Business Maverick


Are sanctions effective? A South Africa/Russia comparison

Are sanctions effective? A South Africa/Russia comparison
Russian President Vladimir Putin (left) speaks to South African President Cyril Ramaphosa (right) at the first plenary session as part of the 2019 Russia-Africa Summit at the Sirius Park of Science and Art in Sochi, Russia, on 24 October 2019. (Photo: EPA-EFE / Sergei Chirikov / Pool)

When people talk about sanctions on Russia, I have to say, I’m a bit sceptical. I think what happens is that there is great pressure on politicians to ‘do something’, and that something ends up being sanctions.

I was a very young journalist when PW Botha delivered his infamous Rubicon speech. I was working at the Natal Witness in Pietermaritzburg and our office was across the road from where the speech was given at the city hall. We all stayed at work to watch it and to be ready to report local celebrations after the speech. But there were none.

The title of the speech was wrong in so many ways. It was called the Rubicon speech because, in the final lines of the speech, Botha said: “I believe that we are today crossing the Rubicon. There can be no turning back.” The problem is that he didn’t even cross the Gamtoos, never mind the Rubicon.

The expected offer to open negotiations with the ANC was absent; in fact, the determination to continue kragdadigheid was explicit. He’d considered the freeing of Nelson Mandela, but this was declared to be conditional on Mandela denouncing the armed struggle. It was a sad and depressing evening. The following day, the rand tanked, and over the next few years, international sanctions were tightened.

But economic growth did not entirely disappear. This is extremely hard to believe, but here it is: SA’s economic growth was higher in the 1980s at 2.2% per year on average than the 1.7% it was from 2010 to 2019 — roughly the Zuma years. And that, if nothing else, shows how bad the Zuma years were for SA economically. But it also says something about the nature of sanctions.

Muted impact

To me, there is no doubt that global sanctions did help end apartheid and put pressure on the regime. But their effect was muted and nothing like what the proponents expected and hoped for. There were many ways to counteract them. The splitting of the rand into the financial and commercial rand was one; capital controls kept the value of the rand up, and import substitutions helped combat commercial shortages.

Sanctions also actually helped domesticate capital. Barclays sold its South African bank at fire sale prices to local business interests, and this was repeated across a range of industries. Whole new industries popped up, like Sasol and local electronics companies. Yet, there is no doubt sanctions hurt too; economic growth in the 1980s was well down on the 1960s and a comparative disaster compared with the roaring ’50s and ’60s.

So when people talk about sanctions on Russia, I have to say, I’m a bit sceptical. I think what happens is that there is great pressure on politicians to “do something”, and that something ends up being sanctions.

How effective have these sanctions on Russia been? Western sources will tell you, correctly, that businesses worth about $600-billion have left Russia since the invasion of Ukraine; roughly equivalent to all the FDI since the Soviet Union days. But in SA, Barclays Bank became First National Bank, and it just carried on as before. Likewise, in Russia, some McDonald’s franchises are now called Uncle Vanya, and their sign — and this you have to see — is a red and yellow “M” lying on its side.

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 The wealthy decamp

As happened in South Africa during the apartheid years, many people have left Russia, and it’s estimated that about 15% of the country’s dollar millionaires have decamped. That will hurt, as it did in SA, but not immediately. In one sense, SA and Russia are very different. Russia has something the West needs desperately: oil and gas. But look more carefully and you will notice a huge difference between the cost of a Urals barrel and one of Brent. There is a large buildup of oil in Russia, and China is not stepping in to pick up the slack, partly because transporting it from Russia to China is very far and very expensive.

Russian imports are way down, and you can see the effect most acutely in depressed Russian car sales. The Russian stock exchange index, the Moex, is a clearer indicator: it dropped 40% at the start of the war, and has stayed there. The Russian state is running a small budget deficit, but it has a huge rainy day fund to cover it. The rouble went into free fall after the invasion, but incredibly, it’s now well up on its pre-war position. 

Longer-term consequences

But all is not what it seems. The Russian bond market is almost non-existent. For South Africans with a memory of the apartheid years, the trajectory of the rouble is easily explained: capital controls. It is now a managed currency and bears no relation to its intrinsic value. Hello, black market.

Like in SA during apartheid, the effect of sanctions is hidden, but it’s there, lurking like cancer, turning ordinary businesspeople into sanctions busters, perverting and twisting everything in the economic system. Eventually, they tend to turn society into a kind of bad gangster movie.

On Thursday, Ravil Maganov, the chair of oil major Lukoil, one of the few Russian companies to criticise the war in Ukraine, died, apparently after falling out of a hospital window in Moscow. Who believes that? It is so reminiscent of SA where detainees fairly often died after slipping on soap in the shower.

Sanctions might not seem to be working, but every day that passes ends up being another day lost. Eventually, people just get sick of it. South African history tells you that. DM/BM


Comments - Please in order to comment.

  • Oblivious Traveler says:

    Economic sanctions are like a slow poison. It’s cummulative effect is what delivers the final outcome in the end.

  • brooks spector says:

    Tim — as I understand it, the harshest impact of the Rubicon speech was to provide encouragement to foreign banks to decline to roll over SA’s sovereign debt, and the serious consequences that came from that. in fact, I once tried to get the bankers at the bank that first refused to roll over the debt — Chase Manhattan, I believe — to get some recognition at the Heroes Monument just south of Pretoria….

  • Jane Crankshaw says:

    Great article – what sanctions did do for South Africa was also to make us self reliant, something that has stood us in good stead even today where a boere maak ‘n plan! Has Russia become so reliant on its oil reserves that the government has got to nationalise this resource? This seems to be the case and appears to be Putins plan and the reason why so many heads of oil companies are being killed!

  • Peter Underwood says:

    All so true. I remember working with a client company in Cape Town in the early 2000s. I asked the owner how and when the company was formed. He told be it was 25 years prior during sanctions, when he was asked by a customer if he could manufacture the needed products locally because they couldn’t source them overseas due to sanctions. He researched it, set up a manufacturing company using local inputs, and bingo, yet another successful enterprise was born out of adversity. I am sure similar things will apply in Russia.

    We are witnessing the demise of globalisation, a retreat into national economies with short supply chains, and the emergence of a multipolar world where the BRIICS will have every opportunity to prosper over the declining West – it’s called ‘Localisation’ and there’s already a global movement enabling it – google.

    Happy days are coming to SA if only we can get political stability and deal with endemic corruption.

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