Russia: Lost oil revenue bonanza for shippers and refiners

Western sanctions on Russia have significantly reduced state oil revenues and diverted tens of billions of dollars towards shipping and refining firms, some with Russian connections.

Most of the winners from the sanctions are based in China, India, Greece and the United Arab Emirates, a handful are partly owned by Russian companies.

None of the firms is breaching sanctions, but they have benefited from measures designed by the European Union and the United States to reduce the revenues of what they call Russian President Vladimir Putin's war machine.

As the Ukraine conflict heads into a second year, the calculations show that Russia's income has dropped but the volume of exports has remained relatively stable despite sanctions.

Putin told the West that sanctions would trigger an energy price rally. Instead, international benchmark Brent oil prices have fallen to US$80 per barrel from a near-all-time high of US$139 in March 2022, weeks after the start of the war. Before Moscow's invasion of Ukraine began on February 24 last year, Brent traded at around US$65 to US$85 per barrel.

After the Group of Seven (G7) industrialized nations imposed a price cap on Russian oil in December 2022, Moscow's oil export revenues fell by 40%YoY in January this year, Russia's finance ministry said.

"Low official oil price meant that the Russian state budget has suffered in recent weeks," Sergey Vakulenko, non-resident fellow at the Carnegie Endowment for International Peace, said.

Vakulenko was a former head of strategy at Russian energy major Gazprom Neft. He left the firm and Russia days after the start of the war.

"Judging by the customs statistics, some of the benefit was captured by refiners in India and China, but the main beneficiaries must be oil shippers, intermediaries and the Russian oil companies," he added.

Sanctions on Russia - probably the harshest imposed on an individual state - include outright bans on purchases of Russian energy by the United States and the EU, as well as bans on the shipping of Russian crude anywhere in the world unless it is sold at or below US$60 per barrel.

Russia has diverted most crude and refined products to Asia by offering steep discounts to buyers in China and India versus competing grades from the Middle East, for instance.

The ban on shipping and the price cap have made buyers wary and forced Russia to pay for transportation of crude as it does not have enough tankers to carry all of its exports.

As of late January, Russian oil firms were offering discounts of up to US$20 per barrel for crude to buyers in India and China.

In addition, Russian sellers have also paid up to US$20 per barrel to shipping companies to take crude from Russia to China or India.

As a result, Russian companies received only less than US50 per barrel of Urals at Russian ports in January, down 42%YoY and just 60% of the European Brent benchmark price, according to the Russian Finance Ministry.

By comparison, a US exporter of Mars crude - a grade similar to Urals - would pay about US$5 to US$7 per barrel for shipping a cargo to India. Given a discount of US$1.6 per barrel versus the US benchmark WTI, a US exporter would collect some US$66 per barrel at a US port, or 90% of the benchmark price.

With output of 10.7 million barrels per day (bpd) in 2022 and exports of crude and refined products of 7.0 million bpd, the discount and additional costs would see Russian producers' revenues falling by tens of billions of dollars in 2023.

The head of the International Energy Agency (IEA), Fatih Birol, said on Sunday the price cap reduced Moscow's revenue by $8 billion in January alone.

However, because some lost revenues are captured by Russian firms, the exact hit to earnings of producers and the state is difficult to quantify.

As a further complication, some Russian oil grades, including Pacific grade ESPO, are also worth more than Urals.

 

Pakistan: Petroleum sales down 20%YoY

Sales of petroleum, oil and lubricants (POL) products were reported at 1.44 million tons for January 2023, up 8%MoM but down 20%YoY, as compared to 1.34 million tons for December 2022 and 1.8 million tons for January 2022. This marks the second consecutive month with petroleum sales reported below 1.5 million tons.

There was a slight increase of 8%MoM) due to rumors of a potential price hike, which may have prompted some hoarding. Overall, total POL sales remained down by 19%YoY during 7MFY23, reported at 10.5 million tons as compared to 12.9 million tons for the same period last year.

