There’s a deep sense of déjà vu that politics may, once again, be about to ring in economic despair. Few will forget December 2015 when, late at night, then president Jacob Zuma axed finance minister Nhlanhla Nene in favour of a little-known former mayor, David Des van Rooyen.
Nene later told the commission of inquiry into state capture that he was axed for refusing to rubber-stamp a nuclear deal pushed by Russia’s President Vladimir Putin. Today, it’s South Africa’s trade links with the US that may be the collateral damage of the Union Buildings’ desire to indulge Putin.
There were echoes of “Nenegate” in the rand’s capitulation to a record low of R19.32/$ a few weeks ago, after US ambassador Reuben Brigety said he’d “bet his life” that South Africa provided arms to Russia when the Lady R clandestinely docked in Simon’s Town last year.
Frank Whitaker, counsellor for public affairs at the US embassy in South Africa, tells the FM: “What gives us concern is South Africa’s position [given that] Russia’s illegal invasion of Ukraine is in direct contradiction to the UN charter. I believe it threatens the world.”
US sentiment is, in this sense, a proxy for Western disquiet with South Africa. Allies and trade partners were taken aback last October when South Africa abstained from the UN vote condemning Putin’s invasion of Ukraine, ostensibly because the country wants to remain “nonaligned”.
In a more tangible sense, this has raised fears that the African Growth & Opportunity Act (Agoa) — the long-running trade deal that gives 35 African countries duty-free access to the US market on qualifying goods — could end up being sacrificed on the altar of the ANC’s mystifying loyalty to Russia.
This month, four US senators wrote to President Joe Biden’s administration, urging it to take action against South Africa for its stance on the war. They urged the administration to move the upcoming Agoa forum (due to be hosted in South Africa later this year).
“These actions by South Africa call into question its eligibility for trade benefits under Agoa … while we understand the Agoa eligibility review process for 2024 is under way and that decisions have not been made, we question whether a country in danger of losing Agoa benefits should have the privilege of hosting the 2023 Agoa forum,” they wrote.
The impact of South Africa’s Russia dalliance, National Treasury acting director-general Ismail Momoniat tells the FM, is more far-reaching than Agoa.
“It is a real concern. Look at the benefits to us … we have to try hard to continue to be part of it. The [department of trade, industry & competition, DTIC] is quite worried. We do need to do more to remain,” he says. “More than that — we have to be mindful that a lot of investors in our bonds are foreigners, from the US, EU and UK.”
In other words, it’s not just a route to overseas markets for South African exports that’s at stake, but the country’s ability to raise the R2.1bn that it needs to borrow every day to finance its debt.
President Cyril Ramaphosa’s hymn sheet — that the country is “nonaligned” — seems to be wishful thinking, at best, if not an outright deception. There are clear signals from inside his administration of a nostalgic, though misplaced, sympathy towards Russia in the war with Ukraine.
“Look, there is nothing wrong with being nonaligned,” says University of Johannesburg professor of political studies Steven Friedman. “You take a principled position, you make it clear you are nonaligned, and [you don’t just say this as] a polite way to conceal the fact that you really aren’t.”
Last year, Friedman argued that, in fact, being nonaligned in the Ukraine war is what any solid democracy should do. “The government could be nonaligned but it doesn’t seem to know how to do it,” he said.
He argues that you don’t just proclaim nonalignment and go about life as usual — you have to be more sensitive to your conduct. Yet the government has arguably thrown sensitivity out the window.
Apart from the short-term losses there would be the historic disgrace of having sided with Putin
— What it means:
Agoa is critical — but not in the way you think
Certainly, if Agoa is axed, South Africa has a lot to lose — though perhaps not in the way you might imagine.
On paper, the tangible cost is probably less than you think. Last year, South Africa exported about R178bn worth of goods to the US, of which R62bn (35%) entered the US duty free under the provisions of Agoa.
Figures obtained by the FM show that South Africa is the largest non-oil beneficiary of Agoa, both in terms of the volume of exports (it accounts for 40% of all Agoa exports to the US) as well as the diversity of the products exported.
However, it it were ejected from Agoa, it wouldn’t lose this R62bn in export revenue, but rather the difference between exporting duty-free and having to pay duties on these exports. And US import duties are typically low — averaging about 3.6% for the products exported under Agoa.
