How chickpeas and oranges are helping Russia, Pakistan circumvent sanctions

In a creative throwback to the days of bartering, cash-strapped Pakistan and sanctions-hit Russia have struck a deal for goods that won't require exchanging any money.

The two countries recently signed a landmark agreement, with Russian firm Astarta-Agrotrading set to provide 20,000 tonnes of chickpeas in return for the same amount of rice from Pakistan's Meskay & Femtee Trading Company. Other products include lentils from Russia, in exchange for Pakistani mandarins and potatoes.

"There is a huge potential for an increase in trade between the two countries and today marks the start of new bilateral relations with Russia," announced Pakistani Privatization Minister Abdul Aleem Khan at a Pakistan-Russia trade and investment forum earlier this month.

As Russia faces increased global scrutiny and restrictions on its monetary transactions amid its war in Ukraine, trade with Pakistan gives Moscow a chance to sidestep sanctions.

The deal also offers relief for Pakistan amid a crippled economy. Islamabad is keen to avoid significant pressure on its foreign exchange reserves, and sees cashless exchanges with Russia as a win-win way to continue trade.

The agreement appears to come with many pros and cons, and also serves as an example for other countries who are also navigating similar sanctions or cash flow problems.

Opportunities

On the plus side, the tie-up will provide a major opening for dozens of Pakistani companies who want to foster trade with Russia. Prior to the deal, trade between the countries was minimal. From textiles, leather to logistics and tourism, key Pakistani export sectors have previously lacked a starting point for forging sanctions-proof trade arrangements with Moscow.

But the Astarta-Mekay deal provides an opportunity to pursue trade expansion without engaging in cross-border banking channels, so Pakistani firms in the agricultural technology space can exchange products without concerns about violating Western sanctions.

A sharp economic downturn has put significant limits on Pakistan's revenue generation abilities and had a trickle down effect on payment for future imports. This was caused by sustained political volatility, soaring inflation and a rising debt-to-GDP ratio.

As Islamabad looks to increase its bilateral trade with Russia to $4 billion in the next five years, it can use agricultural products to link more exporters to Russia's economy without drawing excessive pressure on its foreign exchange reserves.

On a regional level, the deal could also foster broader trade settlement interests for both countries.

Notably, Islamabad is not an isolated case. Moscow is prioritising similar agricultural trade schemes with top trading partner China, and has already put forward major guidance for companies to conduct barter transactions.

As Pakistan looks to promote its own barter trade agreements with Afghanistan and Iran, its experience with Russia could provide guidance on engaging with other sanction-hit markets.

This includes ways to import crude oil, natural gas, vegetables and industrial machinery by expanding the current barter framework, and ensuring adequate participation of state and privately owned entities in future trade.

Constraints

However, there are limits to scaling up Russia-Pakistan barter trade.

For instance, the landmark agreement confines trade value to agricultural produce when value addition in other sectors demands much more.

Consider the energy sector. Pakistan cannot scale the barter arrangement up to big-ticket items such as Russian liquefied natural gas (LNG). Islamabad's domestic producers are struggling to cope with a massive energy crisis, and lack an export product that satisfies Russian demands.

Second, as long as Pakistan depends on Russian logistics and food sector supplies to increase bilateral trade, barter trade is unlikely to serve as mutually beneficial.

Lessons from Pakistan's 2023 Business-to-business (B2B) Barter Trade Mechanism put potential constraints into perspective.

Though the trade framework was floated for Iran, Afghanistan and Russia, Pakistan's import-based barter approach still struggle to win over Russian companies. To what extent the new agriculture deal tips future exports in Pakistan's favour remains to be seen.

But it is clear that policy priorities need to focus on export value growth. After all, over 60 Pakistani companies are keen to deepen barter trade with Russia, but their $500 million-strong export value lacks competitiveness.

For instance, Indian companies in energy, manufacturing and fertilisers have the potential to push Indian-Russian trade to $300 billion. Thus, the agriculture deal presents a rare opportunity for Pakistan to invest in the agri-food sector's export base, and bring more companies into the fold.

Russia's high-end agri-technology cooperation could offer some solutions. For instance, Pakistan can enlist Russia's support on mechanised farming and other smart technology transfers to boost crop production. This in turn could have a positive bearing on near-term exports, and help broaden the basket of agricultural products traded among future companies.

Ultimately, the opportunities outweigh the costs when it comes to Pakistan's historic barter deal with Russia. Though it may have limited impact on trade expansion, the deal has the potential to inform diverse commodity exchanges with other sanctions-hit economies, including Iran and Afghanistan.