The decline is largely due to a drop in organic demand, as petroleum sales tend to be closely tied to the overall health of the economy. This is evident by a 3.6% decline in LSM activity during June-November 2022, a 8%YoY drop in power generation during the 1HFY23, and a 41%YoY decrease in auto sales during the same period. The ongoing wave of inflationary pressures has also gripped the economy and contributed to the overall reduction in purchasing power for the spending public. Furthermore, the volumetric downturn may also be due to suspended travelling along the motorways due to fog, reducing heavy transport mobility during the month, as depicted by fall in HSD offtakes, down 21%YoY during January 2023).

Also, lower FO based generation during the recent months, down 89%YoY during January 2023, keeping fuel oil offtakes down by 45% during January 2023.

On the retail front, MS volumes shrunk noticeably as well, by 13%YoY during January 2023, as increased fuel prices and reduced mobility during winters dampened the overall demand. It is worth mentioning that the prices of both MS and HSD were raised by PKR35/liter each during the latest price notification, bringing them to PKR250 and PKR263 per liter, respectively. These prices represent an increase of 69% and 84% as compared to February 2022; in line with the current government's plan to pass on the full cost of supply and levies to consumers (PDL was PKR50/PKR40 per liter for MS/HSD)

Company wise, major players in the sector reporting sales at PSO (704,000), APL (140,000), SHEL (115,000 and GOPL (85,000), taking total market share to stand at 49%/9.7%/8.0%/5.9% for January 2023, respectively. More specifically, APL’s offtakes witnessed the strongest recovery on a MoM basis (up 16% as against industry average of 8% during January 2023) majorly due to a big spike in RFO offtakes, up 84%MoM.

This may be due to increased offtakes from the power plants the company sells to in Punjab (Attock-Gen, NPL, NCPL etc.), as depicted by recent upticks in RFO based generation during December 2023 (up 267%MoM), amidst recent RLNG scarcity in the country. On the retail front, PSO and APL ended the 7MFY23 period with market shares of 49.0% and 8.4% as against 46.9% and 8.3% during the same period last year.

AKD Securities conclude that for the first month of 2HFY23 the demand for petroleum products hasn't looked this bad in years as compared to the last two fiscal years. Overall, increasing fuel prices continue to haunt the sustainability of the sector as risen prices and dampened macros have kept offtakes under pressure. Furthermore, recent news flows suggesting oil/petroleum shortage amidst stringent LC/exchange rate volatility may add further fuel to the fire to the declining health and sustainability of the OMC sector.

 

Indonesia to suspend palm oil export permits

Indonesia will suspend some palm oil export permits to secure domestic supply amid rising cooking oil prices ahead of upcoming Ramadan, senior cabinet minister Luhut Pandjaitan said on his official Instagram account on Monday.

Palm oil exporters had accumulated large shipment quotas last year and they now had little incentive to supply the domestic market, he said.

Indonesia issues export permits for palm oil companies that have already sold a proportion of their products to the domestic market, under a policy known as Domestic Market Obligation (DMO).

The DMO currently allows export volumes that are six times what companies have sold at home.

"Exporters can use those export rights after the situation has calmed," said Luhut, Coordinating Minister for Maritime Affairs and Investment.

Firman Hidayat, an official at the same ministry, said about a third of existing export quotas could be used now, while the rest could be used after May 01, 2023.

He added exporters were holding around 5.9 million tons worth of export permits at end of January.

Exporters could increase their quota when they raised supplies to the domestic market, he said.

Retailers have complained that cooking oil packages at lower prices have been hard to procure and they have been forced to sell them above the regulated price of 14,000 rupiah (US$0.93) per litre.

The Trade Ministry last month said palm oil companies had been ordered to increase domestic supply to 450,000 tons per month until April, up from roughly 300,000 tons per month previously.

Food prices typically rise ahead of the Islamic month of Ramadan and the Eid al-Fitr celebration which falls in April this year.

Sahat Sinaga, chair of the Indonesia Palm Oil Board, said companies have been holding back exports, due to lower global market prices and high export levies. With little urgency for exports, companies were also not encouraged to meet their DMO.

Malaysian benchmark palm oil prices have fallen more than 40% since reaching a peak last year. Meanwhile, Indonesia resumed imposing export levies in November.

Sahat blamed distributors for the tight supply in the domestic market.

"This is a difficult situation, but everybody must work together. Distributors should not take advantage of the situation," he said.

