The war in Ukraine which started in February of 2022, initiated an unprecedented number of sanctions against the Russian Federation, 16000 against Individuals, 9000 against companies and 3000 against institutions. The purpose of these has been to apply economic pressure on Russia. In conjunction with sanctions, Russian assets, totaling an estimated $300 billion were frozen. Russia has been denied access to international trade systems such as SWIFT. However, despite these, there have been several unintended consequences which have had a negative effect on Western economies, specifically the EU.
Higher energy costs making European companies less competitive
European countries were reliant on cheap Russian energy for industry and domestic use. The cessation of supply has forced these countries to seek alternative sources, primarily from the US and Europe pivoted quite quickly to US LNG. Favourable pricing for LNG is subject to contract negotiation and duration periods of the contracts agreed. Europe has taken a short-term view, resulting in higher prices for short-term contracts. The negative impact has been the price which is 4 to 5x higher than Russian energy. This has led to European companies becoming less competitive in the markets they traditionally export to, resulting in lower demand and an increase in EU companies starting to off-shore their operations.
Freezing of Assets and Alternative Structures and Platforms
The freezing of Russian assets sent shock waves throughout the world especially in what is termed the “Global South’’, consisting of mainly developing nations in South America, Africa and the Far East, who have considerable reserves in Western countries. This, amongst others, has provided an impetus to seek an alternative international platform and system that will lessen the risks and vulnerabilities these nations believe they are exposed to.
BRICS, the Global South and the G7
What started in 2009 as a trade platform consisting of Brazil, Russia, India, China and South Africa, has now grown to a powerful association that includes the new members Iran, Egypt, Ethiopia and the United Arab Emirates in January 2024. The recent BRICS summit, held in Kazan in October saw representation by 32 foreign delegations, 24 of which were heads of state. 13 countries attending were invited to participate as partner countries. All in all, there are now 20 African, 7 countries in the Americas, 20 Asian and 4 European countries that have expressed and interest or applied for membership in BRICS.
The current BRICS membership constitutes 45% of the world’s population compared to 10% of the G7’s, and 35% of the world’s GDP (ppp) compared to the G7’s 30%. With new members joining from 2025, excluding the participating partners, this will grow significantly. BRICS is quickly coming to represent developing nations and economies, potential significant areas for future growth, compared to the EU countries, who’s growth projections have been downscaled.
BRICS and alternative International Trade Platforms
A common theme and topic of discussion within BRICS 2024, has been the need for alternative international trade platforms as well as trade in domestic currencies to address the aforementioned risks and vulnerabilities associated with using Western systems, banks and currencies. While BRICS see the advantages, there are numerous risks for the West. For example, China recently cancelled the traditional wheat orders on their primary suppliers consisting of the US, Canada, and Australia. Instead, they procured from Brazil and Russia. International trade in wheat, as with other commodities, is generally done through a commodity exchange and also using US banks and the Dollar. This trade wasn’t. The effect has been that the West cant see the volume traded or the price per ton for the trade. It was also conducted without the Dollar, depriving US banks of the exchange revenues.
US farmers rely on the trade data provided by these exchanges in order to plan their planting seasons, what crops and what quantities. Farmers are not the only dependents for this data. An agreed outcome from the BRICS 2024 Summit, was the need to urgently develop a BRICS Commodity Exchange for all commodities within BRICS using local currencies.
BRICS and alternative International Trade Routes
It has been referred to by Western analysts as the ‘’New Silk Road’’. An inland trade route that links Russia, to China and India, reducing the travel distance between its furthest points, to 7 000kms. A significant reduction compared to the approximate 10 000 nautical miles (18 000kms) sea route from China to Europe via the Suez Canal or the 13 000 nautical miles (24 000kms) using the current Cape Route, which is the case now, due to tensions in the Red Sea.
This East/West corridor has the potential to link Eastern Europe and Scandinavian countries to the East, without using traditional shipping lines. The East/West corridor is also being supplemented with the Nort/South Corridor as well as the Northern Sea route, which links China and Europe via the Bearings Sea, the latter being about 7 200kms by sea.
The New Silk Roads and Africa
Tanzania’s GDP is set to reach 5.7% in 2024, with 6% in 2025. The drivers have been agriculture, industry and tourism supported by public investment and reforms. Whilst Tanzania has not expressed an interest in joining BRICS as of yet, it sees benefits and potential in expanding and cooperating with BRICS members, as China remains Tanzania’s major trading party. Moreover, both China and Russia view Tanzania as the gateway to Eastern, Central and Southern Africa and have been discussing greater involvement in the expansion of Tanga and Dar es Salaam. The upgrading of the TanZam railway is also being actively pursued.
Disruption to Supply Chains
Clearly, the geopolitical environment along with the shifts in trading Blocs, offshoring, lowered demand in traditional markets and increasing demand in new markets will have an impact on near and future supply chain configurations, both in terms of physical routes, the physical means of facilitating trade as well as the platforms and currencies being used to carry out international trade.
The recent elections in the US have resulted in a Trump Administration from 2025. Trump has indicated increased tariffs on imports to the US, primarily affecting China and Europe. He has also indicated that he is aware of the possible impact of De-Dollarisation on the US economy, and he could, therefore, implement broader tariffs and take other punitive measures against BRICS members.
Disruption equals Opportunity
African countries are increasingly supportive of the shift towards a new international system, political and economic. Apart from mitigating or eliminating the now evident risks as mentioned previously, the ability to trade their goods and commodities in local currencies or other mechanism, is extremely attractive, as are the lower and less costly barriers to entry (Western regulations and compliance issues) in potential new markets that will open for them. The elimination of currency exchange costs alone, can represent significant savings to many countries, estimated to be in the billions of USD per annum, savings which can be used for further development internally.
The next decade is going to be disruptive but it doesn’t have to be viewed in a negative light. With the uncertainty of how things are and will play out, I seriously recommend that South African businesses keep these developments on their radars, as, with any disruption, there are always highly beneficial opportunities to be had and as with everything, South Africans have proven to be highly flexible and resilient.
