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Home»Finance»Can Russia Help Cash-Strapped Pakistan?
Finance

Can Russia Help Cash-Strapped Pakistan?

July 15, 2024No Comments8 Mins Read
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Can Russia Help Cash-Strapped Pakistan?
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Pakistani Prime Minister Shehbaz Sharif attended the Shanghai Cooperation Organization’s recent summit in Astana on July 3-4, 2024. On the sidelines of the summit which gathered the SCO’s leaders, Sharif met multiple world leaders including China’s President Xi Jinping, Russian President Vladimir Putin, and Turkish President Recep Tayyip Erdoğan. 

Sharif expressed his pleasure at meeting with Putin, congratulating him on his re-election as president for the fifth time. While recalling the 2022 Samarkand SCO summit, Shehbaz underscored the importance of bilateral trade and recalled the existence of a barter trade system between the two states from the 1950s to 1970s, when trade between Pakistan and Russia was at its height, spanning across multiple sectors such as leather, machinery, and more. During the meeting, Putin suggested an increase in crude oil supplies and cooperation in the agro-industrial sectors. Russia has actively supported Pakistan by supplying grains in the food sector, and other logistics to increase trade between the two countries. While keeping an eye on Pakistan’s struggling economy, Shehbaz reiterated the need for cooperation in the banking and financial sectors to revitalize trade via the barter system, thus supporting Pakistan’s crippling economy.

Pakistan has been facing a depreciation in economic growth for the last half a decade. Pakistan’s gross domestic product growth rate has undergone a rollercoaster in recent years: It was 2.50 percent in 2019, a decline of 3.65 from 2018; GDP contracted 1.27 percent in 2020, a decline of 3.77 from 2019; the GDP growth rate was 6.51 percent in 2021, an increase of 7.79 percent from 2020; and the GDP growth rate of Pakistan was 4.71 percent in 2022, a decline of 1.81 percent from 2021. 

The GDP growth rate of Pakistan’s economy was 4.71 percent in 2022. For comparison, that’s below the growth rate of Kenya, which was 4.85 percent in FY 2022. Unfortunately, the recorded GDP of Pakistan was 2.4 percent in 2023 and GDP per capita in Pakistan was recorded at $1663.99, which was equivalent to 13 percent of the world’s average. In April 2024, the State Bank of Pakistan announced that it had $13.8 billion in its foreign exchange reserves, depicting the condition of the economic growth of Pakistan. In June 2024, the inflation rate in Pakistan was measured at 12.6 percent, an acceleration from 11.8 percent in May 2024. 

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In the budget for FY 2024-25, the government of Pakistan has imposed plenty of taxes in different sectors: Export income tax, capital value tax (CVT) on property, a surge in federal excise duties on flight tickets, a petroleum levy increase, a 10 percent surcharge on “high earners,” and high tariffs on electricity and gas bills. 

Pakistan’s economy has been in a very grave state for the last half-decade. Its declining GDP growth rate shows the fragile and declining economic situation, making it a great challenge for Pakistan to provide basic necessities to its people at affordable prices.

In such times, a state needs to revitalize its economic cooperation and look for vibrant trade partners to deal with its economic issues. In this regard, as a trade partner for Pakistan, Russia can help Islamabad overcome its economic and energy crises. During the Soviet-Afghan war, relations between Pakistan and the USSR were strained, but new agreements and projects, such as the construction of the Karachi steel mill and Guddu Thermal Power Station in Northern Sindh, put them back on track. 

In 2007, when Russian Prime Minister Mikhail Fradkov paid an official visit to Pakistan for three days and met with then President Pervez Musharraf and Prime Minister Shaukat Aziz, both sides had “in-depth discussions” to improve bilateral relations, particularly emphasizing enhancing economic relations. In October 2012, Russia and Pakistan signed a MOU between the closed joint-stock company (CJSC) “Transmashholding” and the Ministry of Railways of Pakistan for cooperation in locomotive manufacturing. In 2013, they signed a protocol to enhance further cooperation in future deliveries of Russian locomotive diesel engines to Pakistan. 

