In the days following Russia’s shock invasion of Ukraine, 32 countries have already imposed severe economic sanctions on Russia – geographically the largest country in the world. These sanctions will not be felt by Russia alone and South African companies with a footprint there are likely in for a tough time.
According to the Russian Embassy in South Africa, Mzansi has R77 billion in investment in Russia. According to local experts, agribusinesses like SAB Miller will feel the effects of mountain sanctions as they will leave these companies with no way to process international payments.
The sanctions are meant to hobble the country’s financial system to such a degree that the government is obliged to retreat from Ukraine. The United States of America, United Kingdom, Canada, Japan, Australia and the European Union are among the countries that have imposed severe sanctions on Russia this week.
In a blistering speech against President Vladimir Putin, US President Joe Biden flagged the invasion as a “flagrant violation of international law” and said that the economic sanctions against the country would have severe consequences, immediately and over the long term.
The first entities sanctioned were Russia’s major banks, including Sberbank, VTB Bank, Bank Okritic, Sovcombank OJSC and Novikombank, along with dozens of linked subsidiaries.
All exports to Russia have also been sanctioned, and members of the country’s most elite families have had their US assets frozen and can no longer trade with or travel to the sanction-imposing countries.
Rocky road predicted for Mzansi’s agri companies
Back home, Bheki Mahlobo, a senior analyst at the Centre for Risk Analysis (CRA), says that agri-businesses like SAB Miller and other South African companies with a footprint in Russia are in for a tough time.
“The SWIFT payment system is responsible for cross-border payments, [so] the sanctions to exclude Russia from that payment system as well as to freeze its foreign currency reserves, which is mainly held outside of Russia, will have a dramatic impact on South African companies that are operating in that country,” he explains.
SWIFT, which stands for the Society for Worldwide Interbank Financial Telecommunication, facilitates most of the world’s cross-border payments. By banning Russia from SWIFT, the US and its allies effectively exclude Russia from trading with other countries.
And with Russia threatening to launch missile strikes in parts of the Ukrainian capital city of Kyiv, it is unclear when the attack on Ukraine will end.
This uncertainty, Professor Mmatlou Kalaba, a senior international trade and agricultural economist lecturer at the University of Pretoria and a director at the Bureau for Food and Agricultural Policy (BFAP) says, breeds equal uncertainty for South African businesses in Russia.
“These companies will be affected for as long as the current state continues [and] the sanctions will have an escalating effect. should they be extended to companies doing business in Russia.”
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What about ordinary South Africans?
Kalaba further says that ordinary South Africans will very likely feel the impact of the war between Russia and Ukraine. The impact will likely be on the products that South Africans, and the rest of the world, depend on from the region, “products such as wheat, flour, petroleum oil and fertilisers for which we rely on global markets for the supply”.
He says, “Russia is the main player globally on those products. But furthermore, countries in those regions, such as Uzbekistan and Ukraine, are [also] major players in grains. There is no doubt movement of goods from that region will be affected, even if countries are not directly involved in the war.”
Mahlobo also highlights that energy prices as well as food prices will be severely impacted. Fuel prices have now reached $100 per barrel (about R1 542,27) when, three months ago, it was $68 per barrel (almost R1 050,00).
“That’s a massive increase in the fuel price. And if you recall, the main driver of inflation in the country has been largely due to the increase in the fuel price. So, unfortunately, that will negatively impact South African citizens. [It will also impact] the transportation of goods in, for example, agriculture,” Mahlobo points out.
Domino effect
Russia is one of the world’s biggest suppliers of fertiliser, which Mahlobo expects to also be affected by the sanctions. Fertilisers have already undergone steep increases and this, coupled with the pressure on global supply chains, will definitely affect agriculture.
“The production and maintenance of farms, for example, would see increasing prices over time, negatively impacting farmers as well as negatively impacting South African households.”
Mahlobo points out that South Africa has not yet recovered to pre-Covid-19 levels, and that the sanctions on Russia will indirectly limit the country even further. He says the CRA estimates that fuel may reach R25 per litre in the next few months and put pressure on farmers transporting their goods.
“South Africa is in [a} particularly negative situation because our indicators, when you’re looking at employment numbers, are still very low. We have not recovered to pre-pandemic levels. There are still about two million South Africans that are without employment when compared to 2019. Those are two million South Africans without income who are now going to be facing an inflationary environment.”
CRA’s projections are that, when combined with an environment with low growth, like in South Africa, this could lead to the 2022 GDP performance being lower than that of 2021.
“Unfortunately, it will negatively impact South Africans and negatively impact their standards of living,” Mahlobo says.
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