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 manouevre 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. 

Relations between Mexico and the US are already at their lowest point in decades. In the past month alone:

  • A coterie of Republican senators, congressmen and a former attorney general have called for direct US military intervention against Mexico’s drug cartels, with or without the Mexican government’s consent. This is not the first time that such an idea has been floated. In his 1998 book The Next War, with a foreword by Margaret Thatcher, Caspar Weinberger, the former secretary of defence under Ronald Reagan, posited that in a not-too-distant future the US would be forced to invade México to contain the chaos and quell the forces unleashed by a “narco State”.
  • Mexican President Andrés Manuel Lopéz Obrador (AMLO for short) responded to the threats by ripping into long-standing US government policy on drugs, guns and health: “They threaten to invade, sell high-caliber weapons at their gun shows, do nothing for their young people, [who] suffer — lamentably — from the terrible and mortal fentanyl pandemic, but don’t address its causes…”
  • Former President Trump has asked advisors to draw up “battle plans” to invade Mexico if he is reelected.
  • The Biden administration has threatened to impose retaliatory tariffs on billions of dollars of Mexican goods if Mexico’s AMLO government doesn’t reverse its decision to roll back the privatisation and liberalisation reforms of the former Peña Nieto government.
  • Mexico has called the US government’s bluff on GMO corn by laying out the documented health risks associating with exposure to glyphosate and long-term consumption of GMO corn.
  • Mexican authorities took over a marine terminal in Quintana Roo owned by US mining company Vulcan Materials. AMLO has repeatedly asserted that the Alabama-based company has committed “ecocide” on the Quintana Roo coast. U.S. Secretary of State Antony Blinken responded to the seizure by warning of a potential “chilling effect” on US investments in the country.

Now, tensions could escalate over Mexico’s alleged purchase of Russian diesel, though for the moment Washington is yet to respond on the matter. The problem the US has is that Mexico, like most countries, has not agreed to apply a cap on Russian oil prices. In fact, many countries, including Brazil and Turkey, are buying record levels of Russian diesel.

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    1. Steve H.

      The wings of the Eagle
      Are Albion and Oz

      The language of business
      Is English, is English

      As Latin, in the day
      Was full cause for Crusade

      The Oligarchic code
      Is writ English, English

    2. Gregorio

      Maybe Mexico can form a “defensive alliance” with China and Russia? Maybe even get some intermediate range missiles to “protect themselves from Iran?” And of course, Ensenada would be a perfect place for a Pacific naval base for the Chinese fleet. The U.S. surely wouldn’t have any issues with any of that because they’re such strong supporters of the “international rules based order” that would respect Mexican “sovereignty.”

      1. digi_owl

        Back when the Ukraine situation went hot, or right before it, some Russian diplomat, not sure if Lavrov or some underling, quipped about checking with Mexico about housing a token force of Russian soldiers.

        It made DC throw a hissy fit, even as USA has several such dotted along the Russian border (and more will come now that they have access to Finland).

        1. Qaswedfrtg

          The popular memory of the Cuban Missile Crisis doesn’t include the US putting missiles in Turkey on the USSR border the year before

          1. Peter VE

            Fixed it for you:
            The popular memory of the Cuban Missile Crisis Turkish Missile Crisis doesn’t include the US putting missiles in Turkey on the USSR border the year before the USSR installed missiles in Cuba.

      2. IECG

        Mexico is not a suicidal country (like Ukraine), starting an arms race against the USA on its southern border has only one possible result: a new Usonian intervention in Mexico (although I think in the USA they prefer to say “Mexico-United States War” or something like that).

  1. Milton

    Why would Russia/Mexico engage in this type of “risky” trade when Mexico could simply purchase from India, the ultimate “illicit” resource launderer, all the Russian fuel stuffs they need? I admittedly know squat about the dynamics of the energy trade–especially as it now sits under an embargo environment so if anyone has any answer, that would be appreciated.

    1. Polar Socialist

      Because neither Mexico or Japan can compete/challenge US, but EU can, so that’s the only place where the sanctions matter. Other countries are not required to destroy their industry for the Hegemon.

      1. digi_owl

        Japan certainly seemed like it could back in the 80s, before the Plaza Accord put a halt to such shenanigans.

  2. The Rev Kev

    I don’t think that the US will press too hard about Mexico importing diesel from Russia as the US is itself still importing Russian oil and pretending it is from another country. The US needs the oil too much and it is so profitable for everybody. Hell, a coupla weeks ago I saw this video clip from a Russian sailor aboard some ship heading to America. And strapped to the deck were red barrels of oil whose documentation show that they came from Russia. I forget the prices he quoted but by buying that oil and bringing it into America, they were making a killing. The US must know that if they press Mexico too hard that the Chinese will be waiting in the wings to step in and help. And I can’t see the US invading Mexico as they would cause millions and millions of Mexican refugees to flee north over the border. The US could try to make nice with Mexico but I can’t see that as a possibility at the moment. That would be seen in Washington as showing “weakness.”

      1. wendigo

        Japan bought 400 Tomahawk missles, in bulk, at the end of February from the US.

        They had committed to buying $ 2 billion worth.

        Maybe Mexico will be getting a few.

        1. tevhatch

          “Maybe Mexico will be getting a few.”

          Buy’m or be bombed by them? That’s pure Obama, Trump, and Joe.

  3. Cristobal

    Some may recall that Mexico and the Soviet Union were the ONLY two counties that supported the Second Spanish Republic against the fascist uprising supported by Hitler´s Germany and Musolini´s Italy, both of which took active roles in the conflict. Conoco Oil was a major supplier of oil to Franco. There is history.

  4. digi_owl

    Ah yes, the old Spanish switcheroo. Worked so well for American companies during WW2.

  5. Jorge

    I believe that when it becomes impossible to pretend that Ukraine is not losing, the US will have a spasm about Russian oil moving around the world. Oil shipping companies will be harassed via IRS, SWIFT and other financial instruments. There will be another oil price burst when that happens.

    1. Piotr Berman

      The issue if Ukraine is loosing or not will not be decided until the long forecasted Ukraine’s reconquista fizzles, looses or wins. Until that happens, relative losses of Russia and Ukraine are in thick fog of war, interpreted as one wills. As commodities go, there seems to be a global surplus of hopium, even if consumption is robust.

  6. Piotr Berman

    Diesel seems to be present in many botched policies. I did not look very closely at the gas station I was passing by on my bicycle, but it seems that diesel is a full USD/gallon more expensive than gasoline where I live. In the same time, USA is too dependent on diesel because of woeful under-investment in railroads, I am not sure if the green plans of Biden have any place for such mundane considerations. Railroads use diesel too (much less than trucks in ton x mile terms), even though the traffic on the main routes, like the one going through much discussed East Palestine, is sufficient to justify electrification. If nothing else, electricity production allows to choose fuels more freely, including wind, solar and nuclear. But railroad companies prefer mergers and stock buybacks rather than investments.

    In the same time, production of diesel in USA probably could be larger with limits on import of Russian and Venezuelan heavy oil.

    The cumulative effect if botched policies is enacting sanctions that cannot be enforced too much, lest they backfire too much.

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