Ketevan Buadze
BSH Law Office, Tbilisi
k.buadze@bsh.ge

Prologue

The maritime transportation of Russian oil has become a massive hurdle for traders and their service providers due to the sanctions and reputational risks, as well as for the global community due to environmental hazards. As the title suggests, this article is about the Russian oil price cap, the 'shadow fleet' and how this affects the environment globally. The article will initially give some hypotheticals with questions, followed by briefly describing the Price Cap Regulation and its enforcement policy. It will be concluded by answering the questions raised first in relation to the hypotheticals.

Hypotheticals and the questions

Regarding the subject of this article, please give a thought to the several hypotheticals as follows:

• a Chinese vessel with no nexus with the G7 countries (ie, the United States, Canada, France, Germany, Italy, Japan, the United Kingdom and the non-enumerated European Union)^[1] has been engaged in the transportation of Russian oil for the last two decades; the company has bare knowledge of international sanctions and how to meet sanctions' compliance requirements, but, as said, the vessel is entirely 'non-G7', including the flag, crew and insurance, and continues its usual operations as of today;
• a Russian-state-owned shipping company and operator with a huge fleet has been operating and moving an enormous amount of Russian oil around the globe with or without G7 services from the day of its inception;
• a United Arab Emirates (UAE)-based ship operator manages the vessels for transporting Russian oil with or without G7 services, but it is unclear how long this company has been active in this business; and
• a Greek shipowner, a true merchant spirit with a medium-sized fleet, has been in the maritime transportation business since the 'Argonauts' and has historically transported Russian oil. Does this owner know about the sanctions? Perhaps… Or better, does all that is required for compliance with the sanctions mean a 'best effort' basis?

Considering those hypotheticals, how would you feel about the following questions: Do these shipowners, operators and vessels violate the sanctions? Should they care about some restrictions called sanctions when doing business? Why? Does a recently dominated 'shadow fleet' syntagma apply to one of them? Or maybe to all of them? The environment? How is it involved? Should we care?

Price cap regulation and its enforcement policy

Before answering the above questions, let's briefly describe the environment of sanctions for the maritime transportation of Russian oil. A parabola is set in the Price Cap Regulation as agreed and developed by the G7 countries, or otherwise, the 'Price Cap Coalition'.

Apart from the unity of so many countries in condemning Russia's aggression against Ukraine, it is fascinating that all G7 countries agreed unanimously on certain restrictions for cutting, or better decreasing, Russia's revenue to fund the war, while keeping Russian oil flowing. As for the tool for reaching the said goals, G7 countries agreed to set a price cap for seaborn Russian oil^[2] when transporting it to third countries or providing services, such as brokering, technical assistance, financing and financial assistance.^[3]

Sanctions and their enforcement are tied with sanctions policy per se, which the sanctions-imposing country or body aims to achieve.^[4] That said, it's worth pointing out two moments from the price cap's recent history: one from December 2022 and another from February 2024.

2 December 2022, Washington, DC

Secretary of the Treasury Janet L Yellen's announcement when releasing the price cap was: 'The price cap will encourage the flow of discounted Russian oil onto global markets and is designed to help protect consumers and businesses from global supply disruptions. The price cap will particularly benefit low- and medium-income countries who have already borne the brunt of elevated energy and food prices exacerbated by Putin's war. Whether these countries purchase energy inside or outside of the cap, the cap will enable them to bargain for steeper discounts on Russian oil and benefit from greater stability in global energy markets.'^[5]

23 February 2024, Washington, DC

According to Deputy Secretary of the Treasury Wally Adeyemo: 'The price cap on Russian oil continues to serve its twin goals of limiting Kremlin profits while promoting stable energy markets… Today, we take the next step by targeting Russia's largest state-owned shipping company and fleet operator, dealing a huge blow to their shadow operations. We are entering the next phase of increasing Russia's costs in a responsible manner to mitigate risks.'^[6]

These two announcements draw similarities and differences between the policy aims firmly allied with the enforcement and its targets. The similarities go clearly for the 'twin goals', whereas the differences are vested in the changed enforcement targets. In December 2022, third-country operators not related to the G7 and not using G7 services would only be interested in the price cap as a means 'to bargain for steeper discounts on Russian oil', while a year later, they are absolutely expected to respect the price cap, and not doing so raises a question of their future existence. Vessels involved in transporting Russian oil have not been titled 'shadow' for long enough; hence, they became potential targets for US blocking sanctions, not because they cause US persons to violate the primary sanctions, but because they are active in the Russian maritime sector and identified as the target of so-called derivative, secondary sanctions.

Epilogue

What has been the critical moment for changing the price cap enforcement course? The answer arguably is that the Price Cap Coalition did not expect Russian oil to flow without G7 services, but, in fact, it did. Therefore, from our hypotheticals, a Russian-state-owned shipping company and UAE-based ship operator have both already been designated by the Office of Foreign Assets Control (OFAC) due to operating a so-called 'shadow fleet', while a Chinese vessel and Greek shipowner could be potential targets in the future.

Do they care?! The answer to this rhetorical question is positive: everybody does when it comes to US blocking sanctions.

What about the environmental risks? The environmental risks remain inherent to the Price Cap Regulation because G7 insurance cannot be obtained for the transportation of Russian oil above the price cap. Therefore, the so-called 'shadow fleet' either sails without insurance or with insurance that is inoperative due to the violation of the Price Cap Regulation, compliance with which is part of the contractual arrangement.^[7] One of the characteristics of the 'shadow fleet' is being old. What if one day, one of them spills the oil, bearing in mind that this is not some remote risk?! It seems that the 'twin goal' is not the friend of the environmental goals, and this question remains open for the price cap architects.

The answer to the final, and again, rhetorical question of whether we care about the environment is obvious: we do, and we should, as there is no alternative to Mother Earth.