FANews
FANews
RELATED CATEGORIES
Category Investments

SA to dodge Russia Ukraine fallout, for now

12 April 2022 Gareth Stokes

For many South Africans, the biggest surprise in the immediate aftermath of the Russia-Ukraine war was our government’s refusal to condemn the invasion. South Africa was among 35 countries to abstain on a United Nations’ motion deploring Russia’s aggression against Ukraine, held early March 2022, and a few weeks later a delegation from our Parliament distanced itself from an Inter-Parliamentary Unition (IPU) resolution stating that “the ongoing Russian use of force against Ukraine is a violation of the Charter of the UN, including the principle of sovereignty and territorial integrity”.

Abstaining is tacit consent

In a recent PSG Think Big Series presentation, the moderator asked economy and political analyst Daniel Silke about South Africa’s reluctance to condemn this apparent human rights violation: “Abstaining can be seen as tantamount to supporting the Russian action in Ukraine; how tarnished is the international community’s view of South Africa as a result?” According to Silke, the historical legacy of support from the Soviet Union and the ongoing linkages between Moscow and Pretoria were very difficult for Ramaphosa’s ANC to navigate. “The apparent unwillingness to condemn the worst parts of the invasion, the killing of innocent civilians in particular, has put South Africa in a difficult and troublesome position,” he said. 

The position, which was described as unsurprising given South Africa’s history, is unlikely to result in immediate censure from the country’s predominantly Western trading partners… It is, however, unclear what the long term consequences of a ‘neutral’ stance on this international conflict will be. For example, how will future requests for foreign investment be considered in light of this voting track record. “In the broader philosophical sense, South Africa does not want to be on the wrong side of history … we have to be a lot more careful about a lack of involvement from a moral and ethical perspective because, ultimately, we are dealing with attacks by Russia on civilian targets,” said Silke, who warned of sending conflicting messages by condemning certain countries while excusing others. 

Putting financial institutions in a pickle

Government’s stance on the conflict could place the private sector under undue pressure due to domestic financial services firms having to align their business practices with those of their global peers. The pressures brought to bear by Western governments on Russia will be felt by all financial services communities worldwide. “Local financial institutions have been getting requests to manage capital for wealthy Russian clients, and banks and brands in South Africa, themselves within the private sector, are going to have to be very careful about taking on that kind of business,” said Silke. “There [could be] a disconnect between the way the private sector handles the [Russia-Ukraine fallout] and the way it gets handled at a diplomatic level”. 

The timing of the conflict could not be worse, with many global economies wrestling with spiralling inflation. As Silke explained, the cost of borrowing will have a significant impact as most European countries increase their defence budgets. Inflation will affect the South African economy too, with pressure on fuel and food likely to exacerbate an already fragile political environment. “Inflation is certainly going to start biting the South African consumer,” opined Dawie Roodt, chief economist at the Efficient Group, in a recent telephone interview with FAnews. “We will probably see inflation staying relatively high and then going up even further”. In fact, we have already seen action from the SARB with another 25 basis point interest rate hike in March. Higher prices for basic goods and services are worrying given South Africa’s socioeconomic backdrop. “The fragility of our politics, combined with the fragility of the disposable income of our citizens present another powder keg for us; we saw it explode in KwaZulu-Natal and Gauteng in the winter of last year, partly due to politics and partly as a result of rising poverty levels,” added Silke. 

Limited impact on the equity markets

There is some light at the end of the tunnel, in that South Africa’s trade with Russia is negligible, equivalent to around R20 billion per year, or 1% of our total imports. In that context, the financial impact of the Russia-Ukraine war will probably be limited to the handful of JSE-listed firms that have direct exposure to that economy. Recent commentary by Momentum Investments singled out a handful of shares, representing approximately 12% of the FTSE/JSE Capped Shareholder Weighted Index, with limited exposure to the conflict. These include British American Tobacco, Barloworld, Mondi, Richemont and Prosus, the latter have already written off significant amounts for shareholdings in Russian firms. 

