Pakistan eyes economic relief from Russian oil imports due in May

Pakistan is poised to import oil from Russia, with the first order expected to be unloaded in May, in a move that promises to save the cash-strapped country money but also raises several questions and challenges.

Pakistan placed the order in April, according to Musadik Malik, the minister of state for petroleum. The imported oil will initially be refined by Pakistan Refinery, which is owned by the government. If all goes well, the intention is to increase imports to 100,000 barrels a day, making up two-thirds of Pakistan’s total oil purchases.

The government has not disclosed the financial details, but it is hailing the deal as an economic relief.

A government official, who requested anonymity because he was not authorised to speak to the media, said Islamabad aimed to buy Russian oil at $50 a barrel. Arab Light oil, which Pakistan is mainly purchasing from Saudi Arabia, was recently trading at $84.75 a barrel.

Experts were sceptical about whether Pakistan could actually secure such a discount. But lower prices would certainly help a country that paid $18.74bn for all kinds of petroleum products in fiscal 2022, according to the State Bank, as it sank into a foreign exchange crisis and was forced to seek assistance from the IMF.

Even if the arrangement helps Pakistan breathe easier, experts see a number of potential issues.

One is the risk of a US backlash, particularly if Pakistan ends up purchasing oil from Russia above the $60 a barrel cap imposed by the G7 as part of penalties on Moscow over its invasion of Ukraine.

Pakistani prime minister Shehbaz Sharif’s government has sought to mend fences with the US as it confronts the economic crisis as well as surging terrorism.

Derek Grossman, a senior defence analyst at Rand, said US policymakers might come down harder on Islamabad rhetorically and diplomatically by postponing meetings, although he said sanctions were probably not on the cards.

Michael Kugelman, director of the South Asia Institute at the Wilson Center, said Islamabad would hope that Washington understood this purchase was being made to help ease its acute economic problems. “I don’t anticipate sanctions, but Pakistan’s disadvantage is that it lacks the shield of a strategic partner, which would allow it to get free passes, as is the case with India,” he said.

India — a member of the Quadrilateral Security Dialogue with the US, Japan and Australia — has significantly increased its dependence on Russian oil since the Ukraine war began.

A second challenge is that Russia will sell Pakistan unrefined oil, which will test the limited capacity of the importer’s refineries. Aftab Zafar, an oil adviser in Islamabad, said that refining the Russian crude would cost between $2 and $5 a barrel, eating into the savings.

Moreover, the crude Russia is selling yields more furnace oil, versus diesel.

Diesel is mostly used by the transportation sector whereas furnace oil is mainly used by power plants. According to the Oil and Gas Regulatory Authority’s Report on the Regulated Petroleum Industry 2020-21, diesel made up 39 per cent of Pakistan’s oil consumption, and furnace oil was just 15 per cent. This suggests Pakistan will end up with more furnace oil than it needs.

Still, GA Sabri, a retired federal secretary for petroleum and natural resources, told Nikkei Asia that before placing such a huge order, Pakistan Refinery must have carried out its due diligence and made sure that the arrangement was feasible.

Sabri, who served for more than three decades dealing with Pakistan’s petroleum sector, said the country could export the additional furnace oil below the market rate to earn revenue, helping to offset the additional refining costs.

But there is also a third challenge: Russia is reportedly asking for payment in its own roubles, Chinese renminbi or United Arab Emirates dirham. Pakistan is not known to have reserves of these currencies. Neither Moscow nor Islamabad has said how they have agreed to work around this.

Bangladesh recently decided to pay Russia for a nuclear power plant in renminbi, but it had been accumulating at least some of the Chinese currency.

Pakistan has little wriggle room, with foreign reserves of just $4.43bn as it anxiously attempts to secure a deal with the IMF for a $1.1bn tranche. That could help unlock other sources of funding.

Kugelman suggested Pakistan may be counting on credit or a loan from Russia, though he said the last thing Islamabad needed now was more debt.

Experts offered mixed assessments of the future prospects.

“The Pakistan government is importing Russian oil as a test run and they are exploring the feasibility of this arrangement,” said oil expert Zafar. In his view, the government may not be completely sure of the arrangement working out.

Sabri, the former petroleum secretary, suggested that the arrangement with Russia could be deferred if it proved too complicated.

Kugelman said that this transaction was quite delicate for Islamabad. “Pakistan badly needs cheap oil, but it also doesn’t want to antagonise key western trade partners,” he said, saying the government “will need to proceed carefully”.

A version of this article was first published by Nikkei Asia on April 27 2023. ©2023 Nikkei Inc. All rights reserved.

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