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Pakistan Reader# 613, 15 June 2023

Pakistan and Russia’s Crude Oil: A New Beginning or More Challenges?



Growing interest from both Pakistan and Russia in expanding bilateral ties beyond energy trade

Subiksha S

On 11 June, Pakistan received the first shipment of discounted Russian crude oil. The cargo, which had been split into two smaller ships, arrived in Karachi after a month-long journey via Oman. Shehbaz Sharif emphasized that it fulfilled one of his promises to the nation and marked the beginning of a new relationship between Pakistan and the Russian Federation. He said: “I have fulfilled another of my promises to the nation. Glad to announce that the first Russian discounted crude oil cargo has arrived in Karachi and will begin oil discharge tomorrow.”
 
The decision to purchase discounted Russian crude oil comes at a crucial time for Pakistan, as it faces an economic crisis and an acute balance of payments problem. With foreign exchange reserves barely sufficient to cover a month of controlled imports, the discounted crude offers a potential respite and an opportunity to alleviate inflationary pressures.
 
However, the purchase of Russian crude oil presents its own set of challenges. Pakistan had to open a letter of credit in a Chinese bank to make the payment in Chinese Yuan due to a shortage of US dollars. Additionally, the composition of Russian crude oil differs from Pakistan's typical imports raising concerns over its compatibility with the existing petroleum infrastructure. Pakistan's refineries are optimized for a different composition, with a higher percentage of high-speed diesel and a lower percentage of furnace oil compared to Russian crude. To address these concerns, Pakistan Refinery Limited (PRL) will have to conduct rigorous quality testing of imported crude oil. The result of this assessment will play a crucial role in the government's decision-making process regarding future long-term commercial oil deals. The compatibility of the refined products with Pakistan's infrastructure and market demand will be key factors in determining the viability of continued imports from Russia.
 
While the discounted rate of Russian crude oil offers potential benefits for Pakistan's economy, careful consideration must be given to the long-term implications. Balancing the need for inflation relief with the challenges posed by composition differences and infrastructure limitations will require a comprehensive evaluation. The decision-making process, guided by the quality testing conducted by PRL, will shape the future of Pakistan's oil imports from Russia.
 
Beyond the Crude Oil: Russia-Pakistan relations
Looking ahead, there is a growing interest from both Pakistan and Russia in expanding bilateral ties beyond energy trade. Russian Foreign Minister Sergei Lavrov expressed Russia's keen interest in strengthening cooperation with Pakistan. He said: Pakistan is a “Key international partner in the joint efforts to combat common security challenges and threats, including trans-border crime and terrorism.” The arrival of discounted Russian crude oil opens up new avenues for collaboration between the two nations, marking a positive step towards diversifying Pakistan's oil sources and enhancing energy security.
 
Pakistan's decision to use Yuan and Russia's acceptance of the transaction with a discount can be seen as a subtle message to the United States. It highlights Pakistan's efforts to strengthen its ties with China and Russia, signalling a potential shift in its geopolitical alignment. By conducting trade in Yuan, Pakistan is moving away from the dominance of the US dollar, which may be viewed as a response to the strained relations between Pakistan and the US in recent years. Additionally, this development could be viewed as part of a broader trend of countries seeking to reduce their exposure to the US dollar and diversify their currency holdings. It reflects a growing sentiment among certain nations to establish alternative payment systems and decrease reliance on the traditional Western-dominated financial order.
 
References
Zafar Bhutta, “Discounted Russian oil reaches Karachi,” The Express Tribune, 11 June 2023
Zafar Bhutta, “Chinese bank opens LC for Russian oil import,” The Express Tribune, 6 May 2023
Pakistan paid in Chinese currency for discounted Russian oil- Petroleum Minister,” The Economic Times, 13 June 2023

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