing and technical inspection services are prohibited, Article 5n para. of Regulation (EU) No 833/2014.
The Russian energy sector is subject to new restrictions as the prohibition of investments in the Russian mining sector has been added to the existing investment ban (Article 3a of Regulation (EU) No 833/2014 as amended).
Further, the Russian Development Bank is now also subject to a general transaction prohibition, Article 5aa and Annex XIX of Regulation (EU) No 833/2014.
Additionally, the ninth sanctions packages sharpens, prolongs and adds derogation regulations. Among these, the derogation from the general transaction prohibition of transactions strictly necessary for divestment and withdrawal from Russia has been extended until 30 June 2023, Article 5aa para. 3a of Regulation (EU) No 833/2014 as amended. Insofar, it seems inconsistent that the accompanying derogation from the prohibition to make funds available to entities which are listed in Annex I of Regulation (EU) No 269/2014 and are subject to the transaction ban, have not been extended accordingly.
The new regulations further add the possibility for the competent authorities of the Member States to authorize the sale, supply or transfer of goods and technologies listed in several annexes – again, if such action is strictly necessary for the divestment from or the wind-down of business in Russia, Article 12b of Regulation (EU) No 833/2014. We will in more detail comment on this provision.
As pointed out above, with the extended sanctions, the EU intends to hit Russia’s economic, military and political power even harder, notably by expanding the list of sanctioned individuals and entities to reflect new insights as well as increasing the overall remit of sanctions.
Under the current sanctions regime, the oil price cap has to be reviewed and potentially adjusted every two months. The Commission may well use those intervals to review sanctions and make any necessary changes and adjustments at the same time. As of now, petroleum exports to third countries will also fall under the purview of the price cap provision beginning on 5 February 2023, further increasing the number of operators and industries affected by EU sanctions. Lastly, the EU’s asset freezes and travel restrictions are up for their rolling renewal by 15 March 2023.