BRICS dilemma, folly or curse?

IT WAS never meant to be anything more than a political union, similar in status to the non-aligned states. Economically, only two of the five BRICS nations, China and India are doing well, the rest are all currently in junk status. Russia was junked in 2015, followed by Brazil in 2016 and South Africa in 2017. In many respect it is Russia which has tilted BRICS in favour of junk, and has lead the pack in this regard, with the result, there is now a Good BRICS and a Bad BRICS story.

Goodness BRICS

Let’s take a look at what is good here. So far as the China is concerned, the need to create markets for its overproduction of goods has meant that it is forced to continue investing in overseas markets, and the result is largely of benefit to us.

South Africa, an outlier so far as size is concerned, has seen several deals involving, variously, the creation of an entire city in Modderfontein, the relocation of a Hisense television factory to our shores, and the latest investment of 11Bn Rand towards a new car factory in PE. So in addition to our ample resources and export market, there is now significant beneficiation of goods within the country, in an evolving relationship, all producing goods which in turn end up in the West.

India, another global leader, has taken a slightly different tack. The past decade has seen successive major investments by Asian-based entrepreneurs in the South African economy. Beginning with Lakshmi Mittal, who bought former state-owned ISCOR shortly after democracy, to create ArcelorMittal. More recently the Indian billionaire Anil Agarwal bought a substantial stake in Anglo American, a traditional dual-listed South African business, which has relocated its headquarters to London. The pattern is thus one of picking up bargains, arguably to the benefit of stakeholders. Though trade between the two countries is booming, this is often however at the cost of local clothing and textile workers.

Badness BRICS

Where trade with the two Asian economic giants of BRICS has tended to benefit South Africa. The reverse is true when it comes to Russia. Instead of buying out state-owned enterprises (SOEs) as in Mittel, relieving taxpayers of an unnecessary drain on the treasury, or simply just investing money, the Russian strategy has been instead to hijack the remaining SOEs whilst foisting projects upon us of dubious merit. In effect it is Russia which has engaged in what can only be called a form of state capture, and nuclear colonialism.

The proposed Rosatom nuclear deal along with its many intrigues under Malusi Gigaba is very bad for South Africa, both economically and politically. Apart from the fact that the deal will result in an unnecessary 1Trn Rand expenditure from the treasury on nuclear technology already past its sell-by-date, — bringing to a halt and seriously compromising a highly successively renewable energy programme — it will not only relieve the country of taxpayers money, but will also remove scarce foreign exchange.

If implemented the Rosatum deal would commit South Africa to paying forward for its electricity in Dollars for the next 60 years — a currency that Russia desperately needs in order to balance its own books. In effect no money is being invested by Russia as such. Instead, the country would borrow money on the open market against its forward production, in order to buy moribund technology from Russia in a similar deal already concluded with Saudi Arabia. The ‘sukuk deal’ financed Medupi and Kusile in this way, and albeit local technology which benefitted, the resulting finance model is no doubt to the ultimate detriment of the economy and climate. See how Saudi money dried up.

The political problem of having one BRICS chief

Politically, both Russia and China have been an uneven, and mixed bag. Whereas, the demands of a China First policy has meant sacrificing trade partners such as Taiwan, and thus local Taiwanese communities, (so too local buddhist communities over Tibet), the belligerent Putin agenda has tended to cast a massive shadow over South Africa’s foreign policy. Hence the Zuma administration silence when it comes to atrocities in Syria and the Ukraine and our increasingly frosty relations with the G8. Bear in mind that South Africa is still a member of the G20 and also the Commonwealth.

So far as Brazil is concerned, there isn’t much that has been put on the table by the Cinderella nation besides the import of rubber and tires, and South Africa needs to be realistic when it comes to dealing with trade with the South American continent. If Brazil emerges from its own crisis, it might provide opportunities for trade with South Africa in the near future, especially if we can export local solutions instead of importing junk bonds.

Despite South Africa possessing the largest community of persons with Indian heritage anywhere in the world outside of India, the country has had very little influence over policy. South Africa could certainly benefit from greater cultural and scientific exchange between the two nations.

The BRICS bank dilemma

According to economist Dr Iraj Abedian, the newly created BRICS Bank is all really an expensive illusion. It will take at least another five decades or 50 years for this institution to have any real effect insomuch as the post-Bretton Woods power-play is concerned. See Mbuyiseni Ndlozi’s piece in the Daily Maverick for another take on this important issue. What South Africa desperately needs though, is not a bail-out as such, but rather a better credit line to avoid being strangled by the S&P and Fitch downgrade. A state of affairs entirely of our own making.

Unless the country is able to borrow money at reasonable interest rates, on the capital markets, much of its developmental agenda under the current government will come unstuck, while consumers in the domestic SADC economy will find themselves gradually squeezed by interest rates, which are already at historical high levels. The fallout is bound to affect the African Union, and one can only suggest we seemed to be doing a lot, lot better when the narrative was that of an exceptional, big player in our own African backyard.

The solution isn’t to raise interest rates in the hope that investment from hedge fund managers in the West will pour in along with yet another gamble on local and emerging markets, or to import problems from failing states, but rather to attend to the many problems inherent to the BRICS strategy and its overall impact on the AU. This could mean China and India coughing up a lot more than simple investment dollars. It will also mean, trimming back Russian political influence, which to date has tended to outweigh all the other BRICS players combined, even if this means a major rethink, such as a retreat to a more simple BICS-AU relationship. Leaving the R out as in Rouble, could do a lot more for the Rand than maintaining a highly flawed relationship with a troubling administration, one which contradicts most of our domestic human rights outlook.