SA economic crisis deepens as ‘friendship’ with Russia spurs potential US sanctions

South Africa’s perceived ‘friendship’ with Russia is already severely hurting the southern African country economically – with potentially full-blown United States sanctions not yet ruled out.

The Americans are still considering what to do about South Africa allowing a specifically-sanctioned Russian cargo vessel, the Lady R, to dock at the Simonstown naval command near Cape Town, there allegedly loading weapons, or weapons-related cargo, early last December.

Last month, the US ambassador made an extraordinary public allegation that the South Africans had not only allowed a sanctioned vessel to dock, but had further violated international sanctions imposed on Russia for its invasion of Ukraine by supplying Russia with unspecified military equipment, believed likely to include electronic components for high-tech weapons systems.

The subsequent diplomatic row triggered a crisis in US-SA relations, that rift still not having been resolved, despite several missions to Washington by various South African delegations, one sent by President Cyril Ramaphosa, another by the opposition Democratic Alliance.

Even without further direct sanctions from Washington over the Lady R saga, the impact of South Africa’s perceived leaning towards Russia put severe negative pressure on the South African currency, which plunged to its lowest-ever value against a basket of currencies including the dollar and the euro.

International investors also took a dim view, with an enormous flight of foreign investment and a threat posed to preferential SA-US mutual trade, as well as SA-EU trade, as Washington contemplates further steps.

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The South Africans are, meanwhile, ‘playing for time’ through the appointment of an inquiry into the Lady R matter, something likely to take months to come to any conclusion as to ‘what actually happened’ to allow the Lady R to dock, and what the vessel uploaded.

Economists and analysts studying the South African currency’s recent wild fluctuations say they expect an even rougher time ahead for the local currency, along with tightening conditions for an economy still trying to forge a recovery from the Covid pandemic that topped-off a preceding period of years of economic stagnation which saw minimal growth, while other commodities-rich African economies surged ahead.

With foreign investors taking a much tougher position against South Africa’s perceived pro-Moscow stance, virtually all fingers of blame point towards the Ramaphosa administration’s self-contradictory policies.

In Kyiv, even while Russian shelling was under way – an indicator that the African heads of state peace mission to Ukraine and Russia this past weekend was not being taken seriously by the Kremlin – and later in Moscow, Ramaphosa and other African leaders called for an immediate ceasefire, which the Ukrainians ruled out as merely “freezing” of the conflict and not resolving it, while allowing Russia to re-arm.

Putting aside the administrative bungling that took place – a contingent of South African media and around 90 security personnel being trapped in the aircraft that carried them to Poland, while the African leaders took their peace mission to the Ukrainian and Russian capitals – it was clear even before the African delegation left for home that their mission was a dead letter.

Back on the ground in South Africa, diplomats involved in the African peace initiative said it seemed unlikely that the warring sides would suddenly stop fighting, merely because they had been encouraged to do so, and despite both sides saying they were open to dialogue.

Meanwhile, there is a mounting cost to South Africa’s anti-Western rhetoric, as espoused in official documents of the ruling African National Congress (ANC) party, which cites alleged ‘American hegemony’ and ‘Western imperialism’, while overtly embracing Russia as an enduring friend – mainly due to its historic support for the fight against colonialism on the continent and racist oppression in South Africa – and as a partner in the Brics bloc consisting of Brazil, Russia, India, China and South Africa.

Beyond the local currency’s drubbing, and a concurrent sell-off of South African assets by international investors, there is also growing doubt about sustained Western support for vital South African development programmes.

Most urgently and notable among these is South Africa’s ‘just energy transition’, which has a promised $8.5 billion backing, mostly American, for the move away from fossil fuels and towards sustainable and renewable power sources.

South Africa’s is the continent’s heaviest producer of climate change-driving carbon dioxide emissions, while the country’s crippled power production system is in deep disarray and requires major restructuring and redevelopment.

One major local bank recently pointed to the implications of the “deeply negative sentiment” that is developing, or has already developed, towards South Africa, not only in Washington, but other Western capitals.