Rattling global edible oil markets, Indonesia last year banned exports of palm oil used in everything from margarine to cosmetics and fuel for three weeks due to soaring cooking oil prices.

But palm oil prices have since fallen back sharply to stabilize at lower levels as the outlook is now less certain with energy prices off their highs and fears over a global recession.

Malaysia's palm oil futures market was closed on Monday for a public holiday.

Pakistan’s Meltdown

I am delighted to share an article by Dr. Kamran Bokhari. While many Pakistanis, particularly the establishment may not agree with many points, Pakistanis must read and try to understand the narrative.

Dr. Bokhari is the Director of Analytical Development at the New Lines Institute for Strategy & Policy in Washington, DC. He is also a national security and foreign policy specialist at the University of Ottawa’s Professional Development Institute. He has served as the Coordinator for Central Asia Studies at the US Department of State’s Foreign Service Institute.

Decades-old political economic problems in Pakistan are coming to a head. The South Asian nation needs billions of dollars in financial assistance to avoid a default at a time when its usual patrons are disinclined to bail it out.

 The International Monetary Fund is insisting on tough reforms that the fragile coalition government cannot institute without taking a major political hit in an election year.

Even if Islamabad dodges this particular bullet, it will have to massively overhaul the way it has managed the world’s fifth-most populous country.

If it cannot, then it will further push Pakistan toward a systemic breakdown, which has major consequences for security in the world’s most densely populated region.

An IMF team is visiting Pakistan from January 31 to February 09 to continue discussions on the release of US$1.18 billion in assistance, part of a $6 billion aid program that was agreed on in 2019 (and increased to US$7 billion in 2022) but that has since stalled.

Pakistan’s foreign exchange reserves have slumped to about US$3.68 billion, barely enough to cover three weeks of imports. Inflation was already at 25% when the government announced on January 29 a 16% hike in gasoline and diesel prices that will likely rise much further.

A few days earlier, the Pakistani rupee fell 9.6% against the US dollar, the biggest one-day drop in over two decades, after the government removed unofficial caps and allowed the currency to move toward a market-based exchange rate.

Earlier in the month, the country’s civil and military leadership traveled to Saudi Arabia and the United Arab Emirates to secure the funds needed to avert a financial meltdown. Reports surfaced that Riyadh and Abu Dhabi would provide several billion dollars. In sharp contrast with their past behavior, they aren’t willing to write a blank check; the Saudi finance minister said January 18 that the kingdom was no longer providing direct grants and deposits to debtor nations without seeing reforms.

The Saudis, the Emiratis and others who could provide the cash want to first see the Pakistanis accept an IMF program. Besides, the beleaguered South Asian nation’s financial needs far outstrip the global appetite to assist.

Islamabad, has been struggling to finalize what would be the country’s 23rd IMF arrangement since it first knocked on the lender’s doors in 1958.

The Pakistan Muslim League-Nawaz (PML-N) party, which heads the fragile and increasingly unpopular coalition government, has a lot to lose by agreeing to IMF terms that are bound to exacerbate harsh economic conditions. As it is, the PML-N and its allies are facing an uphill electoral battle against the populist opposition Pakistan Tehreek-i-Insaf (PTI) party of former Prime Minister Imran Khan.

Still, Pakistan’s political instability is the result of a much deeper malaise. Since the end of Pakistan’s fourth military dictatorship in 2008, the country nominally has experienced its longest stretch of civilian governance. 2013 marked the first time one democratically elected government transferred power to another. But the army continued to encumber both governments, and in 2018 it engineered the rise to power of Khan’s PTI in hopes that it would finally have a pliant civilian actor. That experiment was a colossal failure. It has weakened the military politically and has thus plunged the country into uncharted territory.

A similar situation has emerged on the economic front. Pakistan has always had financial problems, which over the decades continued to worsen. The country got by only because of a periodic influx of US assistance, made possible by the broader global geopolitics of the time. There have been three such long periods – 1958-69, 1977-88 and 1999-2008 – each under a different military regime and coming at the height of the Cold War, the Soviet military intervention in Afghanistan, and the post-9/11 war on terror, respectively.

In today’s changed circumstances, Pakistan is facing an unprecedented financial crisis because it never developed a viable economy and is without external bailout options.

