Miscalculations in handling accusations that arms were provided to Russia could cost South Africa dearly.
The bombshell conference by United States (US) Ambassador Reuben Brigety on 11 May triggered a diplomatic spat between Washington and Pretoria. The accusation that South Africa loaded weapons onto a sanctioned Russian ship in December 2022 is significant and could fundamentally alter relations between the two countries.
It also marks a departure from the polite diplomacy approach that's previously characterised US relations with South Africa. But amid the political wrangling, the bigger question centres around the potential economic fallout and what's at stake.
The first and most obvious channel of transmission is in financial markets. In the wake of the news, the rand plummeted to a record low of 19.51 to the greenback. South African bonds also lost 1% of their value on the day - out of sync with other emerging market peers. Already reeling from concerns about electricity supply and weak growth, markets have added a geopolitical risk premium to the already significant economic issues.
The message from portfolio investors to South African authorities is clear - actions have consequences. And as a small open economy vulnerable to global developments, investor sentiment matters. Indeed, the markets employ their version of carrot and stick, and South Africa has found itself in the firing line due to domestic dysfunction. Such issues can be masked in a supportive external environment, but with mounting headwinds (including tight US monetary policy, geopolitical tensions and negative emerging market risk sentiment), they are magnified.
The weaker currency will now filter through to inflationary costs amid an already escalating cost-of-living crisis. Moreover, it will further drive up the cost of external funding. Heading into an election year, this will heighten socio-economic risks and present yet another headache for policymakers.
Washington will likely adopt a wait-and-see approach before taking drastic action - using AGOA for leverage
Next is the trade channel, and speculation is that South Africa will be suspended from the African Growth and Opportunity Act (AGOA) which is due to expire in 2025. Although this is not a given, South Africa may have crossed a red line for the US, and punitive action may be considered. In the past, AGOA suspension has largely occurred for human rights violations and wars. However, the current situation, along with South Africa's sweetheart deal status, may provide sufficient grounds for termination.
So, while the threat is credible, much will depend on how South Africa navigates the current dispute, and other aspects of its relations with Russia. Despite its sabre rattling, Washington will likely adopt a wait-and-see approach before taking drastic action - using AGOA for leverage.
Pretoria should however consider the consequences. The impact of such a decision would be grave. Industries such as motor, citrus and wine would be most affected, with job losses and reduced export revenues.
Moreover, there's increasingly bipartisan disillusionment in the US with South Africa's stance. A Republican electoral victory next year could make this position even more hostile, especially as the deadline for an AGOA extension in 2025 draws closer.
Investors have taken a dim view of what they believe is South Africa's partisanship cloaked in neutrality
Then there's the investment channel. Investors have taken a dim view of what they believe is partisanship cloaked in neutrality, saying South Africa's walk differs from its talk. This is most likely to be felt in the energy sector, with funding for the Just Energy Transition Investment Plan likely to come under scrutiny.
But perhaps the most concerning issue is that of sanctions. Executive orders by US President Joe Biden and regulations under the Office of Foreign Assets Control allow for sanctions on individuals and companies aiding Russia's war effort. Should the US move in that direction, it could pressure other countries in the western geopolitical bloc to follow suit, which would be disastrous for South Africa's economy.
Although unlikely, the threat of sanctions should be viewed in the context of other South African own goals. In addition to multiple ratings downgrades, and persistent electricity cuts, the country was grey-listed by the Financial Action Task Force in February. Alongside these growth-dampening blunders, questions remain around the African National Congress' Russian funding sources, and to what extent the blurring of state and party lines may inform the current policy agenda.
Against this backdrop, a loss of US investment shouldn't be taken lightly. South Africa is resident to over 600 US companies, and the US is the country's largest contributor of foreign direct investment, accounting for over US$7.5 billion of inflows in 2021. It is also South Africa's third largest trade partner. This was something Brigety emphasised in his press conference - that South Africa should be aware of where its bread is buttered.
So, where to from here?
Though South Africa has criticised the US' megaphone diplomacy, citing disrespect, there has been no denial of the accusations, and a commission of inquiry is being established to investigate the claims. There is also ambiguity about Brigety's supposed apology and whether it relates to the content of his claims or how they were expressed. The US ambassador's apology has not been made public.
The US' destabilising approach has drawn criticism for bullying tactics and arrogance
At face value, Pretoria seems to have made a strategic miscalculation and must exercise dexterity in its approach given the high economic stakes. Saturday's press briefing by national security adviser Sydney Mufamadi and other heavyweights in the security cluster was a clear attempt to manage the fallout.
Another interpretation is that this was a calculated risk by the US to provide a wakeup call to South Africa and allow for a recalibration in relations. Indeed, Brigety's tone and language during the conference signalled the US would no longer treat South Africa with kid gloves. Previously, Washington has been largely accommodating of Pretoria's positioning despite its lack of US alignment.The belief that South Africa is too strategically important to antagonise for fear of driving it towards China and Russia has informed the US' approach to relations with South Africa, says Peter Attard Montalto of Intellidex. Now sensing a threat to its security interests, the US is exercising both its economic and diplomatic muscle.
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However, if the intention was to provoke a reaction, the US may, like South Africa, also have miscalculated on this issue. The US has hardly covered itself in glory with this destabilising approach, drawing criticism for bullying tactics and arrogance. Given the economic impact of the allegation, this could become a communications disaster for Washington if proof fails to materialise, says Institute for Security Studies Senior Researcher Priyal Singh.
This will all likely come to a head with the Russia-Africa summit in July and the BRICS (Brazil, Russia, India, China, South Africa) summit in August. The latter could see Russian President Vladimir Putin - who is wanted by the International Criminal Court - visiting South Africa. At that point, the US may decide whether it applies more 'stick' than 'carrot'.
South Africa must determine whether compromising US investment, funding and trade access is worth the upside from other partners. It finds itself in a game of Russian roulette and should be wary of the economic consequences.
Ronak Gopaldas, ISS Consultant, Director, Signal Risk and Faculty at the Gordon Institute of Business Science
