Russian Sanctions in Focus: Can EU Persons Purchase Russian Oil?

The responses published by the EU Commission to frequently asked questions on the EU’s sanctions regime in relation to Russia are not legally binding under EU law. Nevertheless, they provide guidance for those seeking to comply and for the EU member states enforcing regulations. When FAQs appear to contradict the regulations they are interpreting or responses appear to contradict each other, where does this leave the EU citizens, residents and companies who seek to meet their legal obligations? In this article Duncan Ealand and Simran Keightley focus on the EU sanctions relating to the purchase of Russian crude oil and petroleum products.

Can EU Persons Purchase Russian Crude Oil and Petroleum Products? Article 3m of the EU’s ‘Sanctions Against Russia’ Regulation Examined

Although the G7 Russian oil price cap has been well publicised, it is important to note that under the EU sanctions regime against Russia, there are in fact two separate key sanctions provisions relating to Russian origin crude oil and petroleum products ("Russian Oil"): Articles 3m and 3n of Council Regulation (EU) No 833/2014 (the "Regulation"). Only the prohibitions set out in Article 3n are subject to exemptions for trades carried out under the applicable price cap. The prohibition under Article 3m is not affected by any price cap measures.

Article 3m of the Regulation, states that:

"1.          It shall be prohibited to purchase, import or transfer, directly or indirectly, crude oil or petroleum products, as listed in Annex XXV, if they originate in Russia or are exported from Russia.

2.            It shall be prohibited to provide, directly or indirectly, technical assistance, brokering services, financing or financial assistance or any other services related to the prohibition in paragraph 1."

(NB: there are certain exemptions to the prohibitions in Article 3m, but these will not be covered in this article)

On the face of it, Article 3m of the Regulation appears to prohibit EU citizens, residents and companies, and foreign companies operating within the EU ("EU Persons") from transporting Russian Oil, regardless of whether those goods are destined for the EU or elsewhere (as the term ‘transfer’, according to the FAQs on the EU’s Russia sanctions regime ("EU FAQs"), "is a broad concept covering… the transport of goods [and applies] also when those products do not enter the EU, but are transferred between Russia and a third country…"[1]).

However, the EU FAQs (as of today’s date) in section E.1 [Oil Imports] state:

"1. Does paragraph 1 of Article 3m prohibit the transport of goods listed in Annex XXV of Council Regulation (EU) 833/2014 also to third countries?

No, as clarified in recital 15 of Council Regulation (EU) 2022/879, the transport of the goods in Annex XXV is only prohibited into the Union. However, as set out in Article 3n, maritime transport, including through ship-to-ship transfers, to third countries, as well as technical assistance, financing or any financial assistance in relation to such transport to third countries is prohibited, unless such goods were purchased at or below the price cap.”[2] [emphasis added]

The Recital (15) referred to in this FAQ states:

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

This interpretation would also appear to bring it in line with a similarly worded provision in the Regulation, Article 3i, which states:

It shall be prohibited to purchase, import, or transfer, directly or indirectly, goods … listed in Annex XXI into the Union if they originate in Russia or are exported from Russia.”

In both of these provisions the banned activities are listed in the same order – “purchase” first, then “import” (which naturally implies a geographic limit of goods coming into the EU), and lastly “transfer”, with the reference to “into Member States / the Union” coming after that.

The natural question which follows is whether the word “purchase” must also be read with the “into Member States / the Union” wording, or whether the purchase of such goods by EU Persons is prohibited regardless of whether they are purchased with the intention of them coming within the territory of the EU or not.

Previously, the EU’s FAQs on the Russia Sanctions were very clear on this. In earlier versions of the EU FAQs [June 2022] the following question and answer (in section E.1 [Oil Imports] of the EU FAQs) made it clear that Article 3m did not ban the purchase of Russian Oil if it was destined for a third country:

15. Is the purchase of Russian seaborne crude oil by an EU company allowed when the goods are exported from Russia towards a third country and are not transiting Union territory?

Yes. Contrary to Articles 3g, 3i and 3j of Council Regulation 833/2014, 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, 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.”[3] [Emphasis added]

A different EU FAQ (in section D.5 [Import, Purchase and Transfer of Listed Goods]), which is still included in the latest version of the EU FAQs, appears to corroborate this interpretation:

1. Is the purchase of goods listed in Annexes XVII and XXI of Council Regulation No. 833/2014 by an EU company allowed when the goods are destined for a third country and are not transiting Union territory?

No. Articles 3g and 3i of Council Regulation No. 833/2014 prohibit the purchase, import, or transfer, directly or indirectly, of the goods listed in Annexes XVII and XXI if they originate in Russia or are exported from Russia. The prohibition on purchase applies irrespective of the final destination of the goods. Provided the purchase falls within the scope of Article 13 of Regulation 833/2014, it is not relevant whether the goods are destined for the EU or not…

Please note that the situation is different for the purchase of Russian seaborne crude oil (question n°15 of the FAQ on “oil imports”).”[4] [emphasis added]

The above-mentioned FAQs make it clear that Article 3m is to be interpreted such that purchase by an EU Person of Russian Oil is only prohibited if those goods are destined for the EU. Accordingly, it was widely accepted that Regulation 3m was effectively an “Import Ban”.

