Due to the severe shortage of foreign exchange reserves, Pakistan has expressed interest in purchasing Russian crude at discounted prices to ease its financial burden. The State Bank of Pakistan’s foreign exchange reserves recently fell to a nine-year low of $3 billion, according to the central bank. Flooding during the third quarter of 2022 also impacted the economy, resulting in $16 billion in losses.
Opportunity for significant savings from Russian oil
If Pakistan could import cheap Russian oil, it could save about $1 billion a year on its oil imports. This could be done by purchasing distressed Russian oil shipments at prices 30% below the international market price. Pakistani refineries, such as Pakistan Refinery Limited and Pak Arab Refinery, could also increase the amount of Russian crude in their blend to 50% and 30%, respectively.
Specification, configuration and logistics issues
Despite the obvious advantages of importing cheap Russian oil, Pakistani refineries and fuel distributors need to assess the technical, commercial, logistical and financial suitability of such offers. Refiners found that Russian crude specifications were better suited to Pakistani refineries for lighter, sweeter grades, such as ESPO Blend and Sokol. However, the transportation cost for these cargoes would be much higher than for Persian Gulf cargoes, as the cargoes must come from the Russian Far East, which would cost three times as much as Persian Gulf transportation.
Existing supply contracts with Middle Eastern suppliers are also an obstacle, and Pakistan can only import a maximum of 25% of its oil from Russia. Pakistani banks are also unwilling to open letters of credit for local trading companies seeking to trade in Russian oil due to international sanctions and payment problems.
While the purchase of cheap Russian oil could help Pakistan reduce its oil import costs and ease its financial burden, there are still many logistical, commercial and financial hurdles to overcome for this to happen. Refineries and fuel distributors also need to assess the specifications and configurations of Russian crude to determine its suitability for Pakistani refineries.
