Over the last few years sanctions have steadily intensified on Russian oil exports.
Initially, sanctions on Russian oil exports targeted revenues earned by Russia. This was done via the oil price cap which was originally set at US$60 per barrel but later reduced to US$47.50 per barrel by the EU and UK. This enabled shipowners and operators to continue to load oil from Russian ports provided that the proper due diligence was done to ensure that the oil price did not exceed the cap. The rationale was that Russian oil could keep flowing to those countries who depended on it, principally China and India. This did not of course prevent other countries from banning imports of Russian oil. It did however enable vessels to load and carry Russian oil without prejudicing their insurance cover most of which lay within the UK market. There are obvious benefits for oil to be carried on vessels that are properly insured than on “dark fleet” vessels where the insurance can be questionable. Even with the cap, we have seen a huge expansion in “dark fleet” vessels – presumably due to oil being carried above the cap.
Recently there have been more aggressive moves by the EU and UK to sanction Russian oil exports and the vessels that carry those cargoes. The oil price cap remains in place but the US and UK moves to sanction major oil producers Lukoil and Rosneft (which between them account for over half of Russian oil exports) will cause additional problems. Shipowners and operators are now faced with the need to do extensive due diligence to check if cargoes exported from Russia involve Lukoil or Rosneft or front companies for Lukoil or Rosneft. If so, then those trades will be prohibited regardless of the price cap.
Another problem is the increasing tendency for regulators to sanction specific named vessels based on an entirely subjective view of whether those vessels are deemed to be benefiting the Russian energy industry by carrying oil and other products such as LNG. The sanctioning of vessels causes very serious losses for shipowners who may, in most cases, have done nothing wrong by complying with the oil price cap. The only option for these shipowners is to make an application to the EU and UK sanctions regulators to have their vessels removed from these lists. The economic consequences of being on those lists are very serious because the vessel is effectively untradeable and it may also become uninsurable within the legitimate market. We recently assisted an LNG client in this regard and succeeded in getting EU sanctions lifted on their vessels.
The latest moves to sanction named exporters is also likely to cause legal issues for shipowners and operators. They will need to do the necessary due diligence and be aware of the issues that arise as regards subsidiaries and controlling interests behind those companies. The key cases in this regard are PJSC National Bank Trust v Mints [2023] EWCA Civ 1132 and Litasco v Der Mond Oil [2023] 1 All ER (Comm) 1044. Reliance on sanctions clauses can also be problematic as highlighted in our recent article on The Catalan Sea. It seems likely that this will lead to more enquiries from shipowners and operators faced with voyage orders to load Russian oil. How can then be sure that such orders (assuming Russia is not excluded under the charter) are legitimate? What do they need to do to ensure that the shippers of that oil are not linked to Rosneft or Lukoil? What is the exposure if they comply and end up with their vessel being sanctioned?
We are routinely approached by clients on sanctions issues and we have developed substantial experience within the BDM team to enable us to provide the necessary support that clients need when faced with these issues.
Nick Burgess
Partner
