Occasional Paper 4/2022
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Inclusive Society Institute
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by Prof William Gumede
Associate Professor, and former Convener, Political Economy, School of Governance, University of the Witwatersrand; and former Programme Director, Africa Asia Centre, School of Oriental and African Studies (SOAS), University of London; and author of South Africa in BRICS (Tafelberg
Russian President Vladimir Putin appears to be seeing his historical mission as repositioning Russia as a major global power, taking the mantle from the old Union of Soviet Socialist Republics (USSR). A key part of this mission involves reintegrating parts of the former USSR into Russia. Another is for Russia to re-engage with Cold War allies of the former USSR.
This re-engagement is a central element in Putin’s attempt to break Russia out of its isolation from the West – with the country hoping to trade with its former Cold War allies to escape this cut-off state of affairs. Russia has tried to source finance, technology and investments – and buyers for their products – from these new allies. It has focused on selling technology, arms and machinery developed during the Soviet Union-era and now further built on during the Putin era, to these renewed partnerships.
Since the end of the Cold War, and the collapse of the USSR alliance, the US-European Union-led Western alliance has dominated global power, institutions and ideas. Putin has been working with other emerging powers, such as China, India and Brazil to foster an alternative global power alliance to that of the dominant US-European Union-led Western alliance.
Russia also sees these new allies as critical partners in international organisations such as the United Nations, World Trade Organisation and World Bank.
The US-led global hegemony wilted in the aftermath of the 2007/2008 global financial crisis; unilateral military interventions in developing countries, without seeking global consensus; and the often manipulation of multilateral organisations for self-interest, rather than for the greater good of the world.
Furthermore, during the 2007/2008 global financial crisis, some of the neoliberal economic thinking that underpinned the US post-Cold War ideology hegemony lost its lustre, when, in order to save economies, companies and livelihoods, Western countries used decidedly un-neoliberal tools, such as state investment in private businesses.
Expanding Russia’s borders back to Cold War era
Putin believed that the end of the Soviet Union in 1991 was tantamount to the “disintegration of historical Russia”. Putin wants the North Atlantic Treaty Organisation (NATO) – the defensive military alliance – to close military formations stationed in countries that used to be part of the USSR and allies in Eastern Europe, Central Europe and the Baltics, who are now NATO members. Essentially, Putin is arguing for a return to the pre-1997 NATO boundaries – the Cold War country borders.
Putin in the past has described Russia and Ukraine as “one nation”. Before the Russian invasion, Putin questioned Ukraine’s right to exist as an independent country. In 2014, after Ukraine deposed the pro-Russian leader in a coup, Russia annexed Crimea, Ukraine’s southern peninsula.
Putin has now attacked Ukraine, a country of 44 million, after having amassed troops on the Ukrainian border. Initially, Putin sent troops, which he described as “peacekeeping” missions, to Ukraine’s eastern regions – where two “republics” have been declared by Russian-supporting separatists backed by Russia – but then launched a full-frontal attack on the country. The Russian attack has unleashed the biggest conflict in Europe since the Second World War.
Russia opposes Ukraine’s ambition to join the North Atlantic Treaty Organisation (NATO) and the European Union. Ukraine’s President Volodymyr Zelenskyy has asked NATO for “clear, feasible timeframes” for the country to join the 30-country defensive alliance.
As part of the strategy to reintegrate the old USSR, Putin, in 2015, reintegrated some of the former economies of the Soviet Union into a regional trade bloc between Russia, Belarus, Kazakhstan and Armenia, called the Eurasian Economic Union.
Globally, Putin has also re-engaged with the Cold War allies of the USSR. In addition, Russia has allied with the rising emerging powers: Brazil, India, China and South Africa, in BRICS.
Over the years, under Putin, Russia has also been re-engaging with sympathetic former African, Asian and Latin American Cold War-era partners of the USSR. During the Cold War, many newly independent African countries as well as independence movements fighting Western colonial governments allied themselves with the Soviet Union, in opposition to the US and Western countries.
After the end of the Cold War, and the breakup of the Soviet Union, its successor Russia withdrew from Africa and other developing countries. Putin has worked hard to re-engage the countries with which it was allied during the independence struggles. Russia is now involved in more African peacekeeping operations than the US, UK and France combined – as the country moves to build its presence and influence, and to secure partners on the continent.
Russia sees former Cold War allies in BRICS, Africa and the rest of the developing world also as key allies in international organisations such as the United Nations, World Trade Organisation and World Bank.
Putin has attempted to position the post-Cold War world – based on resurrecting some of the Cold War allies of the USSR – as being dominated by a US-led Western alliance, now being challenged by a developing country global alliance including Russia.
Breakdown of global rule of law
Developed countries have increasingly manipulated global political, economic institutions and laws for purely self-interest, rather than for the global good. This has fostered a global climate where it appears dominant countries can get away with breaking global political, economic, legal and trade rules for selfish motives.
Developing countries have less say within global institutions – which set the rules of the global market – whether it be the United Nations, World Bank, International Monetary Fund, International Finance Corporation (IFC) or World Trade Organisation (WTO).
