Why aren’t we buying Russian oil?

Much has been made of the suggestion that Pakistan could have avoided the current economic crisis it is in if it had managed to import cheap crude oil from Russia. Former Prime Minister Imran Khan has made it the cornerstone of his political campaign – claiming he had reached an understanding with the Russians and was deposed by an international conspiracy as a result. 

While the claims may be a tad bit on the fantastical side, particularly ever since the Russian Ambassador to Pakistan recently confirmed that no MoU was signed on the trade of wheat and oil at cheaper prices with Pakistan, could looking towards Moscow for cheap fuel be our ticket out of this crisis? 

Here is the crux of it – Countries like India are indeed importing cheaper fuel from Russia and in turn undercutting the global economic crisis domestically by having cheaper oil. In fact, India is even exporting the oil at higher rates than they get from Russia. Similarly, China is also taking full advantage of the situation. 

So why can’t Pakistan? The problem is three-fold. For starters, given our particular dire-straits it might prove to be more economically disastrous to test the patience of the United States and other Western powers that have put sanctions on Russia. It would also jolt the relationship we have built with the Arab world over decades if we started buying Russia’s Ural blend of crude oil over the Arab blend. The second part of the equation is the fact that currently we do not have the facilities to process Russian crude oil in Pakistan. And lastly, even if these issues were set aside, Pakistan as a market is not large enough for Russia to consider selling their oil at a discounted price. 

Of course, there are always going to be hitches in any plan. Setting aside the obstacles and the fact that Prime Minister Imran Khan was wrong in his claims that an MoU had been signed with Russia, how viable would it be if Pakistan decided to go ahead and buy Russian oil anyways – even if not at discounted prices. 

Why buy Russian? 

Simply put, because Russian oil is cheaper generally and on top of that the Russians are desperate to sell. Waging war isn’t cheap, and Russia will very much be looking for markets to sell to as it tries to shore up revenues. That is why the impulse to turn towards Russia for oil is not entirely unfounded. 

As of this moment, many European countries are also importing Russian oil and gas despite public condemnation and sanctions. Consistent posturing by EU member states to strip Russia of its oil and gas revenues have been little more than words. 

In 2021, the EU imported 155 billion cubic metres (bcm) of natural gas from Russia. This accounts for over 40% of the EU’s overall gas consumption, with Germany’s reliance reaching 65%. Russian oil and gas sales to the EU directly fund the Kremlin’s military budget. 

Russia has exported €63 billion worth of fossil fuels since the start of the war, with the EU accounting for 71% of that, according to a research released by the Centre for Research on Energy and Clean Air. In absolute terms, Germany, Italy, and the Netherlands are among Europe’s top importers. 

At the same time, China and India are taking full advantage of the predicament as well. Indian refineries, both public and private, have increased their purchases of Russian crude on the back of the sanctions and trade restrictions from the west, which have driven most purchasers to back out of deals with Russia. This has made Putin’s Russia somewhat desperate to increase revenues as waging a war is not cheap, this led to offers at lucrative discounted rates. 

According to Bloomberg projections based on trade data, India purchased upwards of 40 million barrels of Russian oil from late February to early May, accounting for 20% higher flows for the entire year of 2021. According to Kpler statistics, Russian oil arrivals in India increased to 740,000 barrels per day in May, increasing from 284,000 barrels in April and 34,000 barrels a year ago. 

Access to low-cost crude is already helping to enhance India’s petroleum imports, which increased by over 16% in April alone compared to the previous year. According to Indian government data, the Eurasian (including Russia) region’s oil contribution increased to 10.6% in April from 3.3 percent a year earlier. Cheaper oil therefore gave the BJP government fiscal space to reduce domestic petrol and diesel prices while the prices in the rest of the world continue to inflate.

At the same time China continued to acquire considerable energy from Russia, with imports of oil, gas, and coal increasing by 75% by almost $6 billion in April. According to Chinese customs data, imports of Russian liquefied natural gas increased by 80% year on year to 463,000 tonnes. Imports of crude followed a similar trend, increasing by 4% to 6.55 million tonnes for the year. 

Could Pakistan do the same? 

The recent increase in fuel prices have wreaked pandemonium in the economy. And we are being told that a cheaper source of fuel is just a little north of us. Currently, Pakistan consumes approximately 500,000 barrels per day (bpd) in which Russian oil has no share. In India, Russian oil has a 10% share in comparison. 

Hypothetically speaking, if we shifted to the same ratio of 10% Russian oil, that would translate into 50,000 bpd. Given that we purchased this oil with no discounts would amount to approximately $4.5 million per day and a total of $1.6 billion annually. Even if Pakistan was refused any discounts it would still be cheaper considering the fact that the primary export blend Ural brent is cheaper than Arab blends. 

Now if we did the same calculations using a hypothetical discount of 30% on the Ural Brent price that would mean a per barrel rate of $64. Using the same consumption levels as above would generate a revenue of approximately $1.2 billion for Russia on an annual basis. 