Without a major reform process – which is unlikely given the acute state of social and political divisions – Pakistan’s situation is likely to worsen. Its annual population growth rate is 1.9%, which is 237 times that of the global rate, and its fertility rate exceeds the global rate by 157%. At this pace, in another 10 years the country will have added 50 million people, increasing its population to 275 million. There is already a massive youth population.

Sixty percent of Pakistanis are under the age of 23. As many as 44% of all Pakistani children between the ages of 5 and 16 do not attend school. Females make up almost half the population, and literacy among them is at 48 percent.

Dealing with the multiplicity of crises plaguing the country requires a political consensus. This is extremely difficult in the current highly polarized political climate, which is unlikely to abate anytime soon. Pakistan’s powerful military establishment, which has intervened in politics for much of the country’s history, is in an unprecedented dilemma.

After the failure of its latest attempt to shape the country’s political economy, which ended with the April 2022 ouster of Khan, the top brass publicly committed to keeping the army out of politics. Rationalizing the economy, however, will take a long time – assuming the country’s tumultuous politics can be brought under control.

In moments like these, when normal politics produces only more chaos, the pressure (or temptation) for the army to hit pause or reset on the constitutional process is high. However, the general staff has been down that road many times, only to end up exacerbating the problems it aimed to solve. When problems are such that degradation is happening much more quickly than is the realistic efforts to fix them, stalling the political process could be akin to an out of the frying pan and into the fire type situation.

The only other option is to continue the slow path toward recovery, which is fraught with perils. As large swathes of the population suffer under the weight of debilitating economic conditions, intra-elite political struggles intensify. These are precisely the conditions that Islamist militants – both Taliban rebels and Islamic State militants ensconced in the neighboring emirate in Afghanistan – hope to exploit. A resurgent jihadist insurgency will likely force an already weakened Pakistani state into a new major military campaign – one that has serious potential to spill over across the border.

It is this nightmare scenario – a cash-strapped Pakistani state whose security is compromised on its western flank – that will eventually result in Arab Gulf states, China and the United States gaining greater influence in the country. Washington cannot allow Pakistan to descend into chaos, especially with Afghanistan under a Taliban regime. Likewise, China, which has pumped tens of billions of dollars’ worth of Belt and Road funds into the China-Pakistan Economic Corridor, is not going to sit by and watch its investment sink.

Pakistan is thus going to become an even bigger arena for the US-Chinese competition.

Meanwhile, the Saudis and the Emiratis, who have long played a major role in periodically mediating intra-elite power struggles in Pakistan, will likely have greater influence over Pakistan’s internal workings.

In India, which only months ago surpassed the UK to become the world’s fifth largest economy, there is immense concern over how a financially collapsing Pakistan could affect New Delhi’s upward trajectory.

While it is too early to speak with any specificity on how external powers will behave, Pakistan can’t continue to chug along as it has. It may not always appear this way, especially in chronically fragile states, but long-term dysfunction adds up. Major fissures have emerged that outstrip Pakistan’s available resources, disrupting the status quo in which it was able to get by for so long.

 

Corporate financial health to worsen in 2023

Corporate financial health will worsen across the globe this year, failing to gain respite from signs that inflation has peaked and hopes for an economic soft landing, asset manager Janus Henderson said in a report released on Monday.

Its global credit risk monitor's indicators - debt loads, access to capital markets, cash flow and earnings - all flashed red in the fourth quarter of 2022, signalling caution to investors.

The firm, which manages around US$275 billion in assets, expects earnings growth to weaken in 2023, with energy and input costs eroding companies' cash flows.

While companies' financial metrics have been resilient so far, the second half of 2023 is when corporate margins will decline as weaker consumer confidence and higher interest rates bite, the study found.

All companies it tracks across global regions had flat or negative earnings forecast revisions for this year. Earnings are then expected to rebound in 2024, particularly in emerging markets.

Although an economic soft landing looks more likely, the asset manager remains cautious given the retreat in inflation is too late to prevent further deterioration in the credit cycle.

It said economic activity data point to a recession and government bond yield curves moved deeper into inversion territory - often a reliable signal of an upcoming recession - while central banks continue to withdraw liquidity and inflation-adjusted rates spikes translate into high borrowing costs.