However, this has now been complicated by more recent updates to the EU FAQs, which have seen the above captioned question no.15 (FAQ section E.1) on “Oil Import” removed and replaced with a different, unrelated, question/answer. This means that the cross reference in FAQ question no.1 set out above (EU FAQ section D.5) no longer makes sense if one refers to the latest version of the FAQs alone.

The latest version of the EU FAQs (FAQ section E.5 [Oil Price Cap]) also includes a question/answer which arguably expands the scope of Article 3m and the interpretation of “purchase” accordingly:

18a. Is it prohibited for an EU vessel to bunker Russian petroleum products?

… if an EU person has no reason to suspect that the petroleum product that it has purchased for the bunkering of its vessel in a third country is of Russian origin, it should not be held liable if such product is of Russian origin. If, exceptionally, the EU person knew, or could not have ignored the Russian origin of such product, it would be in breach of Article 3m, paragraph 1. [emphasis added]

A ‘third country’ means a country outside of Russia or the EU – which means that this FAQ is suggesting that Article 3m should be interpreted as though the purchase of Russian Oil by EU Persons is prohibited regardless of whether it is destined for the EU or not.

Therefore, currently the EU FAQs contain question and answer no.1 (FAQ section D.5), which makes a distinction between how “purchase” should be interpreted in Article 3m in comparison with Article 3i of the Regulation (for example), suggesting that the “purchase” under 3m is only banned if it is for import into the Union. However, the EU FAQs also contain question and answer no.18a (FAQ section E.5) which appears to directly contradict this.

Where there appears to be an inherent contradiction on the interpretation of “purchase” in Article 3m in the EU FAQs, which technically do not have any legal force in any case, it is necessary to look at the Regulation itself in order to determine the true extent of this prohibition.

Although the wording of Article 3m does not include geographically restricting language such as “into Member States” or “into the Union”, it is true that Recital 15 of Council Regulation (EU) 2022/879 (which amended the Regulation to include, among other things, Article 3m) does include this language. Recitals to EU laws are not inherently legally binding, however, where an unclear provision of EU law is referred to the Court of Justice of the EU (the “CJEU”) for clarification, the CJEU would consider the recitals as part of a “purposive” approach in determining how to interpret the relevant legislation.

Nonetheless, even if the wording of Article 3m is to be interpreted in conjunction with the additional wording set out in Recital 15 of Council Regulation 2022/879 – a natural reading of the wording suggests that the prohibition on “purchase” of Russian Oil is not intended to be limited to instances where the goods are entering the union, since one does not usually ‘purchase something into a place’. Furthermore, although with EU law it is possible that there may be different constructions of certain provisions depending on how certain words are translated in different languages, this does not appear to be the case here.

However, there is another aspect of the Regulation which should be considered here. As set out above, Article 3m paragraph 2 also prohibits EU persons from providing ancillary services, including brokering services related to the prohibition in paragraph 1. This means that if the prohibition in paragraph 1 of Article 3m is interpreted such that EU persons are prohibited from purchasing Russian oil even if it is not destined for the EU, then it would also be prohibited for an EU person to broker the purchase / trade of Russian Oil to third counties.

This interpretation of Article 3m would therefore be in conflict with Article 3n which provides for a prohibition on EU persons providing technical assistance, brokering services or financing or financial assistance, related to the trading, brokering or transport, including through ship-to-ship transfers, to third countries of Russian Oil and which sets out a clear exemption to that prohibition where such Russian Oil is traded below the price cap. It is clear from this provision that the intention of the Regulation (as also confirmed in the EU FAQs (see FAQ section E.4, Oil Price Cap – question 19)) is that the trading and brokering of Russian Oil destined for a third country is allowed if the oil is purchased at or below the applicable price cap.

Conclusion

The contradictions in the EU FAQs raised above highlight a broader point about the difficulty of using and relying on the FAQs generally. The Regulation is directly applicable, which means that it forms part of the laws of each member state without any further action being required on the part of those member states. Nonetheless, the day-to-day interpretation, application and enforcement of the Regulation ultimately comes down to the discretion of the relevant authorities and courts of each member state.

The responses in the EU FAQs published by the EU Commission are not legally binding, but they provide guidance for the interpretation of the Regulation, not only to those who are required to abide by the Regulation, but also to the relevant authorities of member states who are required to implement and enforce the Regulation. Nonetheless, whether (or how) a national court will apply or interpret the EU FAQs will likely depend on that nation’s own jurisprudence.

Significant issues arise when guidance included in the EU FAQs provides an interpretation which goes far beyond the wording in the Regulation or gives different interpretations of similarly worded provisions in the Regulation, or guidance in the EU FAQs is updated and gives a vastly different or contradictory interpretation of a particular provision. The latter is particularly problematic since the purpose of the FAQs should be to help interpret the Regulations, not to change the effect of the Regulations.

