South Africa’s neutrality on Ukraine war may trigger financial sanctions

South Africa risks exclusion from SWIFT, the inter-bank network, which supports international bank transfers, and the US tariff-free African Growth and Opportunity Act (AGOA) in a swathe of secondary sanctions as South Africa continues with its neutral stance regarding the Russia-Ukraine war, say analysts.

Secondary sanctions are trade restrictions that the US treasury department usually imposes on countries that continue to trade with Russia in a manner that could damage US interests.

“South Africa’s bromance with Putin fits the frame of countries that could land in the crosshairs of US trade penalties,” says political analyst Kudakwashe Magezi. “The effects could be dire.” 

Capital leak

Markets are already suffering following an exodus of capital from international investors. Yields have increased and the rand has depreciated, said the central bank governor, Lesetja Kganyago during a presentation of his Finance Stability Review session in parliament on 6 June.

“In our interactions with investors, South Africa’s neutrality [on the Russia/Ukraine war] is misunderstood and increasingly questioned. The bank has not included the imposition of secondary sanctions in its baseline assumptions, but it is worried about the behaviour of the market,” Kganyago said at the presentation.

“Should this risk materialise, the South African financial system will not be able to function if it cannot make international payments in US dollars,” he said.

South Africa claims ‘neutrality’ in the Russia-Ukraine war, but has hosted and conducted navy drills with Moscow, abstains from UN security council votes where Russia is censored and is set to host the BRICS summit in August where Russian President Vladimir Putin is slated to attend.

South African President Cyril Ramaphosa responded to the US furore by sending envoys to explain the country’s stance to Washington. 

Power failure

Amid this market uncertainty, Eskom instability and potential power grid failure serve as a worrying backdrop deputy central bank governor, Kuben Naidoo, said on 29 May during a press conference. 

The central bank has expanded its diesel tank sizes so that if Eskom collapses, it will be able to manage the closure of the Johannesburg Stock Exchange and the banks gradually so that they can stay online for as long as possible.

As Magezi says: “Bigger diesel tanks are a coded way of South Africa’s reserve bank telling the government, markets, and the public that a total collapse is no longer far-fetched.”

Indeed, South Africa’s ongoing electricity shortage results in poor economic growth and investment projections, says Kenneth Creamer, a finance professor at the University of the Witwatersrand in Johannesburg.

“There is a risk that a loss of control over fiscal policy will add additional pressure for monetary tightening,” says Creamer.