Donald MacKay, CEO of XA Global Trade Advisors, estimates from South African Revenue Service (Sars) data that the direct, short-term benefit of Agoa last year was R1.9bn-R2.6bn — essentially, the savings on duties.
Of the 3,866 firms that exported goods to the US under Agoa last year, just 23 accounted for 75% of South Africa’s R1.9bn total benefit (using the most conservative figure). Digging deeper, just five firms accounted for almost half of those exports (roughly R30bn) and accrued R859m in savings on duties — about 46% of South Africa’s total R1.9bn Agoa benefit.
Or, to frame it in another way, if South Africa were to lose the Agoa benefits, it stands to affect just five companies materially.
South Africa’s biggest Agoa beneficiary is a single automotive firm, which exported R15bn of products to the US last year — 24% of the country’s total Agoa exports. It saved R377m on duties (assuming all those exports were cars, which would otherwise have attracted duties of 2.5%) — 20% of South Africa’s Agoa benefit.
While the Sars data is anonymised, that firm is most likely Mercedes-Benz SA — something its CEO, Andreas Brand, will not confirm or deny.
Approached for comment, he says: “The US is an important, and one of the largest, export markets for Mercedes-Benz SA. However, we do not rely on a single market — [our] exports are destined for over 90 markets globally. As developments regarding Agoa are ongoing, we cannot speculate about the impact for South Africa.”
The second-biggest beneficiary (in terms of duties saved) was a chemicals company that exported R4.1bn worth of goods under Agoa last year, saving R139m in duties. It was followed by a single jewellery company that saved R125m in duties on exports of R2.5bn.
Should South Africa lose its Agoa preferences, a sudden stop in exports to the US is highly unlikely.
MacKay thinks, for instance, that many automotive importers will probably absorb the 2.5% duty rather than shift their entire supply chain to a different country. However, it may become a factor when a firm decides where to put up a new factory — and it is this longer-term risk that South Africa may have badly underestimated.
“More severe than the short-term direct economic impact of losing Agoa is the signal it would send to the world that the US is unhappy with South Africa,” says MacKay.
The concern is that over time this could result in significant, negative knock-on effects on foreign direct investment and portfolio flows into SA and that the rand could weaken further and become even more volatile as a result.
The fact that there is a high degree of concentration among exporters, and that the benefit is relatively small, doesn’t mean we can afford to lose Agoa, says Francois Fouche, a research fellow at the Centre for African Management & Markets at the Gordon Institute of Business Science.
“It is wrong to assume that losing Agoa will not affect South Africa-US trade. It will affect our competitiveness materially,” he warns, adding that it can take a decade to find new markets because of the complexities involved in trading across borders.
Independent trade expert Martyn Davies describes this as “another own goal by South Africa”.
He expects a recalibration of the trade relationship after August, resulting in a slimmed-down version of South Africa’s Agoa benefits — especially if Putin arrives for the Brics summit.
Davies is particularly concerned about the implications for manufactured goods, which make up a considerable share of South Africa’s Agoa exports and are unlikely to find other duty-free markets easily.
“This is the last thing we need right now when we are trying to revitalise manufacturing through special export zones,” he says. “The structural reform light we seek could once again be extinguished by this move.”
To fixate only on Agoa, however, would be to miss the bigger picture, which is that to shun the US in favour of Russia may threaten the wider body of trade.
While China was South Africa’s largest trading partner last year, accounting for R190bn in trade (9.7% of exports), the US trailed only marginally behind at R188bn (8.8%), followed by Germany, Japan, the UK, the Netherlands, Mozambique, India and Botswana. Russia, with exports totalling just R4.6bn (less than 0.2% of all exports), wasn’t even in the top 50.
Were Russia not keeping the ANC’s top brass in top-shelf whisky, you’d be forgiven for thinking its economic influence was nonexistent.
Contradictions and ambiguity
Reassuringly, South African policymakers are deeply worried by the letter from the US senators. Officials in the National Treasury, as well as Ebrahim Patel’s DTIC, tell the FM that they’re doing their utmost to address the issues.
Patel tells the FM that South Africa values the relationship and will continue to engage with the US “on the benefit of strengthening, rather than weakening, two-way trade”.
