Iranian oil exports to Pakistan hindered by sanctions and thriving black market

F.M. Shakil , February 7, 2023 — Despite defying US sanctions on Russian fuel imports, Islamabad has shied away from doing the same with Tehran, hindering potential lucrative bilateral trade between the two neighboring states.

Pakistan appears willing to import Russian crude oil despite US sanctions, but is wary of importing Iranian gasoline for fear of annoying Washington and the EU. The fact that Islamabad has different rules for dealing with Moscow and Tehran reveals fundamental inconsistencies and dependencies in Pakistan’s foreign policy.

Pakistani authorities maintained that their deal to acquire Russian crude oil did not violate any laws or limits. In a late January interview with Russian satellite network RT, Pakistan’s Petroleum and Energy Minister Musadik Malik downplayed potential US retaliatory measures, stating, “I do not see any complications; we are not violating or doing anything the world has never seen before.”

Malik rightly pointed out that Europe continues to import energy from Russia, while Pakistan only purchases a small fraction of Europe’s amount.

Price cap on Russian oil

Malik’s confidence conceivably stems from the G7 and EU countries’ $60 per barrel cap on Russian oil to prevent Moscow from using the proceeds to fund its war against Ukraine. The US also, quite unexpectedly, supported Islamabad’s position last week.

During a question-and-answer session with journalists, US State Department Spokesman Ned Price said that Pakistan and other nations that have not formally committed to the price cap may also benefit from the discounts on Russian oil.

However, it remains to be seen if Moscow is willing to sell oil at the capped price. Russia, which is the world’s second-largest oil exporter, has already declared that it will not accept the restriction and will continue to sell oil, even if it has to cut production.

In December 2022, Russian Deputy Prime Minister Alexander Novak argued that the western price cap measure was a flagrant violation of free trade laws which disrupted the global energy markets by causing a supply crisis.

Alternative consumers 

China, India, Turkiye, and several other countries are not adhering to the G7 price formula, and despite the price cap on Russia’s seaborne oil supply, its oil exports did not see any meaningful cut, despite fierce western efforts.

In 2021, around 3 million barrels per day (mb/d), or 45 percent of Russian crude oil exports were imported by the EU. The price cap may reduce that amount to a little more than 0.25 mb/d, but Russian oil will still flow into the EU. This is largely because Germany and Poland have agreed to stop importing oil through the northern Druzhba pipeline by 2023, while Bulgaria has been permitted to keep importing oil from Russia by sea.

The immediate impact of this ban is a decrease in demand for Russian oil and, consequently, its relative price. But oil markets are interdependent and will themselves independently test the global appeal for Russian fuel. When the EU appealed to world markets to replace their purchases from Russia, new and alternative purchasers for Russian barrels came forward instead. The global oil trade is very likely to simply re-equilibrate itself with perfect market corrections.

As the EU increasingly spurned Russian oil, Russia found new consumers for approximately 1 mb/d of displaced crude oil, albeit with price discounts relative to the global market. Russia is now on the lookout for clients to take an additional 0.8 mb/d of exports through western ports.

On a four-week rolling average basis, the total volume of crude expected to wind up in Asia remained at 2.28 mb/d, including 89,000 barrels per day on tankers whose point of discharge is unknown. Fuel cargos bound for Asia were purchased at a price exceeding the $60 per barrel G7 price cap at the time of loading.

Media reports claim that Eastern Siberia Pacific Ocean (ESPO) crude oil prices exceeded the cap in Asia. The reports say that China’s teapot refiners had placed orders at $67.11 per barrel with Russia in December last year. To bypass the price limit, Russia is using its own tankers and insurance coverage.

Pakistan’s oil imports from Iran

Pakistan has a hard time securing enough energy supplies, and the Iranian oil in its backyard is more affordable than its Russian counterpart. However, US and EU sanctions make it difficult for Islamabad to engage in official trade with Tehran.

Tehran is now seeking to establish a land route trading system with Islamabad, similar to the one Pakistan has enjoyed with Afghanistan through the Sistan-Balochistan province’s 1,000-kilometer common border, to curb the illegal trade in Iranian oil and consumer goods.

