SARB governor Lesetja Kganyago. Photo by Waldo Swiegers/Bloomberg via Getty Images
South Africa has recently received a refresher course on the economic perils formed in the wake of geopolitical tumult.
Last week the rand touched a new record low of R19.90 to the US dollar amid renewed fears of the blowback caused by South Africa’s relationship with Russia.
With no end in sight to Moscow’s aggression, and as another conflict brews in Asia, the world has been forced to negotiate an economic war zone — with countries hoping to avoid whatever landmines lay ahead. Depending on what course they take, economies will be made, broken or reorganised in the fallout.
In its Financial Stability Review, published early last week, the South African Reserve Bank flagged the risks involved in maintaining the country’s neutrality.
Should the risk of sanctions materialise, the central bank said, the South African financial system will not be able to function, as the country is rendered unable to make international payments in US dollars.
More than 90% of South Africa’s international payments, in whichever currency, are processed through the Swift international payment system. Should South Africa, like Russia, be banned from Swift because of secondary sanctions, these payments will not be possible.
This situation could lead to a sudden stop to capital inflows and increased outflows and would also affect many countries in the South African Development Community region who depend on our banks for cross-border transactions.
In turn, the sanctions could further exacerbate declining domestic financial market depth and liquidity and further erode investor confidence, the Reserve Bank added. Sanctions, the bank said, “will be catastrophic for the South African economy and has the undeniable potential to trigger a financial crisis”.
Recent history has proven that the world’s economic powerhouses in the US and Europe are still more than willing to use sanctions as a way of throwing their weight around — even if their heavy-handedness imperils key supply chains and brings them to the brink of recession. Meanwhile, the sanctions against Russia have lit a fire under the feet of another beast threatening to turn the current economic order on its head. There will be casualties.
Importantly, the Russia sanctions have seemed to do little in the way of cooling the conflict, raising questions about their effectiveness. The longer the war persists, and sanctions stick, the more time Russia has to develop a sort of resiliency — a sought-after characteristic of economies navigating the treacherous geopolitical conditions of globalisation’s twilight.
Responding to the Reserve Bank’s warnings, Bianca Botes, director at Citadel Global, noted that in an increasingly globalised world the ripple effects of conflicts and sanctions have become more and more pronounced. In other words, there is a higher risk of contagion.
In 2003, French philosopher Jacques Derrida, referring to 9/11 and the subsequent War on Terror, gave his prognosis of the political ruptures created in globalisation’s wake. September 11, Derrida concluded, was a distant effect of the Cold War, linking its loop of hostility to his theory of autoimmunity.
For Derrida, autoimmunity explained the contradictions in the compulsion of the body (the sovereign state) to protect itself from disease (incursion and violence). In doing so, one risks the immune system attacking its own tissue. In this way, autoimmunity is “a double bind of threat and chance”, more simply described as risk.
At the height of globalisation, which Derrida described as manifesting “for better and for worse”, immunity isn’t guaranteed. Economies are more likely to be immunised against their own immunity.
These conditions demand a certain degree of fitness — an ability to deftly respond to change. This is especially true now, in the wake of what political economist Ilene Grabel has called the “morbid post-American interregnum”, borrowing from Italian philosopher Antonio Gramsci.
The morbid symptoms of this interregnum, Grabel writes, include the failure to coordinate a just global strategy around Covid-19, inflation, sovereign debt crises and refugee crises. “Financial fragilities and debt distress are pervasive, with the damaging effects borne
disproportionately by the vulnerable. Post-war cooperative traditions and institutions of
multilateralism have been hollowed out, not least by the Trump administration,” Grabel adds.
“These institutions are still struggling to regain their footing and modernise against the backdrop of competition from Chinese-led financial initiatives and institutions … Central banks that exhausted their arsenals in the last few years now face new challenges stemming from supply side shocks, and are resorting to old anti-inflationary scripts.”
Russia and China — even prior to the current wave of western sanctions — have sought out ways to build resilience. Both countries, for example, had already started to develop alternatives to the Swift payment system.
In 2014, Moscow set up its ruble-based payment system called the System for Transfer of Financial Messages. A year later, China’s central bank launched its Cross-Border Interbank Payment System, aimed at internationalising the yuan.
Importantly, Swift is also a vehicle through which the US government can monitor third-party compliance with sanctions, a privilege the world superpower won after 9/11. A credible alternative to Swift, as well as progressive de-dollarisation, could go far in the way of steeling economies against western sanctions.
Meanwhile, the US and others in the G7 are also preparing for what happens if the world’s factory is once again closed to the global economy, an eventuality that will strangle still-recovering supply chains, drag down growth and push up inflation. They are de-risking.
But what is left for a small, open economy like South Africa’s to do in the wake of all this?
South Africa has already put localisation — which comes with preferential procurement, local content requirements, higher tariffs and import duties — at the centre of its industrial policy, though this has attracted considerable criticism.
Despite the blowback, in a world in which global trade is vulnerable to shocks, some degree of localisation is smart and seems to be at the centre of the G7’s de-risking exercise.
Tighter exchange controls, government-imposed limitations on the purchasing and sale of currencies, should also be seriously considered. These would guard against sudden capital outflows.
Whatever South Africa’s policymakers do, they had better take the current moment very seriously. The country’s economy cannot afford for them not to.