To give an example beyond those already shown in this article, although not the subject of this particular article, question 2 in the EU FAQs (section D.5 [Import, Purchase and Transfer of Listed Goods]) confirms that, with regards to Articles 3g and 3i (in relation to iron/steel, and fertilizers, wood cement and other goods generating revenue for Russia), the prohibition on transfer applies irrespective of the final destination of the goods, whereas the prohibition on import applies by nature to goods moving “into the Union”. Again, this appears to be a case of contradictory FAQs, as the opposite interpretation of essentially the same wording (i.e. “transfer… into the Union / Member States”) is provided in FAQ section E.1, Oil Imports – question 1 (as set out earlier in this article) with regards to Article 3m.

In addition, the response to this FAQ was subsequently updated and now includes additional wording stating that there is an exemption to the above-mentioned prohibition for certain types of goods (which are set out in the FAQ) in order to give effect to the EU’s  commitment “to combat food and energy insecurity around the world” and “in order to avoid any potential negative consequences therefore” in third countries, as included in recitals 11 and 12 of Council Regulation No. 2022/1269 (which updated the Regulation). It should be noted that the relevant Articles in the Regulation itself have not changed. There is no specific mention of an exemption or exclusion of the goods set out in this FAQ in the Regulation itself, and so the exemption in the FAQs relies entirely on the limited wording in those recitals as its basis. This is an unnaturally broad interpretation of the quoted recitals and goes far beyond simply providing an interpretation of the Regulation.

Although no longer part of the EU, and with its own unique jurisprudence, the UK sanctions regime has been equally mired in such difficulties. The recent Court of Appeal judgment in Mints v PJSC National Bank Trust [2023] EWCA Civ 1132 criticised the judge who presided over the case in the High Court for putting "an impermissible gloss on the language of the Regulation because of a concern on her part" that a certain construction of the provision in question would lead to extremely broad consequences which, it was not clear from the wording of the provision, Parliament had intended to be the result. The Court of Appeal in this case noted that "the remedy is not for the judge to put a gloss on the language to avoid that consequence, but for the executive and Parliament to amend the wording of the Regulations to avoid such a consequence."

Both in the UK and the EU, when it comes to legislating a rapidly developing sanctions regime, more needs to be done to ensure that individuals and commercial people are able to understand what they are and are not permitted to do. Whilst the political motivations for imposing certain sanctions are often clear and supported by the industries on whom restrictions are placed, more must be done to acknowledge the ever-rising administrative and monetary cost of complying with sanctions regimes which are becoming increasingly complex. In order to do this, regimes cannot be overly reliant on non-binding FAQ guidance and should seek to correct and properly consolidate legislation where necessary.

As for the question of Article 3m of the Regulation – the analysis above hopefully provides some clarity on the relevant provisions for European oil brokers, bunker suppliers and other European companies who, under earlier versions of the EU’s FAQ guidance on the Russian Sanctions, would have seen guidance that clearly permitted them to continue purchasing Russian Oil, provided that the goods were not destined for the EU and that they were in compliance with any other relevant sanctions provisions (e.g. the price cap, where applicable). As indicated above, although some of this permissive guidance from the Commission now appears to have been retracted and replaced, the emphasis on the price cap and its aim to permit the trading of Russian Oil below a certain price should provide some comfort that the interpretation of Article 3m as an “EU import ban” only is still valid.

For more information on this article or if you require any assistance from our sanctions team, please contact Duncan Ealand, Director, CJC, email: Duncan@cjclaw.com;   mobile: +44(0) 779 914 2963.

The CJC sanctions team has guided insurers, managers, ship-owners and charterers on various sanctions compliance issues. This work has included, among other things, carrying out sanctions checks on proposed fixtures for vessels and advising on potential liability for rejecting voyage orders under charterparties where a proposed fixture may result in a breach of sanctions or a breach of any sanctions terms in a vessel’s financing agreements and preparing internal sanctions compliance policies for shipping companies.

The content in this article is provided for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Users of this website are advised to seek specific legal advice by contacting members of Campbell Johnston Clark Limited (or their own legal counsel) regarding any specific legal issues. CJC does not warrant or guarantee the quality, accuracy or completeness of any information on this web site. The articles published on this web site are current as of their original date of publication, but should not be relied upon as accurate, timely or fit for any particular purpose.

 

 

[1] https://finance.ec.europa.eu/system/files/2023-10/faqs-sanctions-russia-consolidated_en_3.pdf - Consolidated version of the frequently asked questions concerning sanctions adopted following Russia’s military aggression against Ukraine and Belarus' involvement in it (as of 31 October 2023), pg 11.

[2] Ibid, pg 190.

[3] Oil Imports - Related provision: Article 3m of Council Regulation 833/2014 – Frequently Asked Questions - as of 22 June 2022, pg 4.

[4] https://finance.ec.europa.eu/system/files/2023-10/faqs-sanctions-russia-consolidated_en_3.pdf - Consolidated version of the frequently asked questions concerning sanctions adopted following Russia’s military aggression against Ukraine and Belarus' involvement in it (as of 31 October 2023), pg 165.