Around 18 months into the Covid-19 pandemic, commentators and governments alike noticed a prevalent feeling of disinterest and listlessness regarding new information about the virus and steps that could be taken to control its spread.
People just didn’t want to hear about masks anymore or news about new treatments. The phenomenon was termed “Covid fatigue”.
More than a year into Russia’s war with Ukraine, a similar attitude has developed. News about the latest developments in the conflict no longer dominates headlines, and the war is no longer the standard “water cooler” conversation. Quite simply, there are other things going on, especially in South Africa.
However, people interested in economics should guard against Ukraine fatigue. The latest developments, in fact, could signal not only important opportunities for strategic investment in global assets but also a reconfiguration of the global economic and financial orders. Here is a quick recap for those who have not been following.
On Monday, 20th March, Chinese President Xi Jinping was welcomed to the Kremlin by Russian President Vladimir Putin. It was Xi’s first trip abroad since his historical re-election as Chinese leader earlier this year.
Xi’s three-day trip to Moscow is significant for a few reasons. First, in the words of the leaders themselves, it was an opportunity to deepen the “no-limits friendship” between China and Russia. Secondly — and related to the first — it sent a powerful message to Western leaders (who are mostly allied with Ukraine) that efforts to isolate Russia from the global order through sanctions have largely failed.
Finally, it shows that the global economic order has already reconfigured itself — US economic dominance, and the resultant dominance of its foreign policy, can no longer be taken for granted.
I’ll explain each of these in turn before offering a view of what they could mean for businesses in South Africa and investors abroad.
Chinese-Russian relations
The Ukraine war has shown just how “no-limits” the allegiance between China and Russia is. Essentially, China has been Russia’s economic lifeline. But this is not because of China’s benevolence: China looks to Russia as a source of power for its mighty economy.
China bought $50.6 billion (R931bn) worth of Russian crude oil between March and December 2022, an increase of 45% on the figures from the same period in 2021. Natural gas imports to China from Russia surged 155% over the same respective periods to a record $9.6bn. Total trade between the two countries reached a new record high last year, up 30% to $190bn.
As the Chinese economy continues to open up following its draconian lockdowns, this is likely to become even more of a windfall for both countries. Russia needs new markets for its fossil fuels following Western sanctions. China needs cheap energy to power its huge manufacturing industry. Neither circumstance is going to change in the foreseeable future.
In addition, Russia has been buying record amounts of Chinese exports, including machinery, electronics, metals, vehicles, and aircraft. China’s export-rich economy needs foreign purchasers, which means Xi is interested in what Russia can do for his country. Again, this is unlikely to change and is a sign that bilateral ties between the two nations will continue to strengthen.
Sanctions have failed
Over a year into the war, Western economic sanctions have failed to affect decision-making in Moscow. While it is true that Russia has entered a recession — its economy declined 3.7% in the latest quarter in comparison to its 3.5% growth in the first quarter of last year — this was never the point of sanctions. The sanctions were meant to end the war, and they haven’t.
Russia doesn’t seem altogether panicked about the recession either. Russian companies have boosted capital expenditure in an attempt to adjust to sanctions and realign their economy towards self-reliance and non-Western trade. Western countries are hoping this anomaly will disappear and that investment will be depressed in 2023 due to high uncertainty. China’s gambit of becoming increasingly reliant on the Russian economy shows that not everyone — least of all the world’s second-biggest economy — shares this outlook.
While Russia has, of course, become isolated from the Western world to an even greater degree than the USSR during the Cold War, this has not meant isolation from the global economic order. That’s because the global economic order looks fundamentally different to how it did in the 1980s.
What does this mean for South African business?
Last year, I wrote about how the South African citrus industry had been hit hard by increasing production and input costs and a sharp rise in fertiliser costs. Around the same time, the United Nations (UN) secretary-general Antonio Guterres asked governments and the private sector to cooperate in bringing Russian food and fertilisers, together with Ukrainian grain, to world markets.
If the UN calls for cooperation to ensure Russian products reach foreign markets, I asked, how should South African businesses react should the Russian market prove to be laden with opportunity? If Russian investors are willing to commit their capital to the local economy, do we embrace such business deals or demand that the private sector act in line with Western sanctions?
I think President Xi’s visit to Moscow — and all the things it signifies — offers an answer. We can choose to stand with the West and apply sanctions that are not working.
Or we can take the more nuanced and pragmatic approach of accepting much-needed support for our ailing economy and accepting much-needed jobs for our ailing people in the context of a new global economic order.
Michael de la Huntis is the CEO & Founder at Ion Capital.
BUSINESS REPORT