Invasion exacts a heavy toll
Expect even higher food and fuel prices
● The upheaval in Eastern Europe threatens to upend global trade and the immediate prospect for South Africans, weary after two years of Covid lockdowns and restrictions, is even higher food and fuel prices.
Still, Russia’s invasion of Ukraine could also yield opportunities for some sectors, and deliver another windfall to government coffers.
National Treasury director-general Dondo Mogajane said this week that the situation in Ukraine is a concern and that the assumptions about the global economy that were contained in last week’s budget have gone “out of the window”.
“We have to relook at the price of oil, the type of financial market conditions that we are seeing now, and what that will mean for the amounts that we have to borrow and what it will mean for global financial flows,” Mogajane said at a post-budget briefing hosted by Deloitte Africa.
In the 2022 budget, presented in parliament on February 23, the Treasury estimated that local growth would average 1.8% in the next three years.
But the war in Ukraine has seen oil prices rise to within a whisker of $120 a barrel a level last seen in 2013 amid fears of supply disruptions that are bound to affect the local economy should they prove sustained.
Izak Odendaal, an investment strategist at Old Mutual Multi-Managers, said global food and oil prices have already increased sharply.
“As a result, the petrol price is very likely to increase again next month unless the situation changes dramatically. Similarly, we should expect higher food prices.”
Motorists are already digging deep into their pockets after the petrol price rose by R1.46 a litre on Wednesday to R21.60 a litre for 95 octane inland and R20.88 a litre in the coastal areas.
Prices of some food staples have also risen. According to the Pietermaritzburg Economic Justice & Dignity Group’s latest household affordability index, consumers paid R146.90 for 5l of cooking oil in February, up from R108.53 a year earlier.
Annual consumer price inflation moderated to 5.7% in January from 5.9% in December 2021, according to the latest data from Stats SA.
However, food and nonalcoholic beverages are among the main components in the basket of goods used to calculate prices, and the recent spikes are bound to be reflected in coming months.
Independent economist Thabi Leoka said that should the war escalate into a global conflict, there are likely to be currency ramifications, which will translate into even more inflation.
“We are going to see interest rates rise as a result,” Leoka said. Ukraine accounts for about 30% of SA’s wheat imports.
“In my understanding, you contract into the forward market, so now you have to scramble for another market at another price that is typically unfavourable because of the timing that is also going to impact the cost of wheat versus the cost of wheat we received from Ukraine,” Leoka said.
Wheat prices soared to the highest since 2008 on growing fears of a global shortage as major ports in Ukraine — which accounts for more than 25% of the world’s exports of the staple — and other transport routes have been closed, Bloomberg reported on Friday.
Investec chief economist Annabel Bishop said with wheat prices soaring, and with Russia the world’s top exporter and Ukraine in the top five, “the Black Sea conflict heavily increases the risks to SA’s wheat imports, and with SA a wheat [and crude oil and petroleum] importer, this has limited the rand’s gain [against the dollar] so far,” she said.
On the other hand, Russia’s increasing economic isolation as a result of sanctions means the prices of palladium, platinum, coal and gold have risen. As a result, the fiscus may benefit from a tax windfall from mining companies.
SA accounts for 80% of global platinum production and more than 30% of palladium output. Russia is responsible for 14% of primary platinum supply and 44% of primary palladium supply.
Speaking at the company’s annual financial results this week, Exxaro Resources CEO Mxolisi Mgojo said he believes the conflict will trigger an energy crisis in Europe with downside risks to global economic activity.
If Europe needs to replace Russian coal volumes it will result in a price shock to the global market for the commodity and a shortage in Europe, Mgojo said.
Russia accounts for more than 60% of European thermal coal imports, and Mgojo said the primary issue in seeking to replace Russian coal is the need to secure supplies of a similar high quality.
“For thermal coal markets, European coal-fired power plants that import Russian coal are designed to burn higher-quality products; we [SA producers] have the products, we just need to get it there,” he said.
Transnet’s logistical constraints resulted in Exxaro struggling to meet coal export targets in 2021.
Terence Corrigan, project manager at the South African Institute of Race Relations, said that despite the upside opportunity for coal and platinum, SA’s policy environment isn’t widely conducive to investment in mining.
“We had a commodity boom and our receipts shot up, but our actual output grew [only] mildly, we have not had exploration for years.
“If SA can get its internal act together, there could be advantages for us to exploit; that is, if we as a country and the government will act in a manner that will allow business and entrepreneurs to do so,” Corrigan said.
Andrew Bahlmann, CEO of corporate advisory firm Deal Leaders International, said: “If anything, it is possible that the sharp increase in interest rates in Russia — brought on by sanctions rather than a sovereign downgrade — could redirect some emerging-market investment to SA.”
FNB CEO Jacques Celliers said that while commodity prices are likely to remain elevated for a while longer and be supportive to the fiscus, there could be a spillover to inflation and fuel prices, and that could be a trigger for higher interest rates.
“Interest rate hikes might come at us a bit faster than we thought,” Celliers said.
South African companies with exposure to Russia and other parts of Eastern Europe are weighing the implications of the invasion of Ukraine, which include soaring fuel prices, inflation, logistics breakdowns and disruption of financial transactions.