The informal border trade with Pakistan, according to Iranian officials, has risen to over $5 billion per annum and should ideally be moved into legal channels to improve state-to-state bilateral trade relations. Tehran has also suggested bartering trade in local currency with Pakistan to transfer the $5 billion worth of illegal commerce between the two countries at the Sistan border into the formal, official trade sector.

Iran’s Consul General in Karachi, Hassan Nourian, stated during a visit to the Karachi Chamber of Commerce and Industry in December last year that if Pakistani authorities allowed legal trade across the Sistan border, trade volumes between the two countries could surpass $5 billion – up from the current $1.5 billion that flows within legal channels.

Nourian said this would address urgent, mutual, national needs, whereby Iran could transport natural gas, crude oil, and petrochemicals to Pakistan in exchange for Pakistani agricultural products.

Opposition to regulated trade with Iran

Majyd Aziz, president of the UN Global Compact and a former president of the Karachi Chamber of Commerce and Industry (KCCI), told The Cradle that various Pakistani “interest groups” do not want Islamabad to regularize trade with Iran.

“Countries, organizations, and individuals with vested interests in the region oppose the development of bilateral trade between neighboring nations. These parties prevented the government from establishing seven border markets in Iran and five in Afghanistan,” he said, noting that the Saudi factor has also contributed to the deterioration of trade relations with Iran.

Despite repeated pledges, Aziz lamented, the Pakistani Ministry of Commerce has yet to execute the barter trade modalities necessary to restart regular trade with Iran. Similarly, he stated that there were no direct banking connections between the two nations to facilitate trade.

“By not directing the unlawful border trade to the legitimate sector, we deprived ourselves of a low-cost oil supply from Iran, which India, China, and Afghanistan already enjoy,” he explained.

In an exclusive interview with the Islamic Republic News Agency (IRNA) in August 2022, Miftah Ismail, a former Pakistani minister for finance and revenue, admitted that unregistered trade between the two countries was a burden on the economy. He stressed that trade should rightfully flourish between Iranian and Pakistani border communities.

“There is no downside to formalizing this trade, as nations often prefer to do business with their neighbors first. I look forward to the day when there is more trade between Iran and Pakistan,” Miftah added.

Lucrative cross-border smuggling

In the absence of a border trade mechanism, Iranian oil smuggling through the Balochistan border involving the illegal transfer of crude oil, fuel, and other petroleum products is rampant.

This illegal activity is usually perpetrated by mainly Pakistani organized crime networks and is facilitated by both local and international actors. The smuggling of Iranian oil through the Balochistan border is a major source of income for these criminal groups and helps to fund activities such as drug trafficking, human trafficking, and terrorism.

If the illicit oil trade is legalized and bilateral trade with the neighboring countries is restored, Pakistan’s civil and military bureaucracies stand to lose spectacular earnings from Iranian oil smuggling. According to credible business sources in Balochistan, the highest-ranking border forces and local government officials profit billions from the illegal oil traffic between the two neighboring countries.

“They do not want to formalize the transaction and risk losing a substantial amount of money due to the massive smuggling of Iranian oil,” a reliable business source told The Cradle.

“The Pakistani government is dragging its feet on establishing formal border trade with Iran primarily because Islamabad is concerned that trading with Iran, which is already subject to US and EU sanctions, would send the west the wrong message,” the source added.

Pakistan, which is susceptible to US influence, fears a backlash from Washington if it pursues bilateral trade expansion with Iran. The Iran-Pakistan gas pipeline, also known as the “Peace Pipeline,” has been shut down for the past ten years because of western sanctions against Iran.

This further showcases Washington’s dogged efforts to isolate Iran, at least economically. Numerous factors motivate the US to oppose this pipeline project, whose completion would represent a symbolic win for Iran in the realm of oil exports. It also raises the possibility of a deeper relationship between China and Iran, particularly in light of Iran’s ambition to participate in the China-Pakistan Economic Corridor (CPEC).

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