For example, since the Second World War, the US has always chosen the president of the World Bank “using the appointment as a vehicle to advance American economic interests, power and development priorities around the globe”. Europeans have traditionally selected the head of the International Monetary Fund. These global development institutions have been criticised for being biased towards Western countries at the expense of African and developing countries, which have little say in the control, policies and ideas of these institutions.
In the current global economic system, developing economies do not have the policy independence to use monetary and fiscal policies to stimulate their own economies – lest they face a market, investor and Western media backlash. Many unilateral monetary policies adopted by industrial countries to deal with their domestic crises often destabilise African and developing countries.
Global trade rules and laws are stacked against African and developing countries. High tariff and non-tariff barriers in industrial countries block African countries from exporting value-added products – which create more jobs and more wealth for more people – to industrial countries. African free trade agreements with Western countries, such as the Partnership Agreements with the European Union and the African Growth and Opportunity Act with the US, are mostly disadvantaging African and developing countries.
Global capital markets are also against many African and developing countries. Western countries regularly come up with unilateral monetary policies, which are destabilising them. For example, these governments often manipulate the value of their currencies to improve their export competitiveness.
Following the past global financial crisis, the US Federal Reserve, the European Central Bank and the Japanese central bank introduced quantitative easing in 2015. However, these quantitative easing policies eroded the competitiveness of emerging market economies. The former Reserve Bank of India, Governor Raghuram Rajan, has rightly warned that the US Federal Reserve’s monetary policy was causing spill overs in emerging markets, with seesawing capital flows, volatility and the destabilising of financial markets.
When African and developing countries object to global rules stacked against them, they are generally threatened with retaliation, whether that means blocking their products, withdrawal of trade, development aid sanctions, or the political isolation of specific countries. They have few recourses for trade, economic and political disputes with developed countries and are marginalised in the WTO’s Dispute Settlement Mechanism.
Inequality between countries in international law
Developing countries are also unequal in international law. A case in point being that the US, China and key industrial countries have not signed up to the International Criminal Court (ICC), and their leaders and citizens are not subject to its jurisdictions. Industrial countries’ security, intelligence and police forces commonly operate across the borders of African and developing countries, something which those countries cannot do.
US-led coalitions, for example, have frequently used their power in the UN to push through invasions in developing countries’ regimes perceived to be anti-Western – in Iraq, Libya and elsewhere – under the guise of defending human rights. Ironically, these countries support equally evil regimes in other developing countries as long as they are pro-Western. Such decisions are frequently based purely on protecting industrial countries’ commercial interests.
The UN was also absent in the descent into chaos last year of Afghanistan when the Taliban took over, and the government and citizens fled the country en masse. Moreover, the UN has been largely silent in the face of China’s continued claims against Taiwan, which the Chinese dragon views as part of it, and not a sovereign country. And in the absence of the UN, it has been left to individual country leaders, the European Union and the North Atlantic Treaty Organisation (NATO), and the G20 to desperately try to persuade Russia to end the war in Ukraine.
The central weakness of the UN is the Security Council, which is limited to five permanent members – China, France, Russia, the United Kingdom and the United States – with outsized powers. The five have veto power on key UN decisions. The UN Security Council as it is, is simply not relevant to the changing world anymore.
These five permanent members have often abused their power for their own national interests, rather than in the common interests of humankind. The UN’s credibility has been destroyed by those members’ abuse of the organisation for selfish reasons, forcing other countries to turn their back on the organisation as a place where they have a voice.
The abuses include the invasion of Iraq, for questionable reasons, and with many countries outside the five permanent members opposing it, and the invasion of Libya, which was also opposed by many countries. The Security Council members have also dominated the election of UN General Secretaries, which means that general secretaries have mostly not gotten wider legitimacy among countries.
The idea of a UN Security Council with permanent members is clearly outdated. So far, proposals for reform have been about increasing the number of countries on the UN Security Council – however, the idea of a limited number of countries having veto power should be abolished entirely. The UN should be democratised in such a way that a few countries – or regional blocs – do not dominate the organisation’s decision-making.
The collapse in credibility of the UN has given countries such as Russia and China the opportunity to act unilaterally. Unless something is done about reforming the UN, the rule of law at global level will collapse. The decline of the UN has raised the spectre of more copy-cat Russian-like incidents of aggression by powerful countries against more vulnerable ones, making the world even more unstable.
The international conditions that made Russia act now
The success of US-led coalitions, to use their power in the UN to push through invasions in developing countries’ regimes perceived to be anti-Western – in Iraq, Libya and elsewhere – under the guise of defending human rights, appears to have bolstered Putin to contemplate acting in the same way for self-interests.
The global breakdown in rule of law gave Putin the space to launch his invasion of Ukraine. Especially industrial countries regularly launching security, intelligence and police missions across the borders of African and developing countries – in many cases to defend their (industrial countries’) commercial interests – and getting away with it, made the Kremlin reckon that Russia will also similarly get away with it. Putin’s success in annexing Crimea, Ukraine’s southern peninsula, in 2014, without Western intervention emboldened him that a takeover of Ukraine would be grudgingly accepted by Western powers.
The decline of the US-led Western global hegemony in the aftermath of the 2007/2008 global financial crisis and the emergence of a multipolar world where power is more evenly spread across the globe, have also emboldened Putin. Furthermore, many developing countries’ people harbour negative sentiment towards the US and allied industrial countries, who were former colonial powers, for their domination of global institutions, politics, markets and laws.