Analysts say that though the war is likely to hit consumer spending in Russia and other parts of the region, there could be exceptions in some areas and for some goods.
Azar Jammine, chief economist and director at Econometrix, said companies with subsidiaries based in Russia or which have dealings with the country could be materially affected by payment problems due to many Russian banks having been cut off from the SWIFT interbank mechanism.
The big risks are rising inflation caused by rocketing fuel prices and a collapse in consumer spending, said Jammine.
This could hit retail sales in Russia and have a knock-on effect in the wider region.
Professor Miriam Altman of the School of Economics at the University of Johannesburg, said a major concern was a possible escalation of the war that could destabilise Europe as a whole.
But she said the war could create demand for certain goods that will be in short supply.
“If there are sanctions against Russian exports then you would be in trouble if that is what you were doing,” Altman said.
“If you were supplying to the domestic Russian market, you may be worried but the issues may be different because you are not dealing with sanctions. It is almost impossible to know the full implications of this.”
Altman said that while the conflict could dampen consumer demand and retail sales in Eastern Europe, at the same time refugees fleeing Ukraine could bolster the retail markets of neighbours such as Poland.
Redefine Properties, which owns logistics properties in Poland and is finalising the acquisition of Polish shopping centre owner EPP, said it had not experienced any disruptions.
Redefine CEO Andrew König said this week: “There is no reason to suggest there is cause for concern at this time and it’s business as usual for us, bearing in mind Poland is a member of Nato and does enjoy the protection of Nato.”
He said Poland’s trade is orientated more towards Western Europe, particularly neighbouring Germany, but acknowledged the war will have wide repercussions due to its effect on the prices of oil, gas and coal.
König said the exodus of refugees to Poland could help to ease the labour shortage in that country.
Spar told Business Times that so far there had been “no significant impact” on its operations in Switzerland and Poland. It said products manufactured and sourced from Russia and Belarus had been “removed from Spar distribution centres in these regions”, adding they were “few and not material in value”.
A spokesperson for Prosus, which is majority owned by Naspers, told Business Times the group’s exposure to Russia is “mainly through our locally run classifieds business, Avito, which has 4,000 employees”.
Prosus says on its website it is supporting Avito “through this uncertain time” and is “appalled by the war in Ukraine and highly concerned for everyone affected”.
Prosus’s OLX Europe business employs 350 people in Ukraine and “their safety is of paramount importance”.
“We have arranged accommodation for employees and their families wishing to relocate away from the east of Ukraine and into the west, and also to leave Ukraine where this is possible.”
Barloworld referred Business Times to a Sens statement in which it said it was “mindful of the sanctions that are now being imposed” by the US, UK and EU and was monitoring developments that might affect “suppliers, customers and the company”.
Barloworld owns Russian company Vostochnaya Technica, which has a broad footprint in the country and “serves a wide variety of industrial sectors, including construction, mining, oil and gas, as well as electric power generation”.
Barloworld said in its most recent results for the year ended September 30 2021 that Russia contributed 78% of revenue for Equipment Eurasia, which represents the group’s combined operations in the UK, Mongolia and Russia.
It said all “local payments from customers in Russia are effected via the Russian central bank system and Barloworld does not use banks that have been barred from the SWIFT system”.
Barloworld did not have excess cash in Russia “at this point”.
Standard Bank said it had limited exposure to Russia and was “actively monitoring” events to ensure it complied with relevant local and international law and guidelines.
Paper and packaging group Mondi said in its Sens announcement accompanying results this week it was also monitoring “this rapidly evolving situation, the international response and the implications for the group”. Its operations in Russia represented about 12% of the group’s revenue by “location of production in 2021”.
Over the past three years its Russian operations had generated about 20% of the group’s underlying earnings before interest, tax, depreciation and amortisation.
Shares in Mondi, Barloworld, Prosus and Naspers were among the biggest losers for the week. Mondi and Barloworld closed the week 22.45% and 20% lower respectively, while Prosus and Naspers closed the week 11% and 13.3% lower respectively.
Some SA exporters may be affected by the sanctions.
Jammine said that while SA’s biggest trade partners are the US, China, Europe and the UK, fruit exporters are exposed to Russia to a degree and could suffer because “ships are refusing to carry goods to Russia”.
Pears, which are now in season, are affected. The Fresh Produce Exporters’ Forum (FPEF) said 20% of South African pear exports go to Russia, which equates to 5.5-million cartons of 15kg each.
SA exports about 8% of its fresh citrus fruit to Russia, but farmers are not affected yet because the export season starts later in the year.
Last year, the Russian Federation was the fifth-biggest importer of South African citrus, accounting for 11.2-million cartons of 15kg each.
“All the South African fruit being exported to Russia will be affected by logistics constraints and payment issues,” the FPEF said. “Should it not be possible to send [the fruit] to Russia and it has to be diverted to other markets, those markets will be oversupplied, which leads to lower prices and lower returns for South African exporters and farmers.”
It is not only South African fruit that will need to find alternative markets; all southern hemisphere countries will be in the same boat.
It is almost impossible to know the full implications of this
Miriam Altman
Professor at the University of Johannesburg’s School of Economics