Russian oil in Pakistan: gambling or respite?

Amidst economic woes, a shipment of Russian oil has arrived in Pakistan, which is considered a breath of fresh air. Pakistan and Russia signed a deal in April 2023, consisting of 100,000 metric tonnes of crude oil out of which 45,000 metric tonnes has docked at Karachi.

The news received extensive international media coverage, generating a mixed range of reviews. Some experts hailed it as a respite for Pakistan as the deal may lower the domestic oil prices, which could help in mitigating the inflation rate. On the contrary, many experts viewed it as a risky gamble which to a large extent is a reality.

The deal for the purchase of crude oil at a discounted rate in Chinese currency has raised various queries about its potential impact on Pakistan’s energy demands and the country’s capacity to refine Russian hard crude oil in its refineries. Furthermore, there arises a question regarding Pakistan’s ability to pay Russia in yuan, as it remains uncertain whether Pakistan possesses adequate currency reserves in yuan or not. Russian Foreign Minister Sergey Lavrov has cleared that Russia has not given oil to Pakistan at a discounted rate. However, it is also a fact that Russia sells its oil at different rates and does not disclose the rates.

Pakistan met 80% of its energy needs from Gulf countries — the UAE, KSA, Oman and Kuwait. The port in the UAE is 1,300 km away from Pakistan whereas the nearest Russian port is almost 8,000 km away from the Karachi port. Thus the Russian oil is going to cost more in terms of transportation charges. Pakistan planned to buy discounted crude oil at the rate of $50 per barrel, which is $10 per barrel less than the price cap. Without a discount rate, if transportation charges and a $4 refining cost are added to the $60 price cap, the cost will increase up to $68-70 per barrel. This indicates that Pakistan may have limited chances of significant savings in this deal.

Moreover, Russian oil produces a high quantity of furnace oil up to 45% while Pakistan needs 15% for power generation. This means Pakistan had to find ways to utilize 30% of furnace oil which will have environmental implications. Also, Pakistan does not have enough yuan reserves to pay Russia, and it may have to negotiate with China for payments in Chinese currency. However, if the exchange rate of the US dollar and yuan is compared, Pakistan saves some money to a large extent. The real figure cannot be predicted because no information regarding the exchange rate or discounted rate has been disclosed by Islamabad or Moscow. It is also expected that the regular consignments of Russian oil can create a split between Pakistan and the friendly Gulf countries.

Another significant aspect of the deal is that it has been cashed by both PTI and PDM to gain popular support. PTI tried to create a narrative that its government was dismissed because Washington orchestrated a regime change operation in Pakistan due to its resentment towards growing Pakistan-Russian relationship. The PTI also accused the PDM coalition government of being the protector of American interests in Pakistan. To save its face, the PDM government signed a ‘popular deal’ with Russia without taking into consideration its pros and cons. Most importantly, Pakistan’s energy consumption per day is approximately 6 lakh barrels per day while the first Russian oil shipment has brought 45,000 metric tonnes (approximately 8 lakh barrels), which would barely be sufficient for one and a half days.

This highlights the limitations of the benefits and savings associated with Russian oil imports, exposing the exaggerated claims made by both PTI and PDM for political gains. The government’s failure to disclose official details about the deal has created a sense of vagueness and uncertainty regarding its potential costs and benefits. Based on the available information, the absence of comprehensive research conducted prior to finalising the deal raises significant concerns about its viability, suggesting that it is a risky gamble.

Source: The Express Tribune.