It is well known that the European Union (EU) uses its economic levers to maximize pressure on the Russian Federation. In order to reach its goals, the EU not merely relies on classical “one-way-sanctions”, but also pressures third States to align with its sanctions policies. Particularly, together with other G7 nations (the so-called price cap coalition), it initiated a global oil price cap. This initiative, alongside other measures, might clash with the international law of jurisdiction.
In the following, I will briefly explain how the oil-price cap mechanism works and then proceed with a legal assessment. The blogpost does not pretend to be comprehensive or exhaustive in its analysis. Rather, it invites to reconsider the EU’s position towards extraterritorial sanctions.
Targeting Russian Oil Revenues
The EU initially imposed sanctions against Russia shortly after the annexation of the Crimean Peninsula in 2014. Sanctions have been constantly altered and extended moderately and hesitantly. However, they gained new momentum following the Russian invasion of Ukraine since February 2022. Next to the Russian oligarchy, the Russian military and financial industries, and the rich Russian energy resources were at the center of the EU’s attention. One prominent example is the oil embargo with regard to Russian oil, codified in Art. 3m (1) Regulation (EU) 833/2014, which closed down the EU market for Russian oil.
But, for Russia, when the EU’s door closed, another one opened: The gap left was quickly filled in by other beneficiaries such as China and India, frustrating the desired results by purchasing much of what was now an unused and, therefore, cheap resource (see here, here and here).
To counteract the deflagration of sanctions effects and simultaneously maximize opportunity costs for Russia, the EU in Art. 3n (1) Regulation (EU) 833/2014 decided to prohibit the provision of certain services “[…] related to the trading, brokering or transport […] to third countries of crude oil or petroleum products […] which originate in Russia or which have been exported from Russia.”
Also, Art. 3n (4) Regulation (EU) 833/2014 introduces a transport ban, according to which ships flying the flag of an EU member State must not trade Russian oil with third States. This amounts to a heavy burden for third States, struggling to find alternatives for European transport and maritime insurance means as a significant number of (re-)insurers and other oil-related service providers are located in the European Union (and other G7 States). To deal with the adverse effects on third States while continuously restricting Russian oil revenues, the EU and the price cap coalition agreed on uniformly capping the oil price.
Direction (CSFP) 2022/2369 and Regulation (EU) 2022/2367 (both of 03.12.2022) thus introduced the first round of the oil price cap. Crude oil with a third State destination, which was meant to be transported via the sea since then has to be purchased at a price of 60 $/barrel or less by third State actors,, lest they be banned from certain services such as insurances and re-insurances or the transport itself. The addressees must not provide the according services or transport, as long as the concerned oil or oil products are purchased at a higher price.
In terms of enforcement, EU member States must make use of their domestic legislation to prevent their subjects from engaging in the prohibited actions (see e.g. for Germany §§ 18, 19 AWG, § 82 I Außenwirtschaftsverordnung). At the supranational EU level there is yet no available penalty for sanctions violations.
Towards EU Secondary Sanctions
Looking at the oil price cap through the international law lens, its extraterritorial reach becomes quite clear. The subject of the regulation aims to influence the trade between Russia and any third State, which obviously is a situation abroad, concerning which the EU wants to exert regulative power.
International law is straightforward when it comes to the regulation of one international law subject over another: The former is, in principle, prohibited to regulate a situation where another subject has the exclusive authority. To cross this border of exclusiveness, the regulating subject has to claim a specific nexus to that situation to rightfully assert jurisdictional authority.
Now, it is pretty obvious that the EU oil price cap is not created in a way that would directly affect third State parties with regard to their oil trading behavior towards Russia. The addressees are, as was mentioned above, the EU member States, i.e. their nationals. The rules of the jurisdiction to prescribe in such a case allow for some leeway: As long as only the regulative authority is asserted by having regard to a foreign situation, international law turns a blind eye on the assertion. States should beware, nevertheless, when they want to enforce the content of the regulation extraterritorially, as the jurisdiction to enforce draws strict territorial boundaries.
Applying these principles to the oil price cap, one could argue that from a jurisdictional point of view, there is no issue with EU sanctions. But if one turns his attention to the sanctions practice of another global player, namely the US, the outcome seems ambiguous.