“The US is a large market for South African products and an important source of investment for South Africa. Preferences associated with Agoa and related trade measures account for close to 20% of all exports by South Africa to the US,” he says.
In return, South Africa supplies raw materials for US factories and provides a market for US farm and factory products “which supports many thousands of American jobs”.
This, perhaps, overstates South Africa’s importance to the US. As MacKay points out, it’s “pure delusion” to assume the US needs South Africa economically; it accounts for just 0.5% of total imports to the US.
Politically, however, South Africa is more important.
Says Whitaker: “It’s the most industrialised country on the continent, arguably the most democratic. And a thriving South Africa will ensure that the rest of Africa rises. And there is no other country in Africa that has as strong a judiciary, or which has the depth and breadth of media, as South Africa. So we see it as a lynchpin on the African continent.”
Patel will be keen to remind the US of this on his visit in the coming weeks as part of Ramaphosa’s delegation to engage with G7 countries on South Africa’s position on the Ukraine war.
He has also been in constant contact with his US counterpart, trade representative Katherine Chi Tai, says one source in his department. “There may well be other issues beyond Russia that we will have to face. So will our participation be renewed? We just don’t know.”
Complicating matters, however, is South Africa’s deeply ambiguous stance on the war: some in the ANC and government are manifestly sympathetic to Russia and steadfastly loyal to Putin, while others are critical of the invasion of Ukraine.
The FM understands that centrists in the government have for months held exhaustive discussions with their colleagues on the implications for the economy of deviating from a nonaligned stance. But this has fallen on deaf ears, due to the hardline approach of ministers who are unswerving in their support for Russia and the fact that Ramaphosa’s administration is, effectively, the same one that served Zuma.
Says one senior government official: “There remain elements in the government who have no clue how much damage this is doing to the country … [they] simply don’t care about the economy.”
Defence minister Thandi Modise, who vociferously denied any government arms sale to Russia, has strong historical ties to Moscow. But her denials were offset by army chief Lt-Gen Lawrence Mbatha, who jetted off to Moscow for a “goodwill visit” a day after Brigety’s revelation.
When tackled about this timing, Mbatha’s retort is that the trip was planned “well in advance”. But it wasn’t the first such ill-timed incident, which makes it look more than accidental.
As Whitaker tells the FM: “In February, we expressed our concern about the Mosi-II naval exercise between China, Russia and South Africa which took place [off South African waters]. Obviously, every country has the right to conduct its own military engagement, but the timing was highly unfortunate, as this happened on the anniversary of Russia’s invasion of Ukraine.”
Whitaker says the actual military exercises weren’t the issue; it was that “the timing seemed designed to send a message.”
These are the mounting incidents that have put South Africa in the firing line, leading many of its largest trading partners to believe its “nonalignment” is a ruse.
This ordeal further highlights the internal contradictions within the ANC and the government. A large number of hardliners are openly hostile towards the West, and those who are more moderate are unable to assert themselves.
This is, at least, something the US recognises. Whitaker says the US has a much better relationship with the Ramaphosa administration than with that of his predecessor — but it realises the ANC isn’t homogenous.
“Just as we see South Africa as a multifaceted country, we also see the ANC as a multifaceted organisation, with individual voices. Some of them are definitely more pro-Russia, and some of them are not. So we always try to differentiate,” he says.
However, what cements the impression of a definite Russian sympathy is that the ANC itself has received funding from Russian oligarchs with ties to Putin. In particular, oligarch Viktor Vekselberg, who is seen as close to Putin, is a significant shareholder in United Manganese Kalahari, which last year donated R15m to the ANC, ahead of the party’s elective conference.
Says one ANC insider: “We end up for sale, very cheaply too. We don’t even have to do much. It’s worrying.”
No coherent foreign policy
Kenneth Creamer, a senior lecturer at the Wits School of Economics, tells the FM that since 1994, South Africa has had a proud history of advocating for a more just global order. “In recent years, though, it would appear that South Africa has lost some of its strategic nous in international relations and runs the risk of sleepwalking into various geopolitical minefields,” he says.
Creamer believes national interest should shape foreign policy, rather than “ill-informed nostalgia and grubby vested interests”.
“The country’s economic problems will worsen if missteps occur, and we lose access to overseas markets for our exports of motor vehicles, agricultural goods and other products. A cleared-eyed approach to our economic interests, including export markets and job creation, must inform our foreign policy stance,” he says.