“We have not seen bad economic effects locally, other than inflation,” commented Silke. The first month of the crisis saw the rand strengthen; foreign buyers snapping up SA debt; and a relatively buoyant JSE. South Africa also has tremendous leverage insofar certain mineral exports and the benefit of being relatively food secure. Over the longer-term the country’s main concern will be with ongoing constraints to supply chains, already affected by two years of pandemic. “Africa needs to improve continent-wide supply chains … what we need to do in South Africa is incentivise the localisation of production [and] we need to deregulate and make it easier for supply chains to be bolstered domestically,” said Silke. Solutions might include creating export processing zones that offered concessions on labour costs and regulation and tax concessions, among other pro-business incentives. 

Inflation up, GDP growth down

It will, however, be impossible for the domestic economy to sidestep the impact of rising prices consequent the turmoil. The Minister of Finance will also have a real battle on his hands, as he attempts to keep the public sector wage bill under check in an inflationary environment. “This conflict is going to be net negative for us,” concluded Roodt. “If you look at things like the balance of payments, there is a net positive … sectors such as agriculture and mining will benefit, but economic growth is going to be lower than previously thought”. Roodt expected South Africa’s GDP growth to dip below 2% in 2022. 

It is difficult to forecast the end game in the Russia-Ukraine conflict. At the outset, most analysts expected Putin to make rapid progress and perhaps install a puppet regime in the country, pliable to Russia’s needs. Today, a more likely outcome will be for Russia to force concessions from Ukraine, perhaps agreeing to an end to the conflict in return for Ukraine’s promise to demilitarise and abandon its attempts to join NATO. And of course, there is the real possibility of the division or portioning of Ukrainian territories. According to Roodt, Russia will likely takeover part of the country following which we can expect years of a cold or civil war scenario. 

You cannot fence-sit through everything

As for South Africa, time will tell to what extent our fence-sitting on the conflict will impact us. According to Silke, our posturing on this important international crisis will not have endeared us to many of our Western partners. “This will affect us in terms of attracting foreign investment [and] add a layer of uncertainty or questioning around the bona fides of South Africa and where the country will be positioned in the future geopolitical structure,” he concluded. 

Writer’s thoughts:
We have read a number of online reports recently suggesting that South Africa has struck some or other sinister economic or political arrangement with Russia, with many drawing attention to pre-war calls between Ramaphosa and Putin or the many visits by our Deputy President to that country. Time will tell if any deals were struck. Until then, would you have preferred the South African government to have taken a stronger stance on the Russia-Ukraine conflict? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.

 

Comments

Added by Gareth Stokes, 14 Apr 2022
Responding to Andre & Humphrey: The only positive I can draw from the situation is that the SA government has been consistent insofar its political alignments. It does seem odd, however, that this alignment is on the grounds of "West versus the Reds" rather than on human rights...
Report Abuse
Added by Andre S Kruger, 13 Apr 2022
What is amazing is the cheek that the leftist world bestowed upon those who are in Putin's circle. Remember, the wheel always turns and this is creating a president for any person who is a so called criminal to have his friends sanctioned....think ministers, politicians, etc and yes also you as normal citizen. I would count Bush, Clinton x2, Blair among those that can be sanctioned due to war crimes, think Irak, Afghanistan, Libia, Egypt.....etc......just my 2 cents opinion
Report Abuse
Added by Humphrey, 12 Apr 2022
Birds of a feather. They have not taken a major stance against crime and human suffering from violence here in SA (or closer neighbors like Zimbabwe). Why would they cause waves when their buddies do likewise to another country.
Report Abuse

Comment on this post

Name*
Email Address*
Comment
Security Check *
   
Quick Polls

QUESTION

SA’s 2025 Budget appears unlikely to introduce major tax hikes, but bracket creep, fiscal debt, and policy uncertainty remain key concerns. What will have the biggest impact on financial planning after the budget?

ANSWER

Bracket creep
Government debt
Laffer Curve effects
Policy uncertainty
fanews magazine
FAnews February 2025 Get the latest issue of FAnews

This month's headlines

Unseen risks: insuring against the impact of AI gone wrong
Machine vs human: finding the balance
Is embedded insurance the end of traditional broker channels?
Client aspirations take centre stage as advisers rethink retirement planning
Maximise TFSA contributions before year-end
Subscribe now