Reed Smith In-depth

As we previously reported, on 3 June 2022 the EU adopted its sixth package of sanctions against Russia and Belarus. We know that there has been considerable confusion and widespread debate across the energy and maritime industries over how to interpret and comply with these recent sanctions. Our alert aims to shed some light on what the latest sanctions mean in practice and the direct impact they are likely to have on the day-to-day business of the companies affected.

We will focus, in particular, on the following two key decisions made by the EU which prohibit:

1.) The purchase, import or transfer of crude oil and certain petroleum products from Russia into the EU 

2.) Insuring and financing the transport, in particular through maritime routes, of Russian oil to third countries

These two decisions are dealt with in the legislation by virtue of two distinct articles: Article 3m (oil imports) and Article 3n (restrictions on insurance, financing of transport to third countries). How do these articles operate and what do companies need to know? In this update we look to give as much clarification as we can on how to interpret the articles and the key points companies should be aware of.

Article 3m – Prohibition on Russian-origin oil into the EU

Looking at the legislation, helpfully recital 15 (which precedes the articles themselves) sets out how Articles 3m and 3n are to operate:

“Recital (15) Decision (CFSP) 2022/884 also imposes prohibitions on the purchase, import or transfer into Member States [emphasis added], directly or indirectly, of crude oil and certain petroleum products, which originate in Russia or are exported from Russia [essentially Article 3m], and on the insurance and reinsurance of maritime transport of such goods to third countries [essentially Article 3n]. Appropriate transitional periods are provided for.”

Therefore, in Article 3m, despite the absence of specific wording, we now know that this is a restriction on imports into the EU only. In our view, this would also prohibit the transfer of crude oil and petroleum products within the EU (i.e., from one EU member state to another) if the product originated in Russia.

No doubt because of a lack of clarity in the legislation, the EU issued an update to its FAQs on 14 June 2022, which states that:

“Article 3m of Council Regulation 833/2014 prohibits only the purchase, import, transfer of Russian seaborne crude oil that is destined for import into Member States [emphasis added], as highlighted in recital 15 by Council Regulation 2022/879 of 3 June 2022 amending Council Regulation 833/2014. An EU company is still allowed to transport Russian crude oil to a third country”, where a “third country” is any non-EU country (China, India or Turkey, for example).

To put it simply, Article 3m imposes restrictions on the purchase, import and transfer of Russian-origin oil into the EU only but does not impose similar restrictions on exports to non-EU countries.

As we earlier reported, there are exceptions to this general prohibition, principally:

  1. Until 5 December 2022 in respect of crude oil transactions (products falling under CN 2709 00), where the transaction is a one-off transaction for near-term delivery, or for pre-existing contracts entered into before 4 June 2022, subject to reporting obligations.
  2. Until 5 February 2023 in respect of transactions in certain other petroleum products (falling under CN 2710) in similar circumstances and, again, subject to reporting obligations.

Reporting obligations

Unfortunately, there is less clarity in relation to such reporting obligations. As things stand:

  1. For reliance on pre-existing contracts, the underlying transaction and any ancillary contracts must have been reported to the relevant Member State authority by 24 June 2022; and
  2. For a “one-off transaction for near-term delivery” (i.e., spot transaction), all aspects of the transaction (including transportation) should be reported to the relevant Member State authority within 10 days of its completion.

There is still no clarification on who should report within a transaction – seller, buyer, supplier, charterer, or owner – nor is there is any guidance on what form the report should be in (though we have had some feedback that the report should be in English).

In terms of who should report, the obvious candidates will likely always be the buyers themselves (whatever form they take). However, until there is clarity on this, we recommend those parties involved in the purchase and/or transport of Russian-origin crude report the transaction or seek confirmation (or indeed a warranty) that the party responsible for reporting does in fact report.