The pulse | Economy | south Asia
Despite Western sanctions against Russia for its invasion of Ukraine, the US has not openly objected to Pakistan buying oil from Moscow.
Pakistan’s Finance Minister Sardar Ayaz Sadiq (left) shakes hands with Russian Energy Minister Nikolay Shulginov after the two signed the final protocol of the 8th session of the Pakistan-Russia Intergovernmental Commission (IGC) meeting on trade, economy, scientific issues and technical cooperation, in Islamabad on 20 January 2023.
Pakistan is close to a final agreement with Russia on the import of crude oil and petroleum products, with the first shipment expected to arrive in the country after a final deal is sorted by the end of March.
Russian Energy Minister Nikolay Shulginov was in Pakistan last week to discuss the deal. “We have already decided to draw up an agreement that will solve all the problems we have with regard to transport, insurance, payments and quantities. These issues are at the final stage of the agreement,” Shulginov said.
Granted that crucial details still need to be ironed out, the deal, if finalized, will have implications for Pakistan’s economy and its ties to the world.
It is the first solid start that Pakistan and Russia have taken towards establishing bilateral cooperation in oil and gas trade. In the past, talks in this regard did not go beyond expressions of interest.
Now, Pakistan not only wants to start imports in a few months, but also wants to meet 35 percent of its total crude oil requirement from Russia. If all goes as planned, trade could further reshape the bilateral relationship, allowing both countries to structure their ties more effectively.
The prospect of oil and gas imports from Russia also means that Pakistan, which already buys oil from Saudi Arabia and other Gulf states with deferred payment options, has another source of access to oil at discounted prices.
This is important as Pakistan faces a default-like situation where foreign exchange reserves are barely enough to cover three weeks of oil imports. Energy accounts for the largest share of Pakistan’s imports, and cheaper oil from Russia will help Pakistan curb its widening trade deficit and balance of payments crisis.
At this time, it is unclear which currency Pakistan and Russia will use to make the payment. However, Pakistan is expected to use the Chinese yuan to pay for Russian oil. According to the joint statement, when “consensus on the technical specification [is] achieved, the oil and gas trade transactions will be structured in a way that is mutually beneficial to both countries.” This could help ease some of the pressure Pakistan is facing on its foreign exchange reserves.
The development is also a major diplomatic success for Pakistan. Pakistan seems to have found a way around Western sanctions against Russia in the wake of the Russian invasion of Ukraine. Had Pakistan feared that the deal would provoke the United States and its allies, it may not have reached this advanced stage of negotiations with Russia. This is particularly important as Pakistan is currently negotiating another review of the release of crucial funds from the International Monetary Fund (IMF).
The rapid pace at which Pakistan and Russia are moving to close a deal indicates that the United States may not have an objection to the two countries doing business. It is also possible that Pakistan may have consulted the US regarding its decision to import Russian oil. So far, neither the US nor Pakistan’s traditional Gulf energy suppliers have issued statements protesting Islamabad’s ongoing talks with Moscow.
The US appears willing to ignore the deal. Earlier this week, emphasizing the US role in stabilizing Pakistan’s economy, State Department spokesman Ned Price said: “This is a challenge that we are prepared to meet. I know that Pakistan has been working with the IMF and other international financial institutions. We want to see Pakistan in an economically sustainable position.”
Washington is said to have deepened engagement with the current Pakistani government on financial issues. A delegation of senior officials from the US Treasury Department is expected to visit Pakistan soon to discuss various aspects of economic assistance to Pakistan. Additionally, the US Embassy in Islamabad plans to host a conference in March in Pakistan to discuss energy security issues.
Apparently, things are working out for Pakistan. Its attempt to strike a deal with Moscow is moving forward without much opposition anywhere. Islamabad should now focus on finalizing all technical details to ensure that Russian supplies arrive at Pakistan’s ports at the earliest.