The world has seen the economic and political ideas of emerging powers such as China, India, Brazil, Indonesia, Mexico and others rise, resulting in a multipolar global order, which has challenged the US and Western dominated global order.
Following Brexit on 31 January 2020, when the United Kingdom left the EU after 47 years of being part of it, the European Union had become less cohesive. The retirement from political office of German Chancellor Angela Merkel, one of the most dominant global leaders in the post-Cold War era, in 2021, almost at the same time as the UK exiting the EU, brought a sense of drift within the EU itself.
The US’ shambolic withdrawal from Afghanistan last year, when the Taliban took over, and the government and citizens fled the country in their masses, was interpreted in many industrial and developing countries as the US having lost its global hegemony.
Strategists in the Putin circle were confident ahead of the invasion of Ukraine that Russia had built itself a formidable global coalition of supporters that would back them against Western criticisms. Apart from the BRICS trade alliance, Russia had reintegrated into a regional trade bloc in 2015 with former economies of the USSR, such as Belarus, Kazakhstan and Armenia, called the Eurasian Economic Union. Russia had also formed a critical partnership with former allies of the USSR, including many African, Latin American, Asian and Middle Eastern countries.
In addition, Putin was emboldened by the fear of Western powers that Russia may unleash the country’s nuclear power arsenal against them – if he faces opposition. Finally, Russian strategists appear to have believed that after amassing more than 100 000 troops on its border with Ukraine before the invasion, the Ukraine leader would surrender quickly without a shot being fired – and that there would be an uprising by pro-Russian Ukrainians in favour of Russia.
In fact, it does appear that Russian strategists calculated that the invasion would be quick with very little bloodshed or destruction, that Ukraine would capitulate very quickly, and the West would grudgingly accept the Russian takeover. But they did not reckon on the formidable resistance by Ukraine President Volodymyr Zelenskyy and his people, and the global outrage against the invasion. Unless peace mediation succeeds, the prospect of a guerrilla war looms, like the one that the Union of Soviet Socialist Republics (USSR) faced in Afghanistan in the late 1980s. The USSR was humiliated in that war – a factor which also contributed to the breakdown of the USSR.
For another, Putin, a former KGB hardman, seems to have fatally underestimated Zelenskyy as a political operator, because he was a former comedian and actor before he took power. Putin refused to acknowledge Zelenskyy when he was elected president in 2019. Yet, Zelenskyy and his wife, Olena Zelenska, a former screenwriter, are in fact serious politicians. Together, they have built strong partnerships between Ukraine, the West, and the EU and NATO, although Ukraine is not yet a member of either. They have also built strong alliances with other developed and developing countries around the world – while enjoying strong support within Ukraine itself as they tried to reposition themselves, through a Russian satellite, towards the West.
The West response: economic war against Russia
The Russian President has threatened to unleash a nuclear Third World War if the US, or any European Union or Western country, comes to the military assistance of Ukraine. For fear of a nuclear war unleashed by Russia, a major nuclear power, Western powers have not rushed to the military aid of Ukraine. Instead, they have unleashed an economic war against Russia.
French Finance Minister Bruno Le Maire put it succinctly: “We will provoke the collapse of the Russian economy.”
Western powers have isolated Russia internationally, launched sanctions against them and impounded the assets of key Russian political leaders, oligarchs and figures associated with Russian President Vladimir Putin. The sanctions are likely to collapse Russia’s finances – which will ironically reverse any military success against Ukraine the country may have thought it scored.
The Group of Seven (G7) industrial nations have also excluded major Russian banks from the Society for Worldwide Interbank Financial Telecommunication or Swift system.
Furthermore, Germany has said it is ready to disrupt Russia’s giant energy industry, even if it harms Germany itself. Europe gets nearly 40% of its natural gas and 25% of its oil from Russia. Russia’s gas, oil and crucial metals export capacity is one of the main sources of its political and economic power. Germany said it will stop the certification of the Nord Stream 2 gas pipeline, the 1200km pipeline, through natural gas flow through the Baltic Sea from Russia to Germany. The pipeline was completed in September last year, but still requires final sign-off from German regulators.
The pipeline, which is controlled by Russian state-owned company Gazprom, will deliver more than 50% of Germany’s yearly gas consumption, making Germany its biggest customer. The US, Ukraine and several European Union countries opposed the construction of the pipeline when construction started in 2015, saying it would give Russia enormous power over European economies.
All these sanctions are pushing Russia towards plunging into a banking crisis, with many of its banks on the verge of collapsing. Its currency, the ruble, has collapsed. Russian companies are leaving in their droves or have stopped production. The country will fall into its worst recession since the collapse of the Soviet Union.
BRICS have battled over how to respond
Russia’s globally condemned invasion of Ukraine has not only stumped the BRICS (Brazil, Russia, India, China and South Africa) trade alliance of large emerging markets, over how to respond, but has also caused deep divisions within these countries.
BRICS countries appear to have been left blindsided by the Russian invasion of Ukraine. Many of the BRICS countries have pegged their support for Russia or their neutrality on a likely scenario that the invasion would be quick, with very little bloodshed or destruction, that Ukraine would capitulate swiftly, and the West would grudgingly accept the Russian takeover.
