Controversial Alleged Weapons Sale to Russia Creates Uncertainty, Impacting Rand's Value Khwezi Main

Controversial Alleged Weapons Sale to Russia Creates Uncertainty, Impacting Rand’s Value

Investors were already worried about the rand’s value when reports surfaced about a ship purportedly transporting weapons and ammunition from South Africa to Russia.

Down as much as 2.4% on the day, the rand’s low versus the dollar was 19.3250, its lowest level since early April 2020 during the onset of the COVID-19 epidemic. The news was blamed by market participants and analysts for contributing to the currency’s decline.

If it is discovered that South Africa provided Russia with weaponry when Russia was at war in Ukraine, traders and analysts on the currency markets expressed fear that the country will face Western sanctions.

As a result of the steep decline in value, the yield on South Africa’s benchmark 2030 local government bond ZAR2030= jumped by 22.5 basis points.

In this article, we take a closer look at the socio-political and economic ramifications of the news that South Africa facilitated a weapons sale to Russia amidst heightening global tensions surrounding the Russia-Ukraine conflict.

Understanding the Russia-Ukraine conflict

The Russian invasion of Ukraine in February 2022 represented a historic turning point for European security, since it marked a major escalation of a conflict that had been going on for eight years, beginning with Russia’s annexation of Crimea.

South Africa facilitated a weapons sale to RussiaAfter a year of combat, many experts in defence and foreign affairs have concluded that Russian President Vladimir Putin made a fundamental strategic error. 

Ukraine has always been pivotal, but sometimes underappreciated, in maintaining international peace and stability. The country is currently at the forefront of a revived great-power rivalry that many experts predict will shape global politics for the foreseeable future.

Rather than expecting a diplomatic resolution in the coming months, many experts are bracing for a deadly escalation that might lead to Russia’s use of nuclear weapons. The conflict has accelerated Ukraine’s drive to join Western political blocs like the European Union and NATO.

Ukraine, in its three decades as an independent nation, has pursued its own path while also seeking closer ties to Western institutions like the European Union and the North Atlantic Treaty Organisation.

Kyiv, however, had a hard time maintaining a stable foreign policy and healing its own internal fractures. Those who spoke Ukrainian in the west were more likely to prefer closer relations with Europe, while those who spoke Russian in the east were more likely to support closer links with Russia.

Following the fall of the Soviet Union, many Russian leaders saw the breakup with Ukraine as a historical error that endangered the country’s great power status.

Many would consider it a tremendous setback for Russia’s international image if it allowed Ukraine to slip permanently into the orbit of the West. Putin framed Russia’s developing conflict with Ukraine as part of a larger fight against Western powers in 2022.

South Africa’s stance on the Russia-Ukraine conflict: is neutrality at an end?

South Africa’s position that the crisis between Russia and the Ukraine must be handled via discussion and peaceful methods was reaffirmed by President Cyril Ramaphosa in his weekly communication to the country.

However, The Lady R, a Russian vessel, docked in South Africa in December of last year, prompting allegations from US Ambassador Reuben Brigety that South Africa had given weaponry to Russia.

In response to this activity, the Ukrainian Association of South Africa (UAZA) stated that “at a time when Russia is engaging in the invasion of the sovereign state of Ukraine,” it is terrible that South Africa invited Russia to join in the Mosi II naval drill.

In December of last year, the mystery ‘Lady R’ cargo vessel moored at the naval station in Simon’s Town near Cape Town, sparking widespread conjecture about its true purpose. Cargo ships typically use the civilian harbour in Cape Town rather than the naval installation.

Kobus Marais, a member of parliament and the opposition’s shadow defence minister, claimed in a statement that the government should explain why cargo was loaded onto and unloaded from the ship overnight.

In May of last year, the US Treasury’s Office of Foreign Assets Control placed the Lady R and a number of other Russian-flagged cargo boats to its sanctions list for alleged weapons trafficking.

