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THE GLOBAL EXPLOSION OF RUSSIA

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The world has been inundated with news of the Russia invasion of Ukraine.

This week’s article shall delve into the likely impacts of the crisis in Europe, this may seem miles from our shores, but will have reaching impacts due to globalisation and the interconnections in commerce and industry globally. The war in Russia will have direct impacts on our trade balance as a country and our ability to earn foreign exchange and effectively our foreign exchange reserves will be affected negatively. In 2019, Eswatini exported US$2.55M to Russia, the main products exported were Fruit Juice (US$1.55M), Citrus (US$943k), and Tropical Fruits ($26.2k). Eswatini imported goods worth US$1.2 million.

Data shows that over the past two decades Eswatini’s exports to Russia increased at an annualised rate of 47.3 per cent. Furthermore, trade statistics show that Russia is South Africa’s top five trading partner. Statistics show that combined Russia and Ukraine supply a quarter of all global wheat exports. Hence the crisis in Ukraine will have a direct impact on our trade balance.

Accelerated Inflation

Since Ukraine is pre-occupied with war, trade might not at all be possible with Ukraine, at least in the early days of the war. As a result if domestic suppliers are not able to find an alternative supply of wheat we should expect wheat related products to show an upward swing in prices. As a result of the sudden shift in risk factors globally and the change in geo-political land scape, we shall expect to see prices increase by more than we expected. Recall that we were already at the onset of an upward inflation trend due to rising fuel prices and global supply chain problems. The geo-political situation is also expected to have an adverse effects on energy prices including oil, yet we had hoped that the price of brent crude oil was stabilising.

We should brace ourselves for yet another increase in pump prices. Furthermore, we should expect to see an increase in the price of bread in the next couple of months due to the iminent wheat shortage problem.

Interest Rates

Central banks had already started effecting interest rate hikes to cushion economies against the increasing inflation outlook globally. Hence with accelerated inflation, the banks will have to also speed up or re-adjust their expected interest rate hike. Albeit the fact that the current global inflation problem emanates largely from the supply side viz the increase in the price of brent crude oil and the global supply chain problems and now the geo-political crisis. All these are problems that cannot be addressed using the interest rate channel, however, as a precaution the central banks will have to increase interest rate. Credit will become a tad bit expensive and that is not good for our recovery in the short-term. The interest rate hike will out run growth and thereby dampening economic growth within the current period.

Payment Problem

The sanctions imposed on Russia will also have an impact on all trading partners. Removing 10 Russian banks from the international payment system, SWIFT will affect all trading partners. In the absence of the SWIFT platform it will be very difficult for payments to be confirmed securely. Therefore, any business trading with Russia will have to find alternative ways of confirming payments and relaying instructions from bank to bank, primitive means of confirmations will have to be revisited and these may be the slow and outdated systems.
Domestic companies exporting to Russia will be faced with a cash flow problem, as funds will not be moving as fast as expected. Furthermore, imports coming from Russia will also not arrive as fast since it will also be difficult to send money into Russia. Consequently domestic production depending on those inputs will also be affected in the process.

Global Uncertainty

Just as the world was beginning to breathe a sigh of relief given that COVID-19 was seen as a pandemic on its petering out route, to the level at which we could then live with it, we are thrown into an abys of a geo-political crisis, with the potential of becoming global. We are at the crossroads of potentially the biggest geo-political debacle of the century. We have a situation that could precipitate into a bigger war, the conditions are fast becoming like those seen ere the start of the two world wars. We watch with baited breath how the global powers handle this situation, but it has thrown markets into another uncertainty frenzy and business does not like uncertainty. This might further contribute to slowing down growth this quarter.

Absorbing the shocks

In the short-term it is critical that domestic businesses diversify where possible, find new export destination and also find alternative suppliers for wheat. This might allow us as a country to absorb the shock in the short-term and medium-term. Also, while the risk is centralised in Russia, it would be a wise decision for domestic firms to find long-term destinations for their exports, outside of Russia.

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