For another, the strong world opinion against Russia – even from supposedly Russian allies in African and developing countries – appears not to have been foreseen. Moreover, Western powers have unleashed an economic war against Russia, which is crippling the country, and making a war financially unsustainable.
BRICS economies may also face collateral damage in the fallout from the war. The conflict could slash more than US$1.5 trillion off the world economy by disrupting global supply chains, pushing up inflation and driving many economies – including BRICS ones – into recession.
Putin, in the lead-up to Russia’s invasion of Ukraine had either met in person or telephonically discussed with individual BRICS leaders, not to tell them specifically about an impending invasion, but to secure assurances of their broad political support or, at worst, neutrality, in a scenario where the Russian bear may fight with a third-party country or a Western power.
While Western powers and many developing countries have rightly condemned Russia for invading Ukraine, a sovereign country, the BRICS countries have either refrained from criticising Russia or, like South Africa, have issued a neutral statement – neither endorsing nor criticising the Russian bear – or like India, have abstained from motions carried in the United Nations to censure Russia.
China and India have similarly refrained from voting against Russia at the UN. In the BRICS democracies that refrained from supporting Russia, it has caused massive political fallouts between country leaders, from within governing parties and across broader society.
In India, the opposition Congress Party, civil organisations and the media have been critical of the country’s “non-aligned” stance towards the Russian invasion. “The Government of India should stop its verbal balancing act and sternly demand that Russia stop immediately the bombing of key cities in Ukraine,” Palaniappan Chidambaram, a leading member of the Congress party, tweeted recently.
Before Russia invaded Ukraine, the country’s leader Vladimir Putin had crucial strategic meetings with BRICS partner countries. On 16 February, when Russian troops were massing at the borders of Ukraine, Putin met with Brazilian President Jair Bolsonaro. Putin declared Brazil as Russia’s most important partner in Latin America; Bolsonaro declared that Brazil was in “solidarity” with Russia.
Brazil exports more to the US, around US$31 billion in goods, than to Russia, around US$1.6 billion in goods, so Brazil’s “solidarity” pledge to Russia was mostly based on political alliances, rather than business alliances. Bolsonaro had to unprecedently slam his own vice president, Hamilton Mourao, who said that Brazil respects Ukraine’s sovereignty and compared Russia’s invasion of the country to the aggressive acts by Adolf Hitler in the late 1930s in Eastern Europe.
The US and North Atlantic Treaty Organisation (NATO) countries have been critical of Brazil’s support of Russia. If Western countries launch sanctions against Brazil for its support of Russia, such sanctions will cripple the country’s economy, which is tightly linked to the US economy.
The Russia-India relationship dates back to the Cold War under the USSR. Russian President Putin visited India in December 2021. The visit coincided with the delivery to India of a Russian-made S-400 missile defence system, with a range of 400km, and the ability to shoot down 80 targets simultaneously – one of the most sophisticated surface-to-air defence systems in the world. Around 60% of India’s weapons are Russian-made. The country has adopted a non-aligned stance towards the Russia-Ukraine conflict. India may depend on Russia’s arms, but its economy is tightly interwoven with that of the West. Isolation by Western countries because of India’s support of Russia, would be painful to the Indian economy.
Chinese leader Xi Jinping and Putin met on 4 February this year and issued a joint statement in support of each other, which was unprecedented in the range of commitments between the two countries. Reliable sources say that Putin promised to move any armed action to until the Winter Olympics staged in China was over. The irony is, if that was true, the later invasion date gave Ukraine breathing space, not only to help Ukraine to prepare, but also because the post-Winter Olympics date fell in the muddy season, when the country’s roads are almost impossible to navigate, which has provided a hindrance to the movement of the Russian army.
Analysts have suggested that China – who was at the start of the conflict deemed to potentially benefit the most out of it, depending on how the Western powers respond to Russia’s invasion – may use it as a cover to act in terms of their Taiwan assertions. China has always claimed that Taiwan is part of China. Now, of course, the global outrage that Russia’s invasion has unleashed, may temper China’s approach to the Taiwan question.
Both the Russian invasion and the Western economic war against Russia could also have devastating economic implications for BRICS countries. Clearly, it is in the interests of all BRICS countries to intervene to end Russia’s war against Ukraine, which is not only causing devastation, loss of life and economic destruction to Ukraine, but is also damaging the world economy, and the economies of individual BRICS countries.
This group of countries has the most influence over President Putin – and he is very likely to listen to them, rather than to leaders of Western countries. China has so far offered to mediate in the conflict. In a phone call with Putin last week, Chinese President Xi Jinping called for a negotiated solution. BRICS countries should get involved collectively.
(Xi Jinping (China), Vladimir Putin (Russia), Jair Bolsonaro (Brazil), Narendra Modi (India), Cyril Ramaphosa (South Africa)
Russia–South Africa relations
The ANC government’s support of Russia is based on a combination of factors, which includes being part of the BRICS (Brazil, Russia, India, China and South Africa) alliance.