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The growing pressure on South Africa is also unlikely to relent, as there is a Brics summit due in Johannesburg in August, with Russian leader Vladimir Putin having been invited to attend and having accepted, but with South Africa under international obligation to arrest the Russian leader over alleged war crimes in Ukraine, including the mass abduction of Ukrainian children into Russia.

Pretoria is consequently on the horns of a dilemma on this issue too.

The Nedbank Group, in a recent assessment, found that Pretoria’s ever-closer ties to Russia were driving much negative sentiment towards the South African economy.

The banking group added that the Ramaphosa government’s decision to “extend diplomatic immunity to all Brics visiting heads of state and their representatives” (during the upcoming summit) was overtly designed to “avoid acting on the ICC arrest warrant for Vladimir Putin”, which had only served to focus more attention on South Africa’s perceived pro-Russian stance.

South African International Relations Minister Naledi Pandor’s comments at a meeting with her Brics counterparts in Cape Town recently also only served to entrench views in Western capitals that South Africa was ideologically bound to Moscow.

“Minister Pandor criticised developed nations for failing to reform and transform global institutions,” the bank pointed out.

“She went even further, downplaying the global impact of the war on Ukraine by referring to it as a ‘regional conflict’ which should not be allowed to replace global poverty eradication as the world’s ‘greatest challenge’,” Nedbank said.

Even though Russia’s war on Ukraine had directly caused the surge in global oil and food prices, Pandor blamed the cost-of-living crisis in developing countries on the developed economies of the West.

“The attention and resources of our Western partners have been diverted, and the agendas of our multilateral organisations no longer respond to the needs and demands of the Global South,” said the minister.

The Ramaphosa government’s view, as espoused by Minister Pandor, was, said Nedbank, “overwhelmingly countered by the facts”.

The bank cited many elements of Western assistance to South Africa’s and other African economies, especially from the USA, the EU, as well as Japan.

The South African government has, said commentators, “come across as two-faced in its recent foreign policy”, seeking to mend relations with the US following the Lady R matter, while at the same time lashing out against alleged ‘Western imperialism’, such as Washington supposedly telling South Africa with whom it could and could not be friends.

Pretoria blames the US-led NATO bloc, and its expansion eastwards to Russia’s borders, as the cause of Russia’s invasion of Ukraine, while insisting Russia still is, and always will be, a “friend”.

This perceived pro-Russian bias meant that the African peace mission’s efforts led by President Ramaphosa were “doomed before they began”, said diplomats, observing that neither the Ukrainians nor the Russians had perceivably moved from their prior stances.

The loss of confidence in the South African leadership, and the economy of the country, consequently, is not only among foreign investors, but has been reflected locally with the South African Reserve Bank adding two new risk factors to its financial stability review: the impact of potential secondary sanctions due to the Lady R saga in the light of South Africa’s foreign policy in general, and the associated increased risk of capital outflows.

The Nedbank Group said the potential economic impacts, especially in lost bilateral trade, of unrepaired damage to relations with the US, and other Western countries in the EU, would be significant.

“If there is a complete breakdown of SA-US relations, the EU will likely follow the US.

“This would greatly cost the country, with most of the impact expected to come through the financial markets and global trade, with very negative impacts on economic growth and job creation.”

In a worst-case scenario, where the USA and EU both withdraw from their respective trade deals, about $24.3 billion of South African exports will be in jeopardy.

“South Africa has strong trade links with both the US and EU. The EU, as a bloc, is our largest trading partner, while the US is our 3rd largest trading partner among individual countries, after China and Germany,” said Nedbank.

About a quarter of South Africa’s exports to the US benefit from both the Africa Growth and Opportunity Act and the Generalised System of Preferences, while more than 98 per cent of exports ($27 billion) to the EU benefit from the European Partnership Agreement.

Being expelled from such preferential trade agreements could cost the country as much as 23.7 per cent of total export value, said the bank, an alarming development that would send the South African economy and currency tumbling further.