Russia appears to be diverting the focus of its economic interests towards the East after serious setbacks in the West, where its investments for centuries reached a dead-end, including disruption in gas supplies and confiscation of assets. It is increasing trade ties with regional countries like China and India, particularly in the fields of oil and energy supplies.
In recent months and years, Pakistan and Russia have been warming up to a new phase of bilateral economic and strategic relations after more than 50 years of unease over the cold-war era. Despite political wrangling, all three- past governments of PPP, PMLN and PTI have been trying to build bridges with Moscow.
The PPP tried to settle a longstanding dispute between Pakistan and Russian businesses, but ultimately, the PML-N succeeded in persuading the Russian side to bring down their claims against a Pakistani firm to $94 million in November 2015 instead of $102m. With the payment of said claims to Russia in December 2019, the decades long trade dispute stood settled, which had been a major irritant to the revival of economic relations.
Former Prime Minister Imran Khan was on an official visit to Moscow in February last year, the day Russian forces entered Ukraine. Prime Minister Shehbaz Sharif also met President Putin in Samarkand in September last year, and things started to progress. The two sides last Friday signed three agreements on custom matters for the exchange of data and documents of imports and exports, besides cooperation in the field of airworthiness of aeronautical products.
After half a century, Pakistan and Russia have been warming up to a new phase of bilateral economic and strategic relations
They also set a deadline for March this year to sort out technical details like insurance, transportation, volumes and payment mechanism for the supply of oil and oil products.
But at least four areas which remained under focus but not discussed in public pertained to the diversion or redirection of trade between the two countries through Kazakhstan and Kyrgyzstan. The Russian energy minister also hinted at the settlement of trade transactions in the currencies of friendly countries to sidestep the US dollar.
Export and import of goods through road transport in the wake of restricted access through air or sea route could also be a stopgap arrangement, while barter trade under which Pakistan could provide military equipment to Russia in addition to textiles, apparel, footwear, backpacks and medical supplies etc.
Pakistan has already set up an inter-ministerial working group on connectivity, trade, and investment which has decided to identify areas for enhancement of bilateral trade, particularly in mining, exploring barter exchange mechanisms, and ways to enhance bilateral trade by land routes.
In addition, the two sides are in discussion on banking communications, and the central banks of the two sides will have to play a proactive role in facilitating settlement arrangements for banks and financial institutions to help businesses. Pakistan is following western banking arrangements like IBAN (international bank account numbers) and Swift Codes, which is not acceptable to Russia for obvious reasons.
Instead, it uses its own system of SPFS — system for the transfer of financial messages of the Central Bank of Russia. Currently, the banks in the two countries cannot communicate, and hence this would be a major development.
Over a short period of time, Pakistan has been able to secure about 750,000 tonnes of wheat from Russia on a G2G (government-to-government) basis at competitive rates, and shipments for the first chunk of 300,000 tonnes are nearing completion at Karachi port while the remaining 450,000 tons will be brought through Gwadar Port with additional transportation costs.
Official records suggest that following the Russia-Ukraine crisis and the subsequent imposition of sanctions on Russia by the US and its allies, Pakistani exporters had been facing problems in the issuance of financial instruments by Pakistani banks for the export of goods to Russia.
Although these unilateral sanctions are not binding on Pakistan, local banks are reluctant to undertake transactions involving any Russian bank, entity, shipping company or port, etc, due to possible implications of such transactions on their correspondent relationships.
Only a few commercial banks, like Soneri Bank and Allied Bank, are processing payments for exports to Russia. Currently, trade is being carried on via land routes and filing of goods declarations via third countries like Afghanistan, Kazakhstan, and Uzbekistan.
In partnership with allies and partners, the US Department of Treasury Office of Foreign Assets Control (OFAC) imposed sanctions that target the core infrastructure of the Russian financial system and bars Russia from the global financial system. As a result, the Russian Central Bank assets have been frozen, and Russian banks have been removed from the international financial messaging system, Swift.
The US and UK have also banned Russian oil imports. The EU nations that have been importing 2.2m barrels per day (bpd) of crude oil from Russia and 1.2m bpd of oil products have agreed to gradually stop importing any oil from Russia that comes in by sea, which rules out about two-thirds of the total.
However, taking advantage of the lower prices of Russia’s Ural crude, a number of countries, including India, have ramped up oil imports from Russia amid soaring international prices and no secondary sanctions on countries doing business with Russia.
At the G-7 Leaders Summit in Bavaria in June 2022, a mechanism was established to cap Russian oil prices and prohibit services like insurance and financial services to cargoes carrying Russian oil above the price cap. Russia has decided not to provide oil to countries that abide by the price cap, except with a waiver by President Putin himself.
Russia is expected to soon have direct flights from Pakistan and allow its air corridor with Central Asian Republics (CARs), besides increasing the scope of scholarships for technical and scientific educational disciplines, which are prohibited for Pakistan in the western world.
The air-corridor opening could be a major development because it currently requires 21 hours to reach Russia and adjoining Turkmenistan, Tajikistan, Azerbaijan, Kazakhstan etc. The direct air traffic will ensure travel between Islamabad and Moscow in four hours and provide direct access with CARs as well.
Published in Dawn, The Business and Finance Weekly, January 23rd, 2023