First Russian Shipment of (Allegedly) Diesel Docks in Mexico Since G7 Plus-Imposed Price Cap, Stoking Controversy and Confusion

The ultimate irony: if the ship was indeed carrying Russian diesel, it was probably able to skirt the price cap rules due to a cheeky little manoeuvre in Spain.

Last Thursday (March 30), a cargo ship called the Loukas I landed at the Mexican port of Guaymas, in Sonora. The vessel had set off from Novorossiysk, Russia, on February 19 and done a stopover in Spain. But it is not clear what was on board. For weeks the London-based price reporting agency Argus Media maintained that the ship was carrying Russian diesel. If true (a big “IF”), it would make it the first tanker of Russian oil to dock and unload in a Mexican port since the G7 imposed a cap on the price of Russian petroleum products in February.

From El País:

The Argus consultancy, an organization that produces international market analysis, mentioned in a report that the Loukas I was heading to Mexico loaded with 145,400 barrels of diesel of Russian origin. The prestigious firm explained that the ship, which left from Novorossiysk, Russia, would be the first of several fuel shipments brought to the Mexican market.

“The Government of Mexico, through its state company Petróleos Mexicanos, aims to keep increases in gasoline and diesel prices below the inflation rate (…) A cheaper fuel supply from Russia could alleviate the pressure on Mexican finances”, said the consultant in a report that has generated a lot of attention.

The Russian Embassy described the allegations as “fake news” while the port authorities in Guaymas insisted the vessel was carrying Russian fertilisers. Petróleos Mexicanos (aka Pemex) also denied the claims, asserting that the shipment was for a private company: “It is not ours or one of our subsidiaries’”. Mexico gets most of its diesel from US refineries, though Pemex has recently increased its output of finished gasoline and diesel.

A Small, Shrinking Club

In February, as readers are well aware, the G7, the European Union and Australia agreed to limit the price of Russian diesel and other refined petroleum products, in the hope of squeezing Russian revenues. They set two price limits: a $100 per-barrel cap on products that trade at a premium to crude, such as diesel, and a $45 cap for petroleum products such as fuel oil and industrial lubricant oil.

Relatively speaking, this is a small club of countries, accounting for roughly one-eighth of the global population — the so-called “Golden Billion,” as Putin disparagingly calls it. But its numbers are shrinking in size: in recent days G7 member Japan, one of the original signatories of the price cap measures, broke ranks and is now buying Russian oil at prices above the cap once again, arguing that its economy needs continued cheap access to Russian energy. 

So far, no other countries beyond the “Golden Billion” have agreed to apply the price caps. Instead, global demand for Russian diesel appears to be rising. According to Argus, Russian diesel exporters were more successful in selling their products in March thanks to higher discounts. This, it says, “has encouraged significant shipments from Russia to the Middle East, West Africa, transatlantic to Brazil and now to Mexico.”

But what was actually on board the Loukas I?

According to Guillermo Von Borstel, the commercial director of the Guaymas Port Administration, the Loukas I was not carrying diesel at all but instead liquid NPK fertilizers (Nitrogen (N), Phosphorus (P) and Potassium (K)). This argument holds a certain amount of water (if you’ll excuse the pun). Mexico, like Brazil and other economies in Latin America, is heavily dependent on Russian imports of fertiliser components. What’s more, Guaymas has specialised facilities for processing liquid fertilisers, says Von Borstel:

This type of product is normally handled at this port. There is a specialized station run by a North American company that distributes these urea and UAN 32 fertilizers to the north of Sinaloa, Sonora, Baja California and Arizona.

I don’t know where in the ocean the ship loaded up on fuel, but it would only be the marine fuel needed to operate the vessel. There is a terminal [in this port] specifically meant for hydrocarbons operated by Pemex, but it did not go there it. Over the last few years the fuel tankers have been received by Pemex.”

Given Russian fertilisers are not subject to sanctions, the port authorities in Guaymas allowed the ship’s content to be unloaded, says Von Borstel. As such, it remains a mystery what was actually on board the Loukas I. For the moment, it is the word of Mexico’s state-owned oil company and the port authorities in Guaymas against that of London-based price-reporting agency Argus Media.

The irony is that if the Loukas I was indeed transporting Russian diesel, it was probably able to skirt the price cap rules with a little help from EU Member Spain, where it took a stopover during its voyage from Novorossiysk, says Argus:

The European Commission’s price cap guidelines state that an oil product will no longer be considered of Russian origin if blending operations in a third country involving oil products result in a different product with a different customs code.

Spain has become a vital cog in Russia’s restructured oil supply lines. In late January, Bloomberg‘s Javier Blas reported that the Spanish enclave of Ceuta was being used to switch (and in the process blend) Russian oil from smallish Russian vessels to Very Large Crude Carriers, or VLCCs. Amid the resulting fallout, Spanish authorities warned shipping companies of the risks of flouting the sanctions, yet over a month later large volumes of Russian oil were still being switched off the Spanish coast, according to Bloomberg.

Souring US-Mexico Relations

Even if the Loukas I was carrying Russian diesel, this, in and of itself, should not be controversial given that Mexico is not party to the price cap on Russian oil and has not lent its support sanctions against Russia. But, of course, it is controversial. Some Mexican journalists and pundits have warned that it risks further exacerbating tensions between the US and its southern neighbor.

In one tweet, the Spanish-Mexican veteran journalist Joaquín López-Dóriga asked why AMLO had not joined the “global” blockade on Russian exports, which elicited a swift, sharp rebuke from the Russian Embassy in Mexico (translated by yours truly):

“We remind those who forget that 85% of the global population did not impose sanctions against Russia.”

They include, much to Washington’s chagrin, the US’ second largest trading partner, Mexico. Just over a year ago, the US Ambassador to Mexico Ken Salazar cautioned Mexican lawmakers against cosying up to Russia:

The Russian ambassador was here (in Mexico’s Congress) yesterday making a lot of noise about how Mexico and Russia are so close. This, sorry, can never happen. It can never happen.

If Mexico, the US’ direct neighbour to the south and second largest trading partner, were flouting the US-spearheaded sanctions against Russia, the resulting fallout could provide a “new source of friction” between the two countries, says the Bloomberg-affiliated outlet El Financiero...

Read the full article on Naked Capitalism

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