Trade wars have a silver lining – 30 November 2018

The oil price is dropping and the Rand is strengthening! And we are part of BRICS!

 Although the ongoing trade wars between China and the US have been blamed in part for the weakness in global equity markets in the fourth quarter, they do have a silver lining, as countries like South Africa have to up their game and decide whether they can use organisations like the BRICS to benefit from trade diversion.

Trade wars from a sanctions and increased tariff point of view have become an important part of the global trading environment since 2014 after the US and the European Union (EU) imposed sanctions on Russia due to the annexation of the Crimea. Russia then retaliated and imposed sanctions on American and European goods, which opened up a gap for South African goods such as farm exports to replace Polish apples, French wines and Spanish valencias.

The first set of restrictive measures against Russia, adopted by the EU in response to the annexation of Crimea in March 2014, was largely regarded as symbolic. The EU only took the decisive step towards serious economic sanctions in response to the downing of Malaysian Airlines flight MH17 on 17 July 2014 over Ukraine. This was a tragedy in which 298 people were killed, including 210 citizens of EU member states, many from the Netherlands. By that time, the Western and Ukrainian media had reported that several Ukrainian military aircraft had been downed in the separatist-controlled areas.

The death of EU citizens created a qualitatively different situation, where even the strongest opponents of sanctions among the member states could no longer deny the need to send a clear signal to Russia. Another critical juncture for the European sanctions debate was the more flagrant and extensive incursion of Russian fighters into Ukraine in late August 2014, which led to further deepening of sanctions. Now in November 2018 we have a further escalation after Russia seized three Ukrainian ships at Kerch.

In response to the American and European sanctions, Russia then deepened its trade relations with its BRICS partners and has also diversified its export focus away from oil and gas, so that it is now the world’s leading wheat exporter, a position previously held by the US.

Russia exported a record 52.4 million tonnes of grain in the 2017/18 season, up 47% year-on-year, including 40.5 million tonnes of wheat.

Successful marketing campaigns in Iraq, Saudi Arabia and Algeria are cementing Russia’s leading position in the wheat markets of the Middle East and North Africa. While Russian success in Iraq and markets like Nigeria could be a huge blow to the US, Russian expansion into North Africa and the Middle East would be a significant setback for EU wheat as well.

The re-imposition of American sanctions on Iran this year has paradoxically led to a large drop in the international oil price. America asked its ally Saudi Arabia to increase oil production to compensate for the expected loss of some 2 million barrels per day of Iranian oil exports. The Saudis did up their production, but then the US granted waivers to eight of Iran’s largest oil customers, so there was hardly any drop in Iranian oil exports. An oversupply of oil ten resulted sending the Brent oil price down from just above $80 per barrel at the start of October to closer to $50 per barrel at the end of November.

Cheaper oil is playing to Russia’s advantage in grain, keeping prices for Russian wheat relatively low in dollar terms due to lower fuel costs and a weaker Russian rouble. Russia is also addressing its port capacity problems. It aims to speed up and increase grain export capacity by 25 million tonnes to 77.7 million tonnes by 2022, two years earlier than expected.

As South Africa is an importer of both oil and wheat, the trade wars have definitely had a silver lining in reducing the international dollar price of both commodities.

 

This contribution to Finance Friday was made by

Helmo Preuss

Forecaster Ecosa cc

+27 79 773 2458

helmop@yahoo.com

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