In this episode of Future Thinking, Mike Salthouse is joined by Olga Dimitrescu, Head of Engagement, Oil Price Cap, at the UK Office of Financial Sanctions Implementation, HM Treasury. 

They discuss the objectives of the Oil Price Cap, its achievements so far and implications for the shipping industry.

They also talk about changes to the attestation process planned to take effect on February 19th 2024.

First of all, thank you very much for coming down to to see us.

[00:00:33] Mike Salthouse: Could perhaps you say a little bit about yourself, then OFSI and, and the role that you have within OFSI.

[00:01:17] Mike Salthouse: Fascinating. Thank you. So let's, let's talk a little bit about the oil price cap then. Could you tell me what from Ofsi's point of view, the objectives of the oil price cap are, and, and then also do you think they're being achieved?

Now the old price cap has a dual purpose, was designed with a dual purpose. It restricts the revenues flowing to the Russian state, which in turn of course undermines Putin's ability to fund his war in Ukraine. And the second purpose is to ensure that third countries can continue to secure oil at affordable prices, uh, and that we maintain stability in global markets of the success of the policy.

I think we are broadly speaking, quite successful. We have driven down Russian revenue, which is evidenced by the IEA research published earlier this year. Uh, the OPC has contributed to reducing Russian air oil export revenues by about 20 20% in, uh, 20 twenty-three compared to the previous years 20 twenty-two.

Furthermore, we also know that the cost of creating and maintaining this infamous shadow fleet is around two point $25 billion in just one year according to Yale research. And of course, this, uh, this further diminishes Russia's profits from oil exports even if indirectly. So this is kind of on the, on the revenue side, I'd say we are, um, we are achieving our purpose.

Uh, on the all flow side. There is stability in. All prices did spike prior to the price cap, uh, due to the war risk premium, of course, but the OPC reassured and calm the markets, which gives us further evidence that the Russian, that the price cap is delivering against its dual intent purpose.

Uh, in 2024?

In February, as of 19th of February, uh, which is quite a significant change. And then we'll also take stock of industry feedback in the coming months and see, see how that is implemented and perhaps do an internal evaluation of, um, of its impact in the second quarter, we'll very likely up the ante on enforcement.

And, uh, continue taking action against actors engaged in deceptive practices. Now of course there may be further coalition advisory notes statements. There may also be new designations under the Russia sanctions regime, and we retain the right to to keep our options open. But the overall theme is remaining.

We want to remain nimble and we want to crack down on circumvention.

[00:05:22] Olga Dimitrescu: I say there are three main changes from the 19th of February onwards. The first one is attestations that are now, uh, that we now expect to be cascaded proactively. Voyage basis, the introduction of a new requirement to record and provide itemized ancillary costs and also the creation of the two sub tiers, tier three A and tier three B.

Just to give you a bit more insight into this. Um, so for the, the voyage basis, attestations, what we're looking at is a new attestation model whereby. Attestations are to be cascaded or passed down proactively from tier one to tier two to then tier three providers on a per voyage basis as part of of course the relevant transaction.

And, um, I guess when, when we say a voyage, um, what, what we mean is that, um, a voyage is a period between when the oil is loaded onto a ship and when it's offloaded. So to the extent that we're doing, uh, that we see several ship to ship transfers, those would constitute two separate voyages. So there will be, we would, we would want to see more attestations being shared down the chain.

As for the, the second, the second requirement, uh, rec recording and providing itemised ancillary costs. Again, these are to be recorded by tier one entities and of course, tier two entities with access to price information and then provided to tier two and tier three contractual counterparties upon request.

So that would be the difference. First one is proactive and we'd expect that to happen. And the, the second requirement is upon request. So it would not necessarily need to happen, um, proactively. And the third change the creation of the splitting of. These two sub-tiers, IIIA and IIIB. The rationale behind the split is that entities that are placed in tier IIIB seem to, we, we judge them to operate at such a distance from the original transaction and the voyages, that it may not be entirely practical to obtain an attestation for each voyage.

And so creating this sub-tier. Better reflects how, how the market operates and is slightly more workable for industry. And of course, tier three B, We've already mentioned this in the, in the existing guidance, um, it will comprise insurance financial institutions that provide general financing facilities, P&I clubs, cargo insurers, hollow machinery, insurance brokers and ship owners will all be in tier three A.

[00:07:57] Olga Dimitrescu: We've feedback from industry and we understand that currently there is limited side of. All transactions. We also understand that the current model is, um, exploited by nefarious actors who falsified the station documents in order to unlock access to coalition services. Um, and of course, because, because these transactions appear to be price compliant, uh, price cap compliant, we realize that.

