Pakistan pins hopes on Russian energy imports shrouded in secrecy

ISLAMABAD — Pakistan’s government is trumpeting its first Russian oil imports as a game changer for the sinking economy, but experts stress that it is too early to say how much the opaque arrangement will help.

A ship carrying the equivalent of about 330,000 barrels of Russian crude oil docked at the port of Karachi on Sunday. Another vessel with slightly more oil is expected to arrive next week. Pakistani Prime Minister Shehbaz Sharif termed the imports transformative for the country.

“This is the first-ever Russian oil cargo to Pakistan and the beginning of a new relationship between Pakistan and the Russian Federation,” he tweeted.

The Russian oil will be refined by Pakistan Refinery Limited (PRL) in a trial run. The refinery will submit a report to the government about the technical and commercial viability of using the oil. But even before that process is complete, the government is playing up the benefits for inflation-weary Pakistanis.

Musadik Malik, minister of state for petroleum, told local media that once Pakistan starts receiving a regular supply of Russian oil, it will result in a major decline in fuel prices. Malik claimed that Islamabad has received a favorable rate from Moscow on the purchases, without giving specifics.

Pakistan paid around $13 billion to import oil for 80% of its needs in fiscal 2022-2023. But like many emerging economies, it has been slammed by the inflationary pressures unleashed by Russia’s invasion of Ukraine, compounded by a domestic political crisis that has at times turned violent.

The new imports come as Pakistan races the clock to secure frozen bailout money from the International Monetary Fund under a loan package that expires June 30. Hopes for that appeared to further fade this week, when Esther Perez Ruiz, the IMF’s resident representative for Pakistan, told media that Pakistan’s budget for next fiscal year “misses an opportunity” to broaden the tax base, although she said the lender was still willing to work with the government.

Moscow, meanwhile, has been sanctioned by Western allies over the war. But Pakistan’s nemesis India has seized the opportunity to buy affordable Russian oil with little backlash, and now Islamabad is banking on taking a similar path.

Yet the benefits may not be so easily extracted.

Aftab Zafar, an oil adviser in Islamabad, worries that any discount Pakistan receives on Russian oil will be offset by higher transportation costs. Russian oil also produces higher yields of furnace oil, rather than diesel, which does not match well with Pakistan’s needs.

Zafar added that the imports from Russia are a pilot project cloaked in mystery. Few details have been made public. “Transparency is required to understand the economics and commercial viability of Russian oil imports for Pakistan,” he told Nikkei.

Pakistan’s minister of state for petroleum says Russian oil imports will greatly lower prices, but few details of the purchases have been made public.   © Reuters

G.A. Sabri, a former federal secretary for petroleum and natural resources, said, “Technically, the refining of Russian crude should not be a problem. The economic aspect is being evaluated by PRL which is a seasoned refinery.” Still, Sabri said it is premature to declare Russian oil imports a success.

Another question concerns how, exactly, Pakistan is compensating Moscow for the oil. Petroleum Minister Malik revealed that Islamabad is paying in Chinese yuan, a break with the practice of paying in dollars, amid heavy pressure on the country’s foreign reserves. But it is unclear what arrangements have been made to facilitate the transactions.

“Paying in yuan is a major shift, but we are not sure how much yuan reserves Islamabad has at its disposal,” Sabri noted.

While the government is celebrating the arrival of Russian oil, it is also shoring up its supply of liquefied petroleum gas (LPG). On Wednesday, 10 containers carrying 5,000 tonnes of LPG reached the Torkham border in Pakistan from Uzbekistan, via Afghanistan. According to local media reports, 5,000 tonnes of LPG from Turkmenistan and 10,000 tonnes from Russia will also reach Pakistan via Afghanistan soon.

“LPG being imported from Afghanistan is a good development,” said Sabri, the former petroleum secretary. But again, he questioned the lack of transparency. As long as “the price at which LPG is purchased is not revealed, this will be a shady deal,” he said.

Further boosting its fuel supplies, Pakistan on Thursday announced it will buy one load — the volume has not been specified — of liquefied natural gas from Azerbaijan per month at concessional rates.

Abdul Rehman, a capital markets and energy expert based in Lahore, termed this a positive development for energy security. “It is a take-and-pay deal with no commitments attached,” he said. He noted that importing from Central Asia can save freight costs over existing sources in the Gulf and Iran, as 70% of demand is in the northern parts of Pakistan — closer to Central Asian states.

Sabri agreed that LNG imports are necessary in the short term. But in the long term, he said, “Pakistan should tap its own natural gas reserves.”

Zafar, the oil adviser, said the deal with Azerbaijan is part of a diversification strategy. “It signals a message to other LNG exporters that Pakistan has other options if they do not enter into an agreement to sell LNG to Pakistan, for which LNG is a critical commodity,” he said.