SA’s growing isolation from trading partners, international community sparks concerns – Katzenellenbogen

South Africa is at risk of becoming increasingly isolated from its trading partners and the global community due to poor governance, corruption, and a range of other factors. The country’s support of Russia’s invasion of Ukraine and inadequate controls on illicit money flows have pushed it into the grey zone of financial operations. These issues have created pressure on economic growth, discouraged foreign investment, and weakened governance. Writing for Daily Friend, Jonathan Katzenellenbogen expands on the topic below.

South Africa’s growing isolation

By Jonathan Katzenellenbogen*

South Africa is drifting into growing isolation from its trading partners and much of the international community.

The consequences will be pressures on economic growth, greater problems in doing business, perhaps deteriorating governance, and maybe the ANC not hearing what much of the world is saying.

The new isolation is due to a combination of factors, including the country’s overall direction of travel into poor governance. Big pushes to isolation have come with the financial greylisting by an international official task force, due to inadequate controls on illicit money flows, as well as our siding with Russia on its invasion of Ukraine.

The inability of the government to run a power utility in the 21st Century has meant a lot less investor interest in the country. Corruption and the extensive influence of construction and other mafias are frightening off investors. Low economic growth, the weak exchange rate, the inability of the ANC to reform, and its ideology play a significant role in our new isolationism.

Holding a naval exercise with Russia and China on the anniversary of the Russian invasion of Ukraine is a turning point. There is now no longer even a doubt on South Africa’s position on the Russian invasion. The financial greylisting by an international body due to poor implementation of laws to counter flows of illicit money will create problems for our banking system. Both of these developments have put the country into a precarious international position.

Last week Alan Pullinger, the boss of First Rand, one of the country’s largest banking groups, said South Africa’s position on Ukraine was ‘foolhardy’. It is rare for a banker to step outside his lane and take a stance on foreign policy, but he is correct to do so as our position on the invasion of Ukraine might well undermine the ability of the banks to secure offshore funding.

Given our poor economic position, problems with governance, and power outages, our foreign policy stance has sent up a red flag signalling another big issue.

Read more: Paul Hoffman: Suggestions to counter SA’s FATF greylisting

Moral authority

The South African position on the Russian invasion amounts to a distancing not only from the West, but also from much of the international community. And it undermines what is left of the moral authority that South Africa had in the world, due to the Mandela legacy.

In the most recent UN vote coinciding with the first anniversary of the invasion, a sizable majority, 141 countries, backed a resolution calling for an end to the war and a Russian withdrawal. South Africa was among 32 countries that abstained on the vote. There were five that voted against the resolution. That means the countries that either abstained or came out against the resolution were massively outvoted.

Most of the states that abstained are in some way dependent on Russia. Some are land-locked neighbours, some like India rely on Russian arms, or need Russian backing in some form. That is not the case for South Africa. The vote means South Africa is voluntarily affiliating itself with a long list of countries with poor governance and strong anti-western sentiment. There was no compelling need for us to abstain, and we might have followed the lead of African heavyweights like. Egypt, Nigeria and Kenya, and voted in favour of the resolution. Our trade with Russia and China is far outstripped by that with the US and Europe.

South Africa probably has the closest diplomatic contact with states that share its foreign policy. Pretoria sees the fellow BRICS countries, Brazil, Russia, India, and China, as its anchor on foreign policy. That narrows the world view to which our diplomats are exposed, and probably shows the ANC is less disposed to hearing out what international bodies and many Western countries have to say.

Ramaphosa has visited the US and UK in recent months, so this is not as though ties have greatly diminished, but they are not nearly as close as they were in the early 1990s. South Africa does not receive the hearing it once did, and we do not give the West the hearing we once did. We would be less isolated and have more leverage in the world if we actually did pursue a neutral stance.

Read more: ANC’s 2024 election trump cards – BIG and Russia. But WSM reckons both will come at a price.

Accelerated our isolation

The financial greylisting was very long in coming and has no evident connection to our stance on the Russian invasion. But the close timing of the two has accelerated our isolation. Both will mean our financial system will be closely watched.

We cannot afford to become a sanctions-buster for Russia, as punitive action will be taken against us by the US and Europe.

Countries are put on the ‘grey list’ because they have been found weak in dealing with money laundering and terrorist financing. We are now on the same list as some pretty dodgy places that are known points of money laundering for drug and terrorist financing. It does not help that probably few of those who have benefited from domestic corruption have had their bank accounts closed. What greylisting will mean is close monitoring of financial flows and greater form-filling, which does not make doing business easier.

Lack of large-scale interest by global investors also hurts and isolates us. Through investment we receive finance and new technology, and a boost to employment. The weak exchange rate is an advantage for investors, but they are not enticed by a barely growing economy with a power crisis.

Also isolating the country is our country’s weakening exchange rate. The currency has been on a weakening trend for almost two years. That makes imports more expensive, feeds inflation, and makes overseas business trips and contacts with the rest of the world more expensive. Companies that require imported technology will buy less, with a potential impact on productivity.

ANC industrial policy is also isolating the country. The stress on a policy of ‘localisation’, under which key items in selected industries will have to be locally made, will prove expensive and difficult.

Read more: Lutz (ex-Niemoller); Listen up Cyril – here’s the antidote to your engineered derangement

Global supply chains

Our market is small and it is best for us to aim at exporting to the world, and importing what we require. Under President Thabo Mbeki, industrial policy focused on trying to ensure that South African manufacturers became part of global supply chains. That has fundamentally changed under Trade and Industry Minister Ebrahim Patel. The question arises as to whether this is essentially a means to protect empowered industrialists, rather than benefiting the economy.

Under apartheid, international economic sanctions added political pressure but hurt the economy. Due to an inability to access the capital markets on a large scale, the country faced a growth constraint as it could not borrow sufficiently to cover the balance of payments deficits. Industries were developed, but at enormous cost.

South Africa might yet face new financial constraints as it heads down the road to a new isolationism. And in this new environment the ANC might be listening more to the views it wants to hear. That might well reinforce its inclination to double down on failed policies, rather than actually implement serious reform.

*Jonathan Katzenellenbogen is a Johannesburg-based freelance financial journalist. His articles have appeared on DefenceWeb, Politicsweb, as well as in a number of overseas publications. Jonathan has also worked on Business Day and as a TV and radio reporter and newsreader.

The views of the writer are not necessarily the views of the Daily Friend or the IRR

If you like what you have just read, support the Daily Friend