Good faith service providers can inadvertently be drawn into facilitating illegal trades, and so because of that, what we're trying to achieve is increasing the visibility of transactions across the entire supply chain, and also empowering legitimate actors to refine their due diligence processes. And particularly we realize that supply chains are quite complex.

They cross, they cross jurisdiction. And so on one hand we want to empower these, these market participants, uh, to have, um, to have more, more transparency and more visibility across transactions and, and gain more confidence, uh, in their counterparties. But at the same time, we want provide G-seven authorities.

Additional intel to support investigations into suspicious trades, um, and also allow for a more targeted enforcement approach. And so I'd say that overall the changes, these changes have been designed to ensure a balance between enforceability and maintaining incentives to, for continued trading. And of course, it will make it easier for good faith actors to comply with the price gap whilst also making evasion more, more challenging.

[00:09:51] Olga Dimitrescu: I think there's several, there are several, um, scenarios, uh, where that could be activated. So perhaps if, um, a service provider wants, wants additional. Clarification about a particular trade, uh, as part of their own due diligence processes. Or maybe they have, they're interacting with a new counterparty.

They do not, they do not have sufficient information about, maybe they're requested by another contractual counterparty in the chain. Um, or perhaps OFSI is, um, requesting that information.

[00:10:45] Olga Dimitrescu: Is a really good question. Um, we are aware that there is a parallel. There's denying that.

Slightly unwelcome, but as I mentioned earlier, that comes at a significant cost to Russia, um, $2.25 billion in one year that is spent by the Putin regime on tankers and tanks as our, uh, coalition partners like to say. So I'd say that. Perhaps looking at this on two different levels. Um, in terms of our response to this, so there's an internal level to the, what, what we're doing within the jurisdiction of the G seven plus coalition.

Primarily want to have more guidance around deceptive practices. We're updating our compliance rules and regulations as seen in the, um, advisory that we've issued on of October year. The coalition statement on the alert. And what we're trying to do with these additional guidance that takes the form of not just the, the old price cap guidance, uh, but also these alert statements.

And, um, what we're trying to do is to ensure that legitimate industry actors remain vigilant and. Able to enhance their compliance processes and they know the steps that we expect them to, uh, to take in case of, um, in case there's any inadvertent misinterpretation of the, of the cap or even if there is some, some outright non-compliance.

So this is internally to the, uh, to the coalition. Now, external to that, because we realize that there is a world out there, uh, that is, um, outside our, our nexus. What we're doing against the, the shadow fleet is very much. Taking action against those entities that are deliberately circumventing the sanction.

Um, we've got designations. The FCDO has already designated, uh, a number of entities and that can, that can continue to happen in In-twin-twenty-four. There will be more coalition alerts that go to governments as well. There is international engagement with state actors, so with other government, we're trying to, trying to drive up, um, understanding of.

And compliance with, uh, our aims and also making, making these other governments aware of the maritime risks that are associated with, um, with circumvention of the cap and of course the, the environmental risks as well. And so I'd say that by operating on both these two levels, we're making it harder for Russia to use its shadow fleet, which in turn would force more volume back into the G-Seven fleet where service providers are compliant with the cap.

[00:13:40] Olga Dimitrescu: We know there's been a reduction, but we want to crack down on non-compliance and circumvention. What we want to do is force these volumes back into the G-Seven fleet. And particularly since it is in our interest that this happens, uh, one of the reasons why the price cap is so effective is because we have this prevalence of services provided by G-Service providers.

It is difficult to make trades or gain significant market share without using G-Service at all. So we, this is why we're talking to industry. We never wanted to cut off Mar uh, G-Seven Maritime Services from insuring or being involved in the global trade of Russian oil cargoes. We, we need the, um, the price cap to remain walkable, and this is why we're quite keen to make sure that these volumes are forced back into, into our jurisdictions.

[00:14:44] Olga Dimitrescu: Definitely. Um, so we've, um, as of this morning, we have published this, uh, red alert on Compliance and Enforcement. It contains an overview of key evasion methods and specific recommendations on how to identify these method methods, how to mitigate the risks and negative impacts, as well as information on how to report, um, suspected breaches.

Across the Price Cap Coalition. Just to give you a very quick overview, we're looking at falsified documentation and attestations, opaque shipping and ancillary costs. Overly complex supply chains that include third countries with, um, intermediaries that have also quite irregular corporate structures. Um, shadow fleet, of course, irregularities and voyages, and also a little bit on flagging.

[00:15:41] Olga Dimitrescu: Us, Mike.

Remember to listen to the other episodes in the Future Thinking Series where we talk all things maritime, from ship security in the Red Sea to what another Trump presidency might mean for the world. You'll find the Alongside podcast and these future thinking episodes on the NorthStandard website at North-Standard.com, or wherever you get your podcasts from.

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