Rubbing shoulders with Russia could be catastrophic for SA’s economy

South Africa’s relationship with Russia could lead to sanctions that would be catastrophic for the country’s economy and trigger a financial crisis.

South Africa’s so-called impartial stance is increasingly viewed as pro-Russian and recent events such as the accusations of providing arms to Russia and the claim that President Vladimir Putin would receive diplomatic immunity if he attended the Brics summit are adding fuel to the fire.

The South African Reserve Bank (SARB) warned in its Financial Stability Review (FSR) that the risk of secondary sanctions has increased and should now be considered when evaluating the financial stability of South Africa.

The rand is trading at an all-time low ranging between R19.60 and R19.86 to the dollar and according to Bianca Botes, director at Citadel Global, the outlook for the rand in the short and medium-term remains fragile. It is expected to continue trading around 26% weaker than a year ago.

Botes says sanctions could cause the South African financial system to stop functioning if it is not able to make international payments in US dollars. The impact of this on the economy and financial markets will be far-reaching.

“More than 90% of South Africa’s international payments, in whichever currency, are currently processed through the SWIFT international payment system. Should South Africa be banned from SWIFT due to secondary sanctions, these payments will not be possible.”

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SA depends on foreign investment

She says as a country with low domestic savings and a current account deficit, South Africa is highly dependent on foreign investment inflows to fund this deficit. “South Africa is already plagued by foreign investment outflows due to its weak economic conditions and the recent greylisting.

“Jeopardising remaining investment inflows which come predominantly from the US, EU and UK could therefore lead to financial instability.”

The Nedbank Group Economic Unit says government’s geopolitical spat with the US 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, driving the rand to record lows at a time that the country can least afford it, with the worsening electricity crisis already hurting economic activity and adding to inflationary pressures.

“It is encouraging that the US and South Africa acted to de-escalate tensions after the accusations of SA arms shipment to Russia. However, the US still wants answers and awaits the results of President [Cyril] Ramaphosa’s inquiry into the secretive visit of the Russian cargo ship, with its transponder deactivated, to Simon’s Town Naval Base.”

The group says the risk, therefore, remains that the US could take a harder line against SA if the enquiry shows that arms were loaded onto the Russian warship, adding that South Africa’s relationship with Russia will likely remain in the spotlight as the Brics Summit in August approaches.

SA runs wide twin deficits – current account and budget balance – equivalent to 0.5% and more than 4% of GDP respectively and the country relies on foreign funding to cover these shortfalls. The bulk of government’s debt is financed by the West and Asian investors from countries aligned with the US.

The group says if our ties with the US and the EU were to be severed, the ripple effects would extend far and wide, threatening financial stability. SA already has its plate full of issues and adding to it is not wise, not geopolitically and certainly not economically. 

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Questions about SA’s friendship with Russia

“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 South Africa 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,” the group says.

“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 in the middle of the night with its transponder deactivated.”

In addition, South Africa took a bewildering and often contradictory array of positions over its membership of the ICC after it issued a warrant of arrest against Putin for war crimes committed in Ukraine.

“The risk remains that the US could take a harder line against South Africa. Worst of all, government is taking these enormous risks for the sake of an insignificant economic and trade relationship with Russia. The geopolitical storm has already inflicted significant damage on the economy and has raised the country’s risk premium further.”

Botes some local industries have made significant inroads into the US market under the trade agreements. Between 2019 and 2022, the proportion of exports under the trade pact increased by R30.5 billion.

“Exports of transportation equipment (which includes vehicles), minerals and metals, agricultural products and chemical products form the bulk of exports to the US. Even products with a much smaller market share, such as footwear, at a minuscule 0.03% of total exports, has managed to increase significantly, growing by over 500%.”

She adds that at a sectoral level, the manufacturing sector would be hardest hit by a trade fallout. Total manufacturing exports under AGOA amounted to 4.3% of manufacturing gross value added (GVA) or R34.7 billion in 2022.