Counting the cost of South Africa’s love for Russia
The government’s geopolitical spat with the United States over its apparent support for Russia in its war on Ukraine has not only undermined the country’s reputation but also wreaked havoc in the financial markets, says Nedbank.
This has driven the rand to new lows at a time the country can least afford it – with the worsening electricity crisis already hurting economic activity and adding to inflationary pressures.
While the US and South Africa have acted to de-escalate tensions after the recent accusations of South Africa supplying arms to Russia, Nedbank noted that Western powers are still waiting for answers, and investigations are ongoing.
Meanwhile, South Africa’s relationship with Russia will remain in the spotlight as the 15th BRICS Summit in August approaches.
As previously highlighted, the summit – expected to host Russian President Vladimir Putin – has put South Africa in an incredibly tight spot.
Despite granting attendees of the summit diplomatic immunity this week, South Africa – as a signatory to the International Criminal Court – remains obligated to arrest Putin for alleged war crimes.
According to Nedbank, this will put South Africa in the global hot seat and will invariably keep the rand and local markets under pressure.
“All eyes will remain on SA’s relationship with Russia, and as a result, the risks of future economic setbacks remain high. The geopolitical risks will continue to weigh on the rand, with potentially harmful implications for inflation and interest rates,” the bank said.
South Africa declares diplomatic immunity for attendees of BRICS summit – but it’s no silver bullet
Economic fallout
Nedbank said that the potential economic and trade costs of damaging relations with the US would be significant. It could also extend to other US allies.
“If there is a complete breakdown of SA-US relations, the EU will likely follow the US. This would greatly cost the country, with most of the impact expected to come through the financial markets and global trade, with very negative impacts on economic growth and job creation.
“South Africa has strong trade links with both the US and EU. The EU, as a bloc, is our largest trading partner, while the US is our 3rd largest trading partner among individual countries after China and Germany.”
As it currently stands, about 25% (R59.2 billion) of South Africa’s exports to the US benefit from both the Africa Growth and Opportunity Act (AGOA) and the Generalised System of Preferences (GSP), while a significant 98.7% (R429.2 billion) of exports to the EU benefit from the European Partnership Agreement (EPA).
The mining, manufacturing and agricultural sectors are the main beneficiaries of these trade agreements.
Should these agreements and benefits suffer in any way because of South Africa’s ties to Russia, the costs could be in the billions of rands, Nedbank’s data showed.
In summary, these could be some of the costs:
- Being expelled from AGOA and GSP could see R59.2 billion worth of exports removed;
- A complete ban on trade or severe sanctions from the US would cost R178 billion in export revenue;
- SA’s exports and imports with the US amounts to 17.3% of total trade, contributing a sizeable 4.7% to GDP;
- Expulsion from the EPA would see almost all SA’s exports to the EU (98.7%) subject to more stringent custom requirements;
- The total loss of export revenue from the EU will equate to around R434.8 billion, 23.7% of SA’s total export revenue;
- When considering all European countries – except Russia – the possible loss climbs to R550.3 billion;
- European trade contributes 15% to GDP, with the EU alone accounting for 12.6%.
In the worst-case scenario, where both the USA and EU withdraw from their respective trade deals, R443 billion worth of exports will be placed on the line, Nedbank said.
“There is much more to lose from possibly severing relationships with the US and EU,” Nedbank said.
Adding further to the potential costs, South Africa runs wide twin deficits – current account and budget balance – equivalent to 0.5% and more than 4% of GDP, respectively, Nedbank said.
“The country is reliant on foreign funding to cover these shortfalls. The current account deficit will widen as exports contract due to the effects of load shedding, increasing the need for more foreign financing.
“In this regard, it is also worth noting that the bulk of the government’s debt is financed by the West and Asian investors from countries aligned with the US. If our ties with the US and the EU were to be severed, the ripple effects would extend far and wide, threatening financial stability,” it said.
“South Africa already has its plate full of issues; adding to that is not wise, not geopolitically and certainly not economically,” it said.
Government vs South Africa
Worryingly, Nedbank said the government appears to be acting against its own interests in many of the decisions it has taken.
“The government has plunged the country into a damaging geopolitical situation with the US over its ‘friendship’ with Russia, the aggressor behind the tragic war in Ukraine.
“While SA has officially adopted a non-aligned or neutral stance on the conflict, it has compromised this position through actively engaging with Russia, not just through diplomatic channels, but through military engagements,” it said.
Pretoria allowed a sanctioned Russian cargo vessel to dock at Simon’s Town Naval Base in December, engaged in a joint naval exercise off the KZN coast in February, and allowed a military aircraft that has been sanctioned for transporting arms for the Russian paramilitary Wagner Group, to land at Waterkloof Air Force Base in April.
The plane landed in the middle of the night with its transponder deactivated.
South Africa has also taken a “bewildering and often contradictory array of positions” over its membership of the ICC after the issuance of a warrant of arrest against Vladimir Putin for war crimes committed in Ukraine, the bank said.
“The risk, therefore, remains that the US could take a harder line against SA. The US, the EU, and its allies imposed strict and wide-ranging sanctions on Russia for its unprovoked and brutal war on Ukraine.”
“Government’s perceived support of Russia has compromised SA’s neutral stance on the conflict between Russia and Ukraine. It has already hurt the economy, and any further escalation could permanently fracture or break relations with our largest trading partners, with potentially severe consequences,” the bank said.
Read: Rand hits a new low after BRICS summit immunity announcement
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