Although direct trade with Russia is important for South Africa, it has larger trade relationships with other Western, developing and BRICS countries. In the 2020 financial year, Russia and Ukraine imported products from South Africa, including citrus fruit, cars, manganese ore, platinum, grapes, apples, pears and wine, to the value of R4.1 billion. At the same time, South Africa imported wheat and mixed grains from Russia and Ukraine to the value of R2.3 billion.
Many ANC leaders appear to believe South Africa is under obligation as a member of the BRICS (Brazil, Russia, India, China and South Africa) alliance to support Russia or at least remain neutral against it in the war against Ukraine. South Africa has at the United Nations abstained from voting for tougher sanctions against Russia for invading Ukraine – provoking criticisms from opposition parties, civil society and the media, and South Africa’s Western allies.
Many ANC leaders, members and supporters are backing Russia for ideological reasons, as the successor to the Union of Soviet Socialist Republics (USSR) which supported the ANC during its liberation struggle. The ANC is in a tripartite alliance with the South African Communist Party (SACP) and the Congress of South African Trade Unions. The Soviet Communist Party directly supported the SACP during the liberation struggle.
SACP leader Blade Nzimande was the first to pledge his support for Russia. The South African Democratic Teachers’ Union, the biggest union in South Africa’s public service and a key component of Cosatu, issued a strong statement slamming Multichoice for blocking Russian broadcaster RT from its DSTV channel 407.
Yet other ANC leaders have personal relations with Russia, many of them, such as former SA and ANC leader Jacob Zuma, trained in the former Soviet Union. In the 1970s, Russian President Putin was a USSR military trainer in Africa for the liberation movements such as the ANC, Zimbabwe’s Zanu-PF, Mozambique’s Frelimo and Angola’s MPLA.
Many ANC leaders are also deeply involved in Russia’s investments in South Africa – most publicly, for example, the agreement signed by former President Zuma to have Russia build nuclear power stations in South Africa. If that deal had been implemented, it would have benefitted many ANC leaders.
A number of ANC leaders, such as Deputy President David Mabuza, have gotten personal largesse from Russian President Putin – in Mabuza’s case, access to medical treatment. Therefore, President Cyril Ramaphosa is under pressure to endorse the nuclear deal his predecessor Zuma signed with Putin.
South Africa’s support for Russia risks its isolation as a global pariah, undermining local investment and, ultimately, economic growth – and at a moment when the country desperately needs new resources to tackle poverty, unemployment and stop the country’s rapid deindustrialisation.
The problem is, because of South Africa’s close association with Russia, and its refusal to condemn the Russian invasion of Ukraine, a sovereign country, it could become collateral economic damage in the Western economic war against Russia.
Western countries, global investors and ordinary citizens may now see South Africa as aiding and abetting Russia. They may turn this into negative market sentiment, withdrawing their investments from South Africa, or not investing here, just when we desperately need foreign investment to lift growth levels to tackle poverty, unemployment and reverse deindustrialisation.
South African President Cyril Ramaphosa wants to raise R1.2 trillion in investments over the next five years. Given the perception that South Africa stands shoulder to shoulder with Russia, this investment target will certainly be a distant dream. In fact, the frightening prospect is that South Africa may see an investor and capital flight, if the country is isolated by Western economies because of its closeness to Russia.
Russian war against Ukraine: impact on South Africa
The war has and will disrupt global production, supply chains and increase logistic costs such as storage. This increases global inflation and therefore depresses global growth.
Russia and Ukraine combined produce 28% of the world’s global wheat and 18% of corn. As a case in point, since the Russian invasion on 24 February 2022, the futures price of wheat jumped 27%.
Ukraine produces around 80% of the world’s neon gas, a component of microchips used in computer screens and smartphones. Ukraine is also the world’s largest exporter of sunflower oil. It produced 45% of the global sunflower seed and safflower oil output – with Russia second, producing 23% of global output. Ukraine produced 19% of the world’s rapeseed. Russia produces under 20% of the world’s barley. Russia produced 14% of the world’s fertilisers – a crucial input in agricultural production. Russia is, most importantly, the world’s third-largest oil producer.
The war in Ukraine has destroyed the country’s food production; and Western sanctions against Russia has meant that exports from there have been blocked. Before the Russian invasion of Ukraine, oil prices were already rising. The Russian invasion has hiked global oil prices further.
Depending on how long this war rages on, it will directly and disproportionally impact on the livelihoods of poor South Africans, as it is leading to price hikes, putting pressure on the country’s already squeezed shambolic public finances and dragging down economic growth.
The Russian war may bring about financial, political and social crises like the Covid-19-induced ones, which were among the root causes of the violent looting last year.
The rise in food prices, depressed economic growth and likely austerity needed to deal with South Africa’s deteriorating public finances – combined with poor public service delivery, lack of action in dealing with corruption, and unresponsiveness from the governing ANC to tackle the country’s pressing problems – could trigger more large-scale violent unrests by the long-suffering poor across the country.
The financial fallout from the war will squeeze South Africa’s already perilous public finances. And any post-Covid-19 economic rebound envisaged for South Africa will grind to a halt, or at least go at a slower pace, as the war slows down investments.
When Finance Minister Enoch Godongwana tabled SA’s national budget last month, the financial impact on the country of the Russian invasion of Ukraine was not factored in.