More positively, a buoyant market for debt sales signalled strong demand for credit, though that may not last.

The risk premium on euro and US investment-grade corporate bonds has fallen some 19 basis points since the start of the year. The cost of insuring exposure to junk debt has fallen by 86 bps, according to S&P Global Market Intelligence.

"Optimism in a central bank retreat has allowed markets to reopen, but this too may prove fleeting," Jim Cielinski, the firm’s global head of fixed income, said.

"We are not out of the woods yet, although the decline in inflation seen in the last three months is a critical prerequisite to the elusive soft landing that investors cherish."

NATO using Ukrainian blood to fight Russia

The West, with the United States in particular, has been shipping billions of dollars worth weapons to Ukraine. As the Ukraine war drags on, more sophisticated weapons are being delivered in an attempt to prolong the war. At the same time, Western governments have been very wary of direct involvement in confronting Russia on the battlefield. 

The most that the West has done is impose round after round of sanctions on Moscow. However, despite repeated Ukrainian appeals, the European Union says there are no rigid timelines for Kyiv to become a member. "There are no rigid timelines, but there are goals that you have to reach," European Commission President Ursula von der Leyen said during an EU-Ukraine summit in Kyiv attended by 15 of the 27-nation bloc's commissioners.

"Ukraine and the EU, we are family," European Council President Charles Michel claimed. "The future of Ukraine is within the European Union," he chipped in, while also refusing to comment about any timeline. The EU has declined to offer a fast-track membership, with the bloc's officials citing several entry requirements such as political and economic stability.

The EU is saying we have goals but we don't have timelines. If we look at that in a wider context and the promises the EU gave to Turkey about its accession which Ankara has not seen for decades now, this process could take many years, potentially a decade judging by Croatia?, the last country that gained membership. It's a similar approach that the US-led NATO military alliance has taken toward Kyiv. 

This effectively means there is no real intention on the EU or NATO side apart from keeping Ukrainians to continue fighting, dying, and suffering as well as prolonging the war to serve the purposes of US hegemony. 

Weapons have been pouring into Ukraine with one NATO member trying to outbid the others in sending its most advanced military equipment. The Western military-industrial complex has been making extremely lucrative profits in the process. 

Prolonging the war, Ukrainian blood as well as rising inflation rate in Europe with consumers struggling to survive as a result. 

Ukrainian President Volodymyr Zelensky also used the summit to call on his Western allies to send even more sophisticated weapons to help repel Russian forces in the country's east.

This is the same region in the country that has witnessed deadly fighting between ethnic Russians and Ukrainian forces since 2014, killing at least 14,000 people until Russia launched what it called a "special military operation".

But can these more advanced weapons help Ukrainian forces? More recently that has come under the spotlight, with NATO members themselves divided on the issue. Some NATO members have started to question whether supporting Ukraine is going ahead as it had planned. 

Reports have emerged that say the tanks being sent to Ukraine will take months to arrive at the frontline, perhaps until the end of May this year. This is while Russia has been taking large chunks of the Eastern Donbas region. 

There is also an expectation among experts that Russia will launch a massive operation in the coming weeks or months, should the war continue, and consolidate its forces in the towns and villages there. That is expected to happen before any NATO tanks even reach the frontline in the country's east.

Russia can mobilize a large number of soldiers and military equipment. That is why NATO at some point will have to enter peace negotiations with Russia. But the pro-war camp led by the hawks in Washington and others in Europe have been advocating for more escalation. 

This comes even though it is the Ukrainians who are suffering the most.

The European Commission president has since taken down a video that revealed Ukraine has lost 100,000 soldiers in ten months. Some say that is a conservative figure when you factor in all the soldiers that are missing and whose mothers and wives are desperately searching for them.

Even the 100,000 figure is horrifyingly large. Some pundits following the war closely have suggested the actual death toll among the Ukrainian armed forces is around a quarter of a million.

Most Western media reporters are stationed in western Ukraine. Research by other journalists who have been dispatched to the flashpoint eastern part of the country on the frontline where the fighting is taking place shows these are realistic figures.