Even if we manage to transition completely to Russian oil, it would only generate $16 billion for Russia. While $16 billion may seem like a lot, it is dwarfed by the revenues coming from Europe, India and China.

It wouldn’t be wrong to say that purchasing Russian oil would have saved the government invaluable foreign exchange in the range of $400 million if the share of Russian oil in imports was 10%. That would have helped the government in saving foreign exchange as well as save some of the subsidies that the government had to give in the form of price differential claims. 

At the same time it is important to mention that the government paid north of Rs 150 billion for subsidies on petrol and diesel. If we converted the savings of $400 million into the domestic currency it would amount to Rs80.8 billion at the current exchange rate (PKR200/USD). 

If we were to compare that to that of China, India or Europe even at the current levels, $1.2 billion annually for Russia is pocket change. Comparing the revenue that Russia has earned approximately $66 billion from EU and an additional $3.6 billion from India since the start of the war. This effectively disproves the claims that the regime change was orchestrated because Pakistan was getting cosy with the Russians. 

The effect on our foreign relations 

That being said it is also clear that Pakistan would not be allowed to go scott free as has been the case with both China and India according to some foreign policy experts. It must be understood that Pakistan has a smaller market and in a much weaker economic position compared to China and India, it can reasonably be concluded that Pakistan would have had to face sanctions. Not to mention that Pakistan has desperately been trying to get back together with the IMF, importing Russian oil would’ve closed that door altogether. 

Another key underlying factor that is often ignored on TV is our strategic and economic understanding with Saudi Arabia and other gulf states. This relationship built over decades will be jeopardised and constrained if we start looking towards Russia. The Saudis and Russians aren’t on best terms as was the case in the 2020 oil price war between the two. 

Can we refine Russian oil ?

Apart from this another technicality that is often ignored is the fact that the Russian Ural oil has a relatively higher content of sulphur, therefore the price of this blend is lower than the market benchmark. 

Refining high-sulphur crude oil is costly owing to its high oxidation and corrosion properties. The costs of excessive oxidation and corrosion damage caused to a refinery not adequately equipped to sustain high sulphur crude will outweigh the revenues from the cheaper oil.

Apart from the Parco refinery which is a mild conversion refinery, all other refineries utilise hydroskimming. We won’t dig into the engineering and technical details of the two different types of refineries, the point of the matter is that our refineries cannot process it. 

As far as the capacity of the refineries that are able to refine Russian goes, only Parco has the ability according to an industry expert. That makes the argument of importing from Russia even weaker given that local refineries would have to undertake massive upgradation. 

Can we pay for it ? 

President Putin said in March that ‘unfriendly’ countries will have to pay for Russian gas in roubles in retaliation to sanctions against Russia following the invasion of Ukraine or have their gas supplies suspended. This was a reply to the sanctions that these nations had immediately agreed upon in response to Russia’s invasion of Ukraine. 

This put the West in a very precarious position as this statement would practically defeat the purpose of the sanctions targeted at destroying the value of the rouble. However as the EU weans itself off of Russian energy the revenues of Russia have not been affected despite lower export volumes. 

Following the sanctions on Russia any financial transactions with the country are seen as high risk, especially in the case of Pakistan. To get Russian oil, nations must first purchase the currency, which may be done at the Central Bank of Russia or on the foreign exchange market.

Dealing directly with Russia’s Central Bank, which has been sanctioned, will be difficult. Buying rubles on the open market will necessitate the use of non-sanctioned Russian banks to complete the transaction. Despite this, if Pakistan is able to position itself to purchase oil from Russia, we’re still in the FATF grey list and any deals with Russia can potentially jeopardise this. Also the country has recently got back on the IMF program after making extremely painful decisions in terms of fuel prices. By making deals with Russia the US lender and other financial organisations might be hesitant to offer loans. 

If we were to compare ourselves with China or India we would be sorely mistaken. Both countries enjoy very strong economic and military ties and have traditionally leaned more towards the former Soviet Union. 

This has allowed both of them to circumvent the sanctions imposed by the west. China has an alternate equivalent to the Western SWIFT called Cross-Border Interbank Payment System (CIPS). Russia also has a similar system called System for Transfer of Financial Messages (SPFS). 

Although these systems are relatively newer as compared to SWIFT, they still have a similar potential. Both the countries are using these systems to side step the sanctions. 

Similarly India has bilateral trade agreements with Russia dating back to the 1950’s that allow the countries to make trade payments denominated in their respective currencies. At the same time India isn’t being pressurised as much by the West as it’s viewed as a key ally in the region to challenge China. 

Bottom line

As much as we all want cheaper fuel, importing Russian oil might not be the answer. Although it might provide the public and government with much needed relief, the costs to refineries which are strategic assets as well as the diplomatic capital burned would be too much. Not to mention that it would make it extremely difficult to secure loans that we need so desperately from time to time. 

The economy is already struggling and the country as a whole cannot afford to burn bridges and get on the bad side of major global players especially at this tricky crossroads we find ourselves in. A very surgical and diplomatic approach is needed to navigate the seas ahead.