The war has and will disrupt global production, supply chains and increase logistics costs such as storage. This increases global inflation and therefore depresses global growth – which in turn will depress economic growth in South Africa as well as globally. An example of this scenario already playing out is that shipping delays, storage costs and increased security put on transported products have already increased wheat prices by 50% in South Africa. Prices of inputs to agricultural products have already increased 100% since January last year in the country.
Western Cape Agriculture MEC Ivan Meyer said last week that major shipping lines were not accepting any bookings or commodities. Ports in Rotterdam, Antwerp and Bremerhaven were extremely congested due to the time-consuming scanning of containers for explosives, making it hard for South Africa’s agricultural products to reach Europe or Russia. A typical 23-day journey for fruit from Cape Town to St Petersburg in Russia now takes 93 days and damages South Africa’s exported agricultural products.
The muti-billion-rand import/export relationship between South Africa and Russia mentioned earlier could come under threat as financial sanctions threaten payments.
Oil is South Africa’s largest import. Higher oil prices will increase prices across the economy. Eskom is also likely to increase its electricity prices because of higher diesel prices. Jan Oberholzer, Chief Operating Officer of Eskom, said on Kyknet Verslag on Wednesday evening, 16 March 2022, that if the Russia Ukraine conflict-induced higher fuel prices were to be sustained, it would add R2 billion to Eskom’s fuel costs this year.
And it is the poorer South Africans who are most affected by higher oil prices, not only because they spend the most on transport, but also because the rise in price of staple foods due to higher transport costs will disproportionally impact on them.
Finance Minister Godongwana did not increase the fuel levy in the National Budget tabled in February. If global oil prices continue to rise, the government may have to decide whether to increase the fuel levy or provide a subsidy to cushion the record oil price increases. Fuel levies currently brings around R90 billion to the fiscus or 1.5% of GDP.
The South African rand will also remain under severe pressure. A slump in global economic growth could mean that demand for South Africa’s commodities could be slashed, which on in its own will put pressure on the rand, as South Africa is a major commodity exporter.
A dragged-out Russian war, and the resultant uncertainty, will increase the volatility of the rand. South Africa buys oil through the US dollar, the price of fuel depends on the exchange rate, therefore a weaker rand will make it more expensive. Further to this, the Reserve Bank may increase interest rates to curb possible rising inflation – which again may be felt across the economy, from bondholders to car owners.
Because of the war, foreign investors are likely to put a brake on any new investments in South Africa or in other emerging markets. During global uncertainty, investors often move their positions from emerging markets. Western governments are also likely to divert development funding away from South Africa and other developing countries to Eastern Europe, which will impact on the critical services provided by many NGOs who have replaced government services in many areas of the country.
Russia-Ukraine War: Impact on non-oil-producing African countries
A protracted Russia-Ukraine war will bring devastating economic hardships to non-oil-producing African countries, increasing instability, leading to a new wave of mass popular uprisings, coups and terrorist insurgencies across the continent and mass migrations away from local conflicts.
The Russia-Ukraine war is causing food price rises, food shortages, and increased energy and transport prices. It will also reduce development funds for Africa from Western countries. It has depressed economic growth in individual African countries. A slump in global economic growth could mean that demand for Africa’s commodities could be slashed – reducing the income of many African countries who depend on single commodities for most of their income.
Steep food prices, food shortages and increases in living costs in African countries have often in the past lead to popular uprisings against African governments, as hunger makes people less tolerant of autocratic, incompetent and unresponsive governments. Africa may see devastating food riots.
Hard-line religious organisations, populist and separatist groups will take advantage of popular anger against governments fuelled by high food prices, food shortages and diminished development funding, to stage coups, launch insurgencies and country break-ups. Many countries may see a rise in terrorist attacks, as terror movements see an opportunity in the rising economic hardships, to recruit members, serve as alternative service providers and to unleash terror campaigns.
Nineteen African countries have consistently supported Russia in its war against Ukraine – this was reflected in the United Nations vote on condemning Russia for its invasion of Ukraine, in which 28 African countries voted in favour, 17 abstained and 1 voted against.
Many African countries supported Russia because the former Union of Soviet Socialist Republics supported the independence and liberation movements of these countries during anti-colonial struggle. More recently, Russia has provided troops to shore up autocratic African leaders – countries militarily supported by Russia, has tended to support the country. Russia have also recently sold military hardware, nuclear power and technology, and invested in Africa’s oil and gas developments, often using loan schemes, in which Russia acts both as the vendor and financier – making the recipient of Russia’s largesse locked into Russia’s political sphere.
These countries who have supported Russia, are inflicting self-harm on their own economies, unleashing domestic political instability and destroying the livelihoods of their citizens – raising the spectre of a new wave of mass uprisings, regime changes and mass migrations of the hungry to Western countries or to South Africa.
African countries are still battling from the Covid-19-induced financial crisis when disrupted global logistical networks, supply chains and business collapses because of lockdowns caused food price inflation, food shortages and increased hunger. The Covid-19-induced African financial crisis reduced the income from Africa’s commodities, following Covid-19 contractions in industrial economies which import the continent’s commodities, causing African countries to experience large revenue losses, leaving up to 30 million people at risk of extreme poverty in Sub-Saharan Africa.