The impact of the alleged weapons sale on the Rand’s value

After a week of sour attitude, compounded by suspicions the South African state armed Russia in its war against Ukraine, the rand plummeted to an all-time low during morning trade on Friday, hitting R19.47 versus the US dollar.

Alleged Weapons Sale to russia

Last Thursday, the rand hit a new record low against the dollar, coming within a hair’s breadth of breaking the record.

The rand opened Thursday around R18.90 and has been hovering near the R19 mark all week. It fell below R19 just after noon versus the dollar, but has since recovered some of its earlier losses.

Independent economist Professor Bonke Dumisa claimed that the US is engaging in a “very malicious political game aimed at bullying South Africa into taking the side of Ukraine” after news of Brigety’s assertion became public, and that the rand subsequently underwent a “second phase” of weakness.

He argued that South Africa should not be forced to help Ukraine despite the fact that it must avoid giving the impression that it is embracing Russia.

According to a recent agreement between a South African delegation and US officials, the Lady R problem will be probed, as stated by President Cyril Ramaphosa’s spokesperson Vincent Magwenya on Thursday evening.

As Brigety makes his provocative statements, South African business leaders have spoken out against the government’s “enthusiasm” for its “close ties” with Russia.

While Standard Bank group CEO, Sim Tshabalala, cautioned that the government must be careful in its stance, not to impact the role of financial institutions, FirstRand CEO Alan Pullinger previously said that the state’s relations with Russia were extreme, adding that these present geopolitical risks.

How the Rand affects investment returns

Currency risk refers to the potential gain or loss in value of a portfolio due to changes in the value of a currency, in this case the Rand.

To make sure that you can still meet your investing goals despite currency volatility, it is important to think about how changes in the Rand effect various elements of your portfolio.

Managing the risk associated with fluctuations in the value of the Rand relative to other currencies can be done by keeping an eye on the relevant exchange rates. To what extent the Rand affects your returns depends, therefore, on how much of your portfolio is exposed to other currencies and economies.

Alleged Weapons Sale to Russia Impacts Rands ValueBusinesses with no international operations could be relatively immune to Rand volatility. However, they will still be indirectly affected by Rand movements through the influence on other economic factors including the currency risk for the cost of materials for their products, inflation, and the impact on their customer base.

However, foreign exchange rate swings will have a more noticeable impact on domestic firms and industries that operate in or directly serve international markets. For instance, as the rand weakens, export-oriented businesses gain because their products become more competitively priced in international markets.

As a result, if you invest in the stock of such a company and the rand decreases, your return on investment may improve. The converse is true for importers, whose profit margins will be squeezed by the higher cost of goods in the short run.

Companies that receive a sizable portion of their revenue from markets outside of South Africa would also benefit from a weak rand because the translation of their earnings will be more beneficial.

Offshore investments benefit from a lower Rand as a rule. A weaker Rand means a higher return (in Rand) for anyone who has money stashed away in a foreign bank or who trades foreign exchange.

When the rand is weak, an investment in dollars purchased at an exchange rate of R14/US$ will yield a positive return, whereas an investment in dollars purchased at an exchange rate of R7/US$ will yield a significantly smaller return.

Final Thoughts

In the best of circumstances, investors must expect market and currency volatility, particularly at times of such geopolitical upheaval as are being caused by the ongoing Russia-Ukraine conflict.

Diversification is crucial since not all asset classes and industries will move up or down in response to the same market events.

Diversifying your portfolio across low-risk to growth assets, industries, markets, currencies, and locations can help you mitigate the effects of risk and volatility, such as rand volatility, on your returns and achieve more consistent long-term results.

Even while investment returns can be volatile and downside risk is always present, a diversified, risk-adjusted portfolio that is examined on a regular basis stands a good chance of helping you achieve your long-term financial goals.

The complex interplay between national and international markets, economies, and currencies has a cumulative effect on your investment returns. Making educated investment decisions is crucial for making the most of possibilities and mitigating the Rand’s effects.

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