A few months ago, Moscow said it had lost 6,000 of its servicemen. That death toll could be higher but analysts say it will never come anywhere close to the Ukrainian fatalities, who are dying in much higher numbers.

This is not taking into account the pro-Russian forces in the Donbas as well as private military fighters, but without doubt, the Russians have overwhelmingly artillery superiority.

Many journalists believe the figures on the Ukrainian side of 100,000 are far more accurate.

What the U.S. wants is to keep Ukrainians fighting Russia until the last Ukrainian. It doesn't make any sense for Ukraine to continue this war but the West is egging it on with repeated military aid packages and false promises of accession to NATO and the EU.

Western media has also played a major role in trying to shape public opinion.With every war, there is a level of propaganda and Ukraine is no exception.

Noam Chomsky, and John Pilger among a few other veteran war reporters who covered Vietnam say they have never seen such levels of Western mainstream propaganda when it comes to the Ukraine conflict. 

With all Western reporters in the west of the country, there is little coverage of the deaths and terror in the flashpoint east. 

Most civilians in the eastern Donbas part of Ukraine voted in a referendum to be a part of Russia. 

So a peace solution that can be found without pouring in so many weapons, but the US and some of its Western allies are not satisfied with that scenario and want to prolong this conflict as long as possible. 

Even before the war erupted, US officials said they wanted to use Ukraine to inflict a geopolitical defeat on Russia. 

Does it come as a surprise that before the US and NATO refused to entertain the Kremlin's proposal for security guarantees over NATO's expansion toward Russian borders that US and UK officials invested shares in their respective country's arms manufacturing companies?

In essence, this war benefits the US establishment. Unfortunately, Ukraine is being used as yet another US proxy that is suffering from Washington's foreign military adventurism.

This appears to be the new strategy of the US following the death of its soldiers in Iraq and Afghanistan. 

Let other countries suffer, its civilians suffer and its soldiers die instead of American soldiers, while at the same time serving multiple US foreign interests. As for the EU in this current day and age, it seems to be taking its orders directly from Washington. 

 

Iran: Supreme Leader pardons tens of thousands of prisoners

Iran's supreme leader has pardoned tens of thousands of prisoners including some arrested in recent anti-government protests, state news agency IRNA reported on Sunday, after a deadly state crackdown helped quell the nationwide unrest.

However, the pardon approved by Ayatollah Ali Khamenei came with conditions, according to details announced in state media reports, which said the measure would not apply to any of the numerous dual nationals held in Iran.

State news agency IRNA said those accused of corruption on earth - a capital charge brought against some protesters, four of whom have been executed - would also not be pardoned.

Neither would it apply to those charged with spying for foreign agencies or those affiliated with groups hostile to the Islamic Republic, state media reported.

Iran was swept by protests following the death of a young Iranian Kurdish woman in the custody of the country's morality police last September. Iranians from all walks of life took part, marking one of the boldest challenges to the Islamic Republic since the 1979 revolution.

According to the HRANA activist news agency, about 20,000 people have been arrested in connection with the protests, which the authorities accused Iran's foreign enemies of fomenting.

Rights groups say over 500 have been killed in the crackdown, including 70 minors. At least four people have been hanged, according to the Iranian judiciary.

In a letter to Khamenei requesting the pardon, judiciary head Gholamhossein Mohseni Ejei said, "During recent events, a number of people, especially young people, committed wrong actions and crimes as a result of the indoctrination and propaganda of the enemy.

Protests have slowed considerably since the hangings began.

"Since the foreign enemies and anti-revolutionary currents' plans have been foiled, many of these youth now regret their actions," Ejei wrote.

Khamenei approved the pardons in honour of the anniversary of the 1979 Islamic revolution.

It would not apply to those "facing charges of spying for foreign agencies, having direct contact with foreign agents, committing intentional murder and injury, (and) committing destruction and arson of state property".

"Naturally, those who do not express regret for their activities and give a written commitment for not repeating those activities, will not be pardoned," deputy judiciary chief Sadeq Rahimi said, state media reported.

The Norway-based Iran Human Rights group said this week that at least 100 detained protesters faced possible death sentences.

Amnesty International has criticized Iranian authorities for what it called sham trials designed to intimidate those participating in the popular uprising that has rocked Iran.