The Covid-19-induced financial crisis and African governments’ autocratic responses to the pandemic, have already led to popular uprisings, coups and angry citizens voting out incompetent governments. During the Covid-19 period in 2021 there have been six coups or attempted coups in Africa. There were coups in Mali, Chad, Guinea and Sudan.
There were attempted coups in Niger and Sudan. Unrest broke out in eSwatini, in Somalia, Democratic Republic of Congo, Nigeria and Cameroon. Early 2020 saw a jihadist insurgency in northern Mozambique. This year, there has been a coup in Burkina Faso and a failed coup attempt in Guinea Bissau.
In a global scenario where there will be food shortages because of the Russia-Ukraine war, industrial countries with bigger purses will buy up most of the remaining food – leaving African countries without the buying muscle with nothing.
Foreign investors and uncertainty about the duration of the war, is likely to put a brake on any new investments in emerging markets and Africa. Western governments are likely to divert development funding away from Africa and other developing countries to Eastern Europe – which will impact on the critical services provided by many NGOs who have replaced government services in many areas of the country.
Russia-Ukraine War: Impact on oil-producing African countries
Russia’s war on Ukraine could boost the economies of Africa’s oil- and gas-producing countries, but only if they tackle endemic corruption in their state-owned resource companies, stop outdated ideological opposition to private sector investment not connected to ruling parties, and equitably distribute the income of resources to local communities to prevent those feeling excluded from sabotaging production.
African oil and gas producers have struggled with guaranteeing security of supply of their outputs, which makes them unreliable. It also undermines their ability to take advantage of Western countries and emerging markets seeking alternative sources of supply following global sanctions on Russia, the world’s third-largest oil producer and the largest gas supplier.
Africa’s leading oil producers, such as Angola, Nigeria, Libya, Algeria and Egypt; and natural gas producers, such as Algeria, Egypt, Nigeria and Angola, could play a critical role in replacing Russian oil and gas hit by Western sanctions.
However, African oil and gas producers will have to overcome their continual supply disruptions, operational inefficiencies and lack of infrastructure, new investment and capital. They will also have to tackle endemic corruption in their resource state-owned companies – which is undermining production, scaring off investors and causing public resentment.
Foreign investors have also been reluctant in the past few years to invest in new African oil and gas infrastructure, as the focus, before the Russia-Ukraine war, has moved away from fossil fuels to clean energy. However, following the Russia-Ukraine war, more investment is likely to occur in oil and gas around the world because of global shortages of energy.
Because of systemic corruption in the Nigerian state-owned oil and gas industry, many communities have been excluded from the benefits of oil and gas income – and have often actively sabotaged oil and gas production.
Nigeria’s state-owned oil company, the Nigerian National Petroleum Company (NNPC), has struggled with corruption, mismanagement and inefficiencies. Investments in many of Nigeria’s oil and gas projects have stalled, as global investors in the recent past switched to cleaner energy investments.
Angola’s oil production has declined almost 30% in the last six years, to a 17-year low, because of operational problems at its oil fields, governance problems at the cash-strapped state-owned oil company Sonangol, and lack of upstream investment. Angola has also seen a decline in gas production for similar reasons. The loss-making Sonangol, the country’s state-owned oil and gas entity, has contributed to Angola having Africa’s largest debt crisis.
Both Algeria’s crude oil and liquified natural gas each declined exports by 30% in 2020, making the country’s oil output the lowest since 2017 and gas output the lowest since 2002. The decline in Algeria’s crude oil production was because of mismanagement, lack of investment, combined with Covid-19, low economic growth, and more local use of energy because of a rapid population increase.
Algerian state-owned company Sonatrach has been riddled with mismanagement, corruption and inefficiencies. On current trends, Algeria may not be an oil exporter within a decade. The Algerian government is reluctant to allow foreign investment – neither help from global bond investors nor the International Monetary Fund – in the energy sector, fearing the country will lose sovereignty over the main income generator.
Egypt has been seeking to turn itself into a regional centre for oil and gas trade. The Egyptian General Petroleum Corporation is the state-owned company responsible for oil and the Egyptian Natural Gas Holding Company the state-owned company that controls gas projects. Both state companies have been accused of corruption, inefficiency and patronage appointments – and of striking poor contracts with foreign companies.
Tanzania is also strategising how to secure new markets. The Tanzania Petroleum Development Corporation (TPDC) is the state-owned company that manages the country’s oil and gas. Former Tanzanian Minister of Energy and Minerals Sospeter Muhongo alleged that staff of TPDC were incompetent, made corrupt deals and were “thieves”.
Mozambique has the third-largest natural gas reserves in Africa. However, it has been systemically unstable politically, which is undermining its gas delivery. Corruption, failure to deliver public services and excluding local communities who are not supporters of the Frelimo ruling party from the benefits of oil, gas and mining investment, have led to widespread opposition against the government, which Islamic insurgents in turn have exploited to launch attacks in the northern Cabo Delgado region, close to the Total-led liquefaction plant being built.
In April 2021, Total declared “force majeure” on its gas projects, suspended continued operations and contractors after Islamic militants attacked Palma, a port town in Cabo Delgado.
