Ukraine invasion: consequences for SA

The Ukraine invasion will have consequences for South Africa and sky-high oil prices will not be the only one. However, there will be more indirect than direct consequences, with global inflation topping the list although South Africa will also benefit from the opportunity to export more platinum when sanctions bar Russian exports.

Ukraine and Russia are two of the biggest producers of wheat and oil seeds, which have been key drivers of global food prices since 2020. Writing for The Conversation, Wandile Sihlobo, chief economist of the Agricultural Business Chamber of South Africa (Agbiz), said Russia and Ukraine play a major role in the global agricultural market and African leaders must pay attention.

He says African countries imported agricultural products to the value of $4 billion from Russia in 2020 and about 90% of this was wheat and 6% sunflower oil. Egypt was responsible for nearly half, followed by Sudan, Nigeria, Tanzania, Algeria, Kenya and South Africa.

In turn, Ukraine exported agricultural products to the value of $2.9 billion to Africa in 2020. About 48% of this was wheat, 31% maize and the rest included sunflower oil, barley and soybeans.

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Ukraine and Russia in the agricultural market

Sihlobo points out that Russia and Ukraine are big players in the global market, with Russia producing about 10% of global wheat and Ukraine 4%. Their combined production is nearly the size of the total wheat production of the European Union (EU) and together they make up a quarter of global wheat exports.

With both countries also significant producers of maize, Ukraine and Russia make up 14% of global maize exports in 2020. They are also leading producers and exporters of sunflower oil, with Ukraine exporting 40% of global sunflower oil exports and Russia 18%.

Sihlobo says he shares the concerns of analysts that intensifying conflict could disrupt trade and adversely affect global food stability, particularly regarding big increases in the price of global grains and oilseed.

These prices escalated due to droughts in South America and Indonesia and rising demand in China and India. “Disruption in trade, because of the invasion, in the significant producing region of the Black Sea would add to elevated global agricultural commodity prices – with potential knock-on effects for global food prices. A rise in commodities prices was already evident just days into the conflict.”

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Grains and oil seed prices already increasing

Domestic Safex maize increased by more than 5% globally and wheat by almost 7% last week. “In the days ahead of Russia’s move, there was a spike in the international prices of a number of commodities. These included maize (21%), wheat (35%), soybeans (20%) and sunflower oil (11%) compared to the corresponding period a year ago. This is noteworthy as 2021 prices were already elevated.”

Sihlobo says there will be an upside to the invasion because the impact will cause price increases that will benefit farmers who now battle with the high cost of fertiliser, however, he points out that increasing commodity prices are bad news for consumers who have already experienced food price increases over the past two years.

“Some countries on the continent, such as South Africa, benefit from exporting fruit to Russia. In 2020 Russia accounted for 7% of South Africa’s citrus exports in value terms and 12% of South Africa’s apples and pears, making it our second-largest market.”

Russia and Ukraine’s agricultural imports from Africa are marginal, averaging only $1.6 billion in the past three years, primarily for fruit, tobacco, coffee and beverages.

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Exchange rate

According to the Bureau for Economic Research (BER) at Stellenbosch University, the rand has so far been fairly well behaved despite the turmoil, only losing 0.5% week-on-week against the US dollar last week.

However, the BER warns that the rand could be adversely affected if sentiment towards emerging markets (EM) sours in general, as increased global geopolitical tension is generally negative for the rand, although it is now deemed safer than some of its usual EM peers.

This includes Turkey, which is dealing with its own issues regarding monetary policy. The JSE Alsi also saw a big sell-off on Thursday, which despite a bit of a rebound on Friday, meant that the bourse lost 2.8% week-on-week.

The BER says Friday’s recovery was in line with global market trends, but uncertainty remains. Several countries have already halted flights to Russia and/or prevented planes from using Russian and Ukrainian airspace and even more significant, banned Russian planes from entering their airspace.

This means that on top of friction due to financial sanctions, global supply chains could be disrupted further as Ukraine and Russia are major players in the air cargo markets.

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Inflation

Apart from direct losses from an escalating war, the most direct impact on the global economy could be to sustain current high inflation for even longer, says the BER. “In addition to higher global grain prices, the Brent crude oil price breached $100/barrel for the first time since 2014 towards the end of the week.

“Brent crude averaged $96 per barrel in February, almost 10% higher than in January and the result is the domestic petrol price increase of a substantial R1.46/litre on Wednesday. An environment of persistent supply shocks that could start to dampen demand complicates the future interest rate path for many central banks.”

While central banks generally do not react to once-off cost-push pressures, the BER believes that multiple supply shocks mean a greater risk of secondary price effects.

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South African trade with Russia and Ukraine

While South Africa’s trade links with Russia are relatively limited, with the country making up less than 0.4% of total merchandise exports in 2021 and importing goods to the value of R9.2bn from Russia in 2021, less than 1% (0.7%) of total imports, some listed companies have more exposure to the country.

The BER says specific sectors, such as citrus producers and fruit exporters, are more susceptible to downside risk should trade with Russia come under pressure due to sanctions and a likely steep downturn in the Russian economy.

South Africa’s trade links with Ukraine are also very minor. “While the higher oil price will also have inflationary consequences here, the ongoing geopolitical tension has boosted the prices of some of our key export commodities, including platinum group minerals (PGM)s and gold. Russia is the world’s largest palladium producer, with SA second.”