Mphumzi Mdekazi
Western hold on South African foreign trade could lose the grip down the line. The current global geopolitical situation between Russia and Ukraine has both solidified BRICS as well as exposed a number of its weaknesses. While some BRICS members and in particular India are taking full advantage of discounted commodities prices offered by Russia, South Africa has done very little to shield itself from the global fallout, let alone benefit from its status within BRICS. The question remains, why are South Africans not being spared from high commodity prices, which are essentially being driven up by Western sanctions?
As Western sanctions on Moscow tighten, commodity prices globally are soaring. This is having a negative global impact, particularly on European nations dependent on Russian gas for industrial operations. South Africa unfortunately has not been spared and the country is already experiencing negative implications, most notably for South African consumers.
According to a recent policy brief issued by the UN Development Programme (UNDP) which looks directly at the impact of the Russian operation in Ukraine on South Africa, the situation presents, “a new multifaceted risk to the South African economy”. It further states that the situation, “exacerbates supply chain bottlenecks and inflationary pressures via higher energy and food prices, which would result in a more rapid tightening of monetary policy. Mounting inflationary pressures and rising interest rates will hurt discretionary income and could negatively impact consumer spending, economic growth, employment, poverty, and food security.”
Disruption in shipping, shortages of fertiliser and increases in fuel prices have increased primary agricultural inputs by more than 100% since January 2021. Food inflation peaked at approximately 10% in July this year and are now expected to stabilise at around a 7% average for the year. This is a full 1.2% higher than the now anticipated 5.8% inflation estimates and 2.1% higher than the South African Reserve Bank’s original forecast of 4.9% for 2022.
High inflation for basic necessities such as food can have a catastrophic effect on a country that has an unemployment rate of 34.5% and with 55% of the population living under the poverty line. This, coupled with the lack of power in the country, is a recipe for disaster. The effects could lead to unprecedented riots, beyond the level witnessed in July 2021.
So again, why has South Africa not utilised its BRICS membership to shield itself, or at least minimise the impact of the current geopolitical warfare? By way of example, according to Reuters, India has seen a five-fold increase in imports from Russia to over $15 billion since February 24. India's imports from Russia jumped nearly 80% in the last fiscal year ending March 31.
Before March, Russia made up just 0.2% of the total oil imported by India, however by May this year, this had jumped to 10%, making Russia India's second biggest oil supplier. India imported 25 million barrels of Russian oil in May alone, at heavily discounted prices.
The Indian Reserve Bank announced last month that it was putting into place a mechanism for international trade settlements in rupees. Rupee settlement would allow India to bypass the orders preventing the use of the US dollar for trade, like in the case of sanctions imposed by Western countries on Russia.
The advantage of such a mechanism is well understood for the sanctions-hit Russian Federation but the importance of national currencies-based trade relations is huge for India as well. The current situation allows for the opportunity to grow Russia-bound Indian exports. Historically, trade between India and the Russian Federation was skewed in favour of the Russian Federation. During the financial year 2021–2022 (April 2021 – March 2022), India had a trade deficit of $6.61 billion in a total bilateral trade between India and Russia of $13.1bn. In order to balance the books, the Indian government is boosting export of products such as pharmaceuticals, plastics and chemicals to Russia. Russia’s imports for pharmaceutical products stand at approximately $8.9bn, out of which India currently supplies $600 million. The prospect for the Indian pharma industry looks very attractive indeed.
Another advantage is the positive impact on its Foreign Currency Reserve (FCR). The FCR for an import-dependent country like India is of huge importance. India maintains and manages a huge FCR, however, this reserve is used to settle import bills. India imports almost 80% of its hydrocarbon needs and most of them are settled in US dollars. Once India is able to pay for its trade with the Russian Federation in its own currency, it would represent a huge relief for the economy.
The bulk of South Africa's exports to Russia are agricultural, mainly citrus and imports are dominated by copper, wheat, and agrochemicals such as fertiliser. The citrus industry exports approximately 7–10% of total South African production to Russia. While direct trade between South Africa and Russia, is not substantial, less than 1% to be more accurate.
There is opportunity now to bolster not only the trade relations between South Africa and Russia, but also the growing BRICS community. Unfortunately, the ruble, unlike the US dollar, is not accepted as a direct trading currency by commercial banks in South Africa. Why then is South Africa not working on a similar mechanism as India, where Russian fuel, fertilisers and other greatly needed and currently inflated commodities could be bought directly from Russia in South African rands as opposed to US dollars or euros?
Beyond imports from Russia, the country also has the opportunity to vastly increase its exports to the Russian Federation. As a friendly nation, South Africa can export value-added goods that are produced in country, where they create much-needed jobs and support SMEs such as those in the automotive parts, filtration media, processed foodstuffs and wine sectors, to name a few.
The other thing to consider is the potential of attracting vast amounts of Russian tourists to South Africa. The global borders are not as freely accessible for Russian tourists as they once were, making friendly destinations such as South Africa more attractive than ever. However, the fact that Russian tourists cannot make card payments in South Africa due to global sanctions on Russian cards, make the country less attractive. Carrying large amounts of cash anywhere in the world is not ideal, I think we can all appreciate the risk of doing so in South Africa.
The acceptance of the Russian MIR system (the national payment card of the Russian Federation) in South Africa would not only open the door for direct Russian trade, it would also go a very long way in bolstering Russian tourism in the country. Couple that with a direct South African Airways flight from Cape Town to Moscow and you would have a winning recipe to assist in rejuvenating South Africa’s severely Covid-affected tourism industry.
According to the Bank of Russia, currently MIR cards are accepted in 11 countries: Turkey, Vietnam, South Korea, Armenia, Uzbekistan, Belarus, Kazakhstan, Kyrgyzstan, Tajikistan, South Ossetia and Abkhazia. The possibility of accepting MIR cards is being discussed with Iran, Cuba, Egypt and Venezuela.
According to the recent Visa Global Travel Intentions report, Russian tourists spend on average $1 676 per person per foreign holiday, more than their European counterparts who spend $1 174. The report also noted that Russian travellers make 4.3 trips a year on average and they tend to stay 10 nights, which is 2 nights longer than the global average.
Again, we need to ask ourselves, why is South Africa not taking advantage of this large and affluent market? In order to answer these pertinent questions, I believe one needs to look at the South African banking sector, understand its true ownership, control, and allegiances, as they essentially dictate our foreign trade opportunities.
Mphumzi Mdekazi is Tourism Minister Lindiwe Sisulu’s advisor. He writes in his personal capacity.