If African countries want to take advantage of the oil and gas shortages brought about by the Russian war against Ukraine, they need to secure stable supply, invest in infrastructure and secure new markets. Corruption, mismanagement and ideological-based decision-making significantly increases the cost of business, inefficiencies and drive away investors.
A prerequisite for this is better governance of countries and oil and gas state-owned companies, merit-based appointments in these organisations, tackling corruption and bringing in the private sector as an investor.
Russia-Ukraine War: Opportunities for South Africa
The Russia-Ukraine war offers new opportunities for South Africa in expanding renewal energy, diversifying local agriculture produce and export, and making military hardware for export.
The war has and will lead to an explosion in energy nationalism around the world, as countries will try to ensure they have security of supply from diverse sources, rather than buy it from one source or country, and risk shortages if the outside supplier goes rogue, like Russia did. European countries are now scrambling to find alternative energy sources.
This provides a new opportunity for South Africa to not only expand its energy resources for local use, but also for export. One of South Africa’s competitive advantages is that it can produce renewable energy, whether solar or wind, for domestic and export use.
South Africa can become an exporter of green energy. However, the government will have to clear up regulatory obstacles, such as preventing companies which generate renewable energy power for their own consumption, from channelling excess power through the Eskom energy grid, meaning their power cannot be used to provide energy for other users.
Furthermore, the ANC government must allow private investment to make investments in renewable energy. The governing ANC must ditch the ideological opposition to renewable energy among many of its leaders which has undermined the expansion of the renewable industry.
South Africa is also perfectly positioned to take advantage of green hydrogen, generating power through renewable energy such as wind, solar and hydro, by splitting water into hydrogen and oxygen through electrolysis. Green hydrogen could help bring carbon emissions to net zero, “the balance between the amount of greenhouse gas produced and the amount removed from the atmosphere”.
Although South Africa has abundant renewable energy resources, we are behind countries such as Australia, Chile and Saudi Arabia in developing green hydrogen. Most of the hydrogen development in South Africa has been pushed by the mining sector, mostly by the platinum group metals, using PGMs in the catalyst plates of fuel cells. However, they are very mine-specific, for example, Anglo American Platinum’s fuel cell electric vehicle or Implats’ fuel cell forklift and hydrogen refuelling station at refineries.
Le Riche Burger from PwC rightly said: “Traditionally, South Africa has been a net importer of energy, especially in the liquid fuels and gaseous sector – development of the hydrogen production sector will be pivotal in cementing South Africa’s position as a net exporter of clean energy and major earner of foreign currency to our economy, but also to secure clean domestic energy supply that is de-risked from supply chain disruptions and currency devaluation.”
The other lesson from this war for South Africa is to diversify the country’s agricultural production to replace agricultural products imported from abroad. South Africa needs an industrial strategy that diversifies South Africa’s manufacturing and agricultural production, to produce agriculture and products that the country needs, but currently imports.
Before the Russian war against Ukraine, many countries cut their defense budgets, redistributing these funds to combat the Covid-19 pandemic. In the post-Russia-Ukraine war world, many countries will also increase spending on military again. A case in point is Germany, who has decided to increase its spending on defense to more than 2% of its economic output – a big policy shift which has been prompted by Russia’s invasion of Ukraine.
This offers opportunities for South African state-owned arms manufacturers Denel and Armscor, who have already prior to the Russian invasion of Ukraine increasingly focused on the export market. This means that South African arms manufacturers must aggressively focus on diversifying their markets, beyond the niche markets strategy they are currently focusing on and make their own operations more efficient.
South Africa’s southern hemisphere are also seeking new markets following the Russian and Ukraine war. South Africa will have to beef up inefficiencies at ports and rail to help diversify exports – and imports to and from different markets. At the moment, South African companies wanting to diversify their exports, have to both change specifications and requirements for new markets, and deal with inefficiencies in our ports, rails and roads.
Conclusion: Lessons for South Africa from the Russia-Ukraine War
It is in South Africa’s self-interest to work with its global partners, particularly in the Brazil, Russia, India, China and SA (BRICS) alliance, to help persuade President Putin to end the Russian war in Ukraine – as the impact of the war is threatening an economic downturn, loss of investments and political instability in South Africa.
In the new multipolar world, foreign policy is more complex, needs to be more strategic and tightly linked to domestic economic interests, political stability and our constitutional democracy interests. South Africa needs to seek alternative markets for products exported to both countries – and products imported from these countries, such as wheat, vital inputs, such as fertiliser.
To support the diversification of South Africa’s exports, the South African government must pursue a diversified foreign policy, which focuses on multiple markets across the world, rather than a foreign policy – as is currently the case – based on ideology, past “struggle” alliances or personal friendships, to make it possible for the country’s producers to secure diversified foreign markets.
In the post-Russia-Ukraine war world, South Africa must pursue foreign policy that is strategic to its own economic interests: which will stimulate economic growth, employment and stability at home. This means partnering with other countries not based on the past, ideology and personal connections, but on South Africa’s development, democratic and peace interests.
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This report has been published by the Inclusive Society Institute
The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions independently from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy. The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental state. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. In South Africa, ISI’s ideological positioning is aligned with that of the current ruling party and others in broader society with similar ideals.
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