MICHAEL DE LA HUNT: SA stands to gain from chances for trade amid sanctions against Russia

UN secretary-general Antonio Guterres asked governments and the private sector recently to co-operate to bring Russian food and fertilisers as well as Ukrainian grain to world markets under a deal that was agreed on in July.

This package deal was highlighted by Guterres at a news conference in Istanbul two weeks ago. He said that securing more food and fertiliser out of Ukraine and Russia would be crucial to help calm commodity markets and lower prices for consumers affected by the conflict worldwide.

Nothing could be more relevant, or close to home, for SA. Our local citrus industry, the second-largest global exporter of citrus fruit, has been hammered by increasing production and input costs, both of which are beginning to have a significant effect on grower returns this export season. The sharp rise in the cost of fertiliser is partly to blame, and without political intervention to help stabilise input costs we may start seeing job cuts due to thinning profits in the SA citrus-growing sector. 

Guterres’s announcement has led me to many provocative thoughts about how individual states and businesses might navigate international conflict, especially at a time of such great economic uncertainty worldwide. While states and multinational corporations might comfortably impose sanctions and suspend trade deals, one is left to wonder how an individual business owner and citizen might hope to navigate the conflict when it results in a decreasing capacity to generate foreign revenue and sustain local jobs and livelihoods.

Businesses in a range of sectors must now walk a line carefully. The foundations of SA’s position on this matter would appear to be based on its Brics membership, and may be supported by its commitment to foreign policy objectives that ensure a mutually beneficial relationship with Russia.

SA was added to the Bric bloc of emerging economies in December 2010. This came after a rise in Africa’s trade with Bric states, from 4.6% of total external trade in 1993 to just more than 19% in 2009, producing a R147bn trade surplus for Africa. These are numbers that speak volumes to a nation such as our own, beset as it is with rising poverty, inequality and record-breaking unemployment.

Withdrawn services

Russia, China and other states are now working to strengthen their strategic co-operation under the conditions of the Ukrainian crisis. This comes from Chinese ambassador and diplomat Zhang Hanhui, who said recently that 13 other nations had shown interest in joining the Brics group, including Argentina, Iran, Egypt, Saudi Arabia and Turkey. It appears that conflict between Russia and Ukraine has not deterred North African, Middle Eastern and South American states from seeking representation on the same multilateral platform as Russia.

One would be forgiven for noting this interest with some degree of shock when the likes of Mastercard, Visa, Deloitte and many others have withdrawn their services from Russia. The interest other states have shown towards joining this bloc may be due to the latest IMF estimates, which indicate that the Brics nations will account for more than 50% of global GDP by 2030.

SA’s diversified foreign policy objectives and interests have consistently sought to allow trade to continue as long as it is highly complementary in nature. As a country it has asserted its independent, non-aligned views on the matter. International relations & co-operation minister Naledi Pandor said in April: “We have resisted becoming embroiled in the politics of confrontation and aggression that has been advocated by the powerful countries. Instead, we have promoted peaceful resolution of the conflict through dialogue and negotiation.”

This statement is in line with the general approach to international politics espoused by the Non-Alignment Movement (NAM). Since its formation in 1961 NAM member states have committed to maintaining independent foreign policies and extending the hand of friendship to all countries that reciprocate that friendship. But it would be difficult to make provocative assumptions regarding our state initiative to continue developing economic relations with Russia without considering the relevant figures.

In January, Russian exports to SA totalled R272m and its imports R774m. The top Russian exports were ethylene polymers (R66.3m), newsprint (R37.4m), coal briquettes (R36m), sulphate chemical wood pulp (R24.5m) and phosphinates and phosphonates (R22.9m). The top imports from SA were manganese ore (R297m), cars (R62.4m), inorganic salts (R54.6m), grapes (R37.4m) and platinum (R26.3m). 

Market power

So, if the UN calls for co-operation to ensure Russian products reach foreign markets, how should SA businesses react should the Russian market prove to be laden with opportunity? If Russian investors are willing to commit their capital to the local economy, do we embrace such business deals or demand that the private sector exhibit restraint?

It seems highly unlikely that the SA government would reverse its course on sanctions on Russia, which it has not contemplated until now. In any event, the EU, UK and US do not seem particularly interested in lobbying emerging economies to follow their own sanction efforts — they have sufficient market power to implement meaningful sanctions without the involvement of other parties.

SA’s presence in Brics and recent communications from the department of international relations have given little indication that it sees any material interest in the conflict itself, and that it is not an issue that ranks high on its policy agenda. However, the opportunities for trade and lack of liquidity in the Russian market may provide huge opportunities for SA businesses. The West pulling out of Russia has left behind products that are now being traded at undervalued prices, making once-in-a-lifetime deals available to those able to navigate the conflict carefully and wisely.

While state-directed sanctions on Russian assets and companies operating in SA are highly unlikely, some risks will need to be considered. The “chilling effect” of sanctions elsewhere may prompt reluctance to do business with Russian companies and capital among SA businesses with major international footprints, as well as multinational corporations operating in SA. This is unlikely to apply to the banking system, which is predominantly run and owned by SA capital.

However, there may be a “known unknown” risk that could materialise as SA seeks to tighten legislation on financial sector surveillance and compliance with international norms to bring it in line with the recommendations of the Financial Action Task Force (FATF). While Russia is not FATF-blacklisted, the SA financial and prudential system may subject Russian-based capital to extra scrutiny if new legislation demands it.

However, this is not now the base case for the future of Russian financial assets in SA. It seems unlikely that explicit sanctions or implicit hesitance among the business community will significantly hinder the movement of capital in or out of the country.

SA is likely to remain a stable jurisdiction for Russian investments, based on its financial system infrastructure and low tail risk. While many businesses aim to align themselves with the US and EU as they seek opportunities for growth, we may actually find that we should be looking to Brics for a growing investor base instead.

The question is, will SA businesses open that door if Russia comes knocking?

De la Hunt is cofounder and fund manager at Cape Town-based Ion Capital Partners.