In Good Company? Comparing US and EU Approaches
The United States of America (USA) is infamous for its use of extraterritorial (secondary) sanctions, which were already discussed at length in the European blogosphere and elsewhere. Making use of its economic and financial supremacy, the USA is pressuring third States to change their behavior. To that extent, the respective imperative of EU- und US-sanctions has a structural resemblance: Both aim at a behavioral change of third State parties towards the primarily targeted State.
Are there, accordingly, no differences between US- and EU-sanctions? The answer to this question must take into account the jurisdictional as well as the factual implications of extraterritorial sanctions. Whereas the EU’s imperative is directed at persons inside the EU (e.g. all natural persons and legal entities of member States), the USA is regularly trying to overstretch its jurisdiction both regarding the jurisdiction to prescribe and its jurisdiction to enforce, as it uses the widest understanding of jurisdictional links to expand its prescriptive power, which then allegedly allows for an expansion of its enforcement reach. Take for example the sanctions regarding the construction of the Nord Stream 2-Pipeline, which allow for the blocking of property belonging to “foreign persons” (Sec. 7503 (c) in conjunction with Sec. 7503 (a)(1)(b)) and severe penalties for sanctions violations (Sec. 7503 (g)(2)). In other cases, such as the so-called Helms-Burton Act, third State entities were made liable in front of US-courts for investing in the Cuban economy and equally precluded from selling Cuban products in the USA (§ 6082 (a)(1)(A) and § 6040 (a)).
In comparison, EU measures seem to be less rigorous and innocently toothless, as they do not, at least until recently, claim any extraterritorial enforcement authority.
Nevertheless, secondary sanctions do have a factual element, which makes their extraterritorial impact perfect and which can be identified in the structure of their imperative. It is quite ambiguous for the EU to on the one hand condemn the assertion of extraterritorial effects of US sanctions – the EU’s response to the Helms-Burton Act inter alia comprised a blocking statute and the initiation of a WTO-proceeding – and, on the other hand, be responsible for extraterritorial effects by enacting third party-measures. Even if qualitative differences between US- and EU-sanctions are considered, one should keep in mind that it is in most cases not the actual enforcement of US sanctions against third State persons, which makes them effective. Rather, it is the threat of them being enforced – as a recent example shows, in which a subsidiary of Deutsche Telekom AG terminated a contract with an Iranian bank, presumably in fear of being subjected to US-sanctions.
Equally, it is not any hypothetical EU penalty, which makes EU secondary sanctions extraterritorially effective but rather the factual control of a majority of maritime oil transport infrastructure (together with other G7 partners). At least this is what EU sanctions were supposed to trigger. Despite all economic leverage they did not have the desired impact on Russia. According to reports and analysis, the price cap coalition is confronted with enforcement issues and sanctions evasion.
A few months ago, the EU thus introduced the latest sanctions package, with which it aims to troubleshoot flaws in the sanctions program (see Regulation (EU) 2023/1214 and Regulation (EU) 2023/1215). Among other measures, it intends an increased influence on third States and third State actors which are believed to circumvent EU sanctions. If this will be crowned with success remains to bee seen. In any event, by ramping up its sanctions game, the EU is gradually becoming a proponent of secondary sanctions.
Conclusion
It is undoubtedly of great interest for the international community to bring the Russian aggression to an end via non-forcible means. Sanctions therefore remain vital in accomplishing those goals. However, the use of extraterritorial sanctions always calls for balancing the aims of sanctions programs with the sovereign interests of third States – and in most occasions in which States used their economic might in order to pressure third States to isolate the actual target State, they received the loudest protest (see e.g. here or here).
In this regard, the impetus behind the sanctions coalition, i.e. defending common interests collectively might be a promising door-opener regarding the legality of such measures.
Maybe it would be wise for the EU to first address the still not conclusively resolved questions surrounding third party countermeasures and secondary sanctions. Even if it only was to be prepared for accusations of international law violations.
Moritz Rhades is a doctoral candidate and research associate at the Walther Schücking Institute for International Law. His research focuses on general international law.