Russia supported Pakistan in tackling its energy hurdles by engaging in discussions of converting the Muzaffargarh power plant to coal-fired generation, technical training in the oil and gas sectors, exploration of minerals, offshore development, and increasing power storage capacity with the help of Russian companies and its engineers. Russia also supported the regional energy project CASA-1000, an electricity transmission system, and reiterated its completion and implementation with the help of the technical support of Russian companies. 

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Recently, as per an agreement signed in April 2023, Russia agreed to deliver 100,000 metric tons of crude oil to Pakistan at a discounted price. The Economic Coordination Committee (ECC) of the cabinet division chaired by Federal Minister for Finance and Revenue Muhammad Aurangzeb approved the purchase of 300,000 metric tonnes of wheat from Russia at an estimated cost of $372 per tonne. The first shipment of 50,000 metric tonnes of wheat arrived at Gwadar port on March 2, 2023, helping Pakistan overcome its wheat crises. 

Over the past few decades, Russia and Pakistan have enjoyed an amicable trading relationship, but the potential of trade is estimated to be $1 billion. As per FY 2022-23 Pakistan’s total trade volume with Russia was $920 million, Pakistan’s exports to Russia were $846 million, while imports from Russia were $74 million during this period. For comparison, Pakistan’s total trade volume with Bangladesh in 2023 was $1.5 billion, which is far more than the volume of trade between Pakistan and Russia. There is clearly a need for both sides to enhance bilateral trade.

In light of much-needed trade enhancement, the two leaders met on the sidelines of the SCO summit and discussed ways to enhance cooperation in various sectors, particularly in the energy and agro-industrial sectors. According to a statement given by Sharif, “We can certainly enhance our trade, which is at the moment approaching $1 billion.” 

Getting a supply of discounted crude oil from Russia will help Pakistan produce electricity at a low cost. It will help the power sector overcome the recent issues of overbilling of electricity in Pakistan. Furthermore, it will reduce the price of petroleum, which will have a positive impact on Pakistan’s transportation sector. Both parties agreed on providing a friendly environment for trade, both for local and international businessmen. 

It is important to note that bilateral cooperation between states sometimes poses secondary diplomatic repercussions as dictated by the global dynamics of contemporary times. Even though energy and trade cooperation with Russia will be helpful for Pakistan to overcome the recent electricity and economic issues, at the same time, it will create a lot of diplomatic challenges for Pakistan due to the persisting Russia-Ukraine war. 

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The pre-trial chamber of the U.N.-backed International Criminal Court (ICC) issued an arrest warrant for Russian President Vladimir Putin in March 2023 in the context of an allegation of war crimes related to the unlawful deportation of children from the occupied territories of Ukraine to Russia. The EU has imposed economic sanctions on Russian companies, including a ban on 2,200 individuals and entities entering EU states, such as  Volga Dnepr Group, Sovcomflot shipping companies and others, and frozen their assets due to their involvement in the Ukraine war. 

Cooperation or any significant business deals with Russia may incur diplomatic consequences for Pakistan, particularly in economic spheres where Pakistan relies on the U.S. and the EU. Pakistan could face economic sanctions from the U.S. and international bodies like the United Nations and the Financial Action Task Force (FATF). The EU is one of the major trade partners of Pakistan in both imports and exports, and Pakistan enjoys special status as a GSP-Plus partner, which is significantly important for the struggling economy of the state. According to official documents, Pakistan’s total trade volume with the European Union stood at $14.2 billion in FY23. Exports to the EU are almost $9.49 billion, while imports stood at $4.71 billion in FY23. 

Consequently, Pakistan needs to maneuver in a careful manner, promoting cooperation with Russia while finding a middle ground to maintain ties with the EU and adopting diplomatic precautions. 

In conclusion, as a struggling economy, Pakistan needs to revitalize its trade and economic choices and develop strong economic relations with newer partners such as Russia, particularly in the energy and agro-industrial sector, to overcome its energy and economic issues. Additionally, Pakistan’s economy largely relies on cooperation with the EU, U.S., and Western economic institutions to secure economic assistance from the IMF, maintain GSP-Plus status, and attract foreign aid which are crucial for the economy. Moreover, Pakistan needs to adopt a balanced approach to foreign policy to establish friendly relations with both East and West, particularly with China, Russia, the U.S., and the EU. This strategic stance will not only be fruitful for fostering economic growth but also for improving the image of Pakistan in the international arena.

CashStrapped Pakistan Russia
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