US sanctions on Russia: Should South Africa care?
Sanctioned by t he US and shunned by his fellow neighbours in the eurozone, Russian President Vladimir Putin should be feeling lonely and rather neglected at this time. But thanks to his allies in the five-member bloc of nations – including China, India, Brazil and South Africa (Brics) – all is not lost, especially after a recent meeting in The Hague and publicly announcing that it rejects the use of sanctions in the Ukraine crisis. This could be a very brave move taken by these developing nations, possibly a very stern way of saying: “One for all and all for one.” What was once an economic club, Brics now seems to be gradually moving into a political and security stance, and is becoming in many ways a counter-weight to Western-dominated blocs such as the G8 and G20.
On 16 July, President Obama imposed a new round of sanctions against Russia by restricting access to American capital markets for Russian giants like the Rosneft Oil Company and Gazprombank that operate worldwide – an assignment to slowly suffocate the Russian economy. The firms targeted by the capital market restrictions are some of the most prominent in Russia. Rosneft, owned by the state and headed by a long-time adviser to President Putin, is the country’s largest oil producer. Gazprombank is the financial arm of Gazprom, the massive statecontrolled natural gas company, which is also headed by a Putin ally.
These companies will be barred from future loans with a maturity of more than 90 days, meaning that they will still be able to conduct day-to-day business with overnight capital but will find themselves shut out of longer-term equity. This is an expansion from the previous penal- ties which were limited to individuals in Russia and Ukraine, including a number of companies. EU leaders followed and beefed up their own sanctions by cutting off lending for investment projects in Russia, halted bilateral cooperation programmes and further clamped down on commerce with Crimea, which President Putin’s government invaded from Ukraine in March.
This has created a mixed reaction in the market, and foreign investors are undoubtedly wary of Russia. Although they have reduced some of their exposure, they still have one foot in. This is generally a debate of whether these sanctions ever really work. Targeting Russia’s largest oil company could complicate the operations of Western oil companies with important investments in Russia, such as BP and ExxonMobil. In retaliation President Putin warned that West-
ern companies could eventually risk being shut out of Russia’s energy sector.
To put things into perspective, BP, which is based in London, owns a 20% stake in Rosneft. ExxonMobil, based in Irving, Texas, has “a series of multibillion-dollar exploration projects” with Rosneft to explore for oil in the Russian Arctic and across a wide region of western Siberia. Currently, Russia is holding over $300bn in US currency reserves. If they were to dump all of these reserves into the world market, it would crush the value of the dollar and cause severe illeffects to the US economy.
The timing of these tougher sanctions also raises another debate; this came as Russia and China signed multiple deals in the f ields of energy, transport and infrastructure, including a $400bn deal to supply natural gas to China. The deals were signed in the presence of Chin- ese President Xi Jinping and Russian President Vladimir Putin in Shanghai. A popular online columnist in the US, Allen Roland, voiced his opinion saying: “The real issue here is this: the United States is getting very upset that China and Russia are forming these economic bonds that are very threatening to the neo-colonialism envisioned by the United States. The Brics nations are becoming a real, real threat to the United States.” This may suggest that the Brics countries no longer want to become part of the tyranny led by the US – they want to have their own vested interests and their own economic ties.
Since joining Brics, Russia has gained its own economic clout, and no longer needs the US Federal Reserve as a means for trading its currency or to deal in the open market. These five countries have developed a system that has bypassed the European and American markets and banks, giving their currencies some kind of stability and a means to trade valuable commodities, such as gold and oil. Some international market commentators believe the outrage of the US government against the Russian action is really more out of concern for Russia being able to trade natural gas throughout the world, without needing European markets to do so. Russia was going to use the nation of Syria and its ports as a means to export, but was blocked by recent civil war. This led them to reach into the Crimean region, to open ports so that Russia can make these natural gas trades without impingement. This has concerned US officials because oil and natural gas are two of the primary commodities upon which the dollar gains value. If Russia were to have free access to be able to sell natural gas, without using American currency to do so, it would have a severe effect on the US dollar and the US economy overall.
So, to my answer on whether SA could be shooting itself in the foot by joining forces to reject the sanctions, I would say no. In more ways than others, the unity displayed by these nations reinforces the gravity of the Brics initiative – many found it pointless, even predicting a potential break-up because of the disparity in size and importance. But bear in mind that Brics is a group of developing countries who are rich in natural resources that drive world economies. Such countries, despite the risks involved in emerging markets, happen to be an attractive long-term investment – meaning that there is plenty of room for profitable upside. It has been 12 years since famed Goldman Sachs economist Jim O’Neill predicted that Brazil, Russia, India and China would experience explosive economic growth (coining the term Bric). He ended his career at Goldman Sachs managing $800bn as the chairman of its division of asset management. He is now talking about Mint – Mexico, Indonesia, Nigeria and Turkey – a premonition that may just materialise.