Which, needless to say, is a tough sell to many in the ANC.
International relations & co-operation minister Naledi Pandor, in response to the senators’ letter, said South Africa would not shift its foreign policy for trade benefits. The problem is, there’s no clarity about what that foreign policy actually is when it comes to the Ukraine war.
If anything, this underscores how the country hasn’t had a coherent foreign policy since 2008.
Says Friedman: “[What] our foreign policy has been based on for a very long time is, ‘don’t ask us what we can do for you, what can you do for us?’ You judge the whole world not by how they behave, but by what they can give us.”
In other words, South Africa’s foreign policy isn’t based so much on a well-thought-out strategy, as it is on naked opportunism.
This is why all eyes were on Ramaphosa’s “peace mission” last weekend. But the event was somewhat overshadowed when 120 of his security personnel, and a planeload of journalists, were barred from entry into Poland, en route to Ukraine.
Insiders hope this mission could be the first step in reversing negative perceptions of South Africa, given the discussion with Ukraine President Volodymyr Zelensky and the frank discussion with Putin. While the 10-point plan presented to the two leaders by Ramaphosa and the African delegation was nothing more than the standard opening gambit in conflict negotiations, there was one comment that stood out.
Gustavo de Carvalho, a senior researcher at the South African Institute of International Affairs, tells the FM that Ramaphosa’s direct message about the sovereignty of states “shifted the needle” to some extent.
“There was a direct reference [to] the integrity of internationally recognised borders, [and] the sovereignty of states. And we see that quite clearly coming in, in many of the speeches that came [during the mission],” he says.
This is a discernible change in tone, since it illustrates that South Africa still believes the UN has primacy. “That is a slow shift in the narrative,” he says.
But is that slight change in tone enough to salvage the frayed ties between South Africa and its second-largest trading partner?
It’s hard to say. Whitaker says the US is “very supportive” of Ramaphosa’s peace efforts, but adds that the country is clear that “no agreement can come at the expense of Ukraine’s territorial integrity or the UN charter”.
Critically, he says he cannot say whether South Africa’s Russian dalliance will scupper its chances for Agoa renewal. “At this point, all I can say is that we share Congress’s concerns. But Agoa is the cornerstone of US trade and investment in Africa, involving not just South Africa, but 35 nations,” he says.
Caution: bungling ahead
What is concerning is that there are plenty of minefields ahead, which are prime opportunities for ANC-style bumbling to take centre stage. This includes the upcoming Russia-Africa summit and the Brics summit.
An International Criminal Court arrest warrant for Putin means that if he sets foot on South African soil, he will have to be arrested. Only, Ramaphosa’s administration is unwilling to do this, because Russia will see this as a declaration of war.
An interministerial committee, chaired by Deputy President Paul Mashatile, recommended the summit be moved, potentially to China. But Ramaphosa loyalists have scoffed at the idea, preferring that Putin not attend in person.
De Carvalho says the country has to tread carefully. If Putin attends the summit and isn’t arrested, it would be disastrous on many levels.
“There are way too many important aspects that are going to be discussed in August. We’re talking about expansion of Brics, we’re talking about the issues around de-dollarisation. That goes way beyond Russia itself,” he says.
Foreign diplomats tell the FM they’re watching the imbroglio with keen interest, as much for what it says about South Africa’s values as anything else.
“People often focus on the trade issues and what can be lost in monetary terms, which is disappointing because this is fundamentally a question of values,” one tells the FM.
It’s a critical point because, as MacKay says, South Africa will be dependent on trade with the West for a long time to come — a factor it daren’t ignore in the design of its foreign policy.
“It’s not possible to swap our trade with the US and the EU for Africa, if for no other reason than there is insufficient demand in Africa to accommodate the volume and variety we trade with the West,” he says.
MacKay says no matter how the war ends, “Russia will remain a global pariah state for a long time and the stink of this war will cling to its supporters for an equally long time”.
It illustrates that all eyes are on South Africa now. Ramaphosa has a small window of opportunity, created by his peace mission, to truly show the country is nonaligned.
It’s touch-and-go, given that the ANC-led administration has proven time and again that rising to the occasion isn’t its strength. But if there were ever a time for the country to haul itself back from the brink at the last second, it is now.
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