As economic historian and sociologist Karl Polanyionce put it, “The economic system is, by its nature, embedded in social and political institutions.” This statement has not been truer under the current rapidly changing global landscape that pits the old Western powers against a political grouping of new powers under the leadership of China and Russia.
Through the BRICS partnership, South Africa has found itself more aligned with the latter, much to the chagrin of Western powers who have always considered the African state as part of their political sphere of influence. Critics question why South Africa supports Russia in global conflicts instead of aligning with its major trading partners like the US and Western Europe. Stuart Theobald, the chair of Intellidex, reportedly said that South Africa’s alliance with Russia was “an international political blunder of epic proportions,” and was placing the country on the opposing side of a conflict and exposing it to potential consequences from its major trade partners.
Understanding the reasoning behind why countries make certain foreign policy choices necessitates a fundamental grasp of geopolitics. It is a huge mistake to simply prioritise economics ahead of politics. Prominent economists argue that tounderstand the rationale behind economic decisions, it is essential to examine them through a political lens. Ha-Joon Chang, for example, emphasises that “the biggest decisions about the economy are political, not technical.” Thus, the numbers are always secondary.
Since the beginning of the conflict in Ukraine, politics has forcefully risen to take its place ahead of economics. Geopolitical power play in Ukraine could have long-term ramifications for the international economy, which is currently dominated by the US and its greenback. With the military action in Ukraine, Russian PresidentVladimir Putin understood that his actions would inevitably be met with the US and other Western countries throwing it out of the international banking system.
Now at stake is not only the dominance of the petrodollar but also its future as the main form of exchange. The petrodollar system, which has remained unchallenged until recently, refers to the exchange of oil for US dollars between oil-consuming and oil-producing nations. During the 1970s, a significant oil crisis emerged, leading US consumers to face prices as high as USD4 per gallon. To tackle this situation, America and Saudi Arabia forged an agreement, otherwise known as the petrodollar system, stipulating that all oil transactions would be conducted in US dollars, irrespective of the purchasing country.
Rehearsed in Syria before relocating to Ukraine, the forceful realignment of the global economy is in full swing. Putin is now gunning for the petrodollar system, which has persisted for the past 50 years. Western countries fell into his trap by imposing economic sanctions to punish Russia for the political conflict in Ukraine. Presently, Russian companies face the inability to utilise the SWIFT mode of banking transactions, resulting in substantial hardships for both them and the entireRussian economy.
The SWIFT system, short for the Society for Worldwide Interbank Financial Telecommunication, is a worldwide messaging network used by financial institutions for secure information transmission and diverse financial transactions. It enables effective communication between banks and other financial entities, facilitating the exchange of payment instructions, confirmations, and data associated with international transfers, trade finance, and securities transactions.
Economic sanctions involve restrictions on the use of the SWIFT system to exert economic pressure and isolate the targeted entities, making it more difficult for them to engage in international trade and financial activities. Notwithstanding the Western insistence that these sanctions are working against Russia, the general view is that they have not been effective.
By cutting off the supply of oil and gas to Europe, where 40% of its energy needs are sourced from Russia, and demanding transactions to be settled in rubles, gold, or other non-dollar assets, Russia has triggered significant disruptions in price and supply in Western markets. This development poses a threat to the established monetary system, the petrodollar. But how does a country, such as Russia, exit from this system without the West calling it an act of war?
Russia understood from the onset that they were involved in economic warfare manifesting in bombs and artilleries. Over the years, Russia together with China have been exploring strategies to re-establish the value of gold and seek alternatives to the SWIFT system. They believe that this would prevent the further strengthening of the US dollar and the subsequent empowerment of the US as the primary owner of the greenback.Most SWIFT transactions are settled in US dollars, which simply helps solidify the dollar as the global reserve currency.
What if the US and EU remove Russia from SWIFT? Would it harm the Russian economy? Initially, yes. However, Russia and China may actually desire Russia’s expulsion, as they have been developing their own messaging system called SPFS (System for Transfer of Financial Messages) since 2014 when the US threatened to disconnect Russia from SWIFT. Moreover, there are plans to integrate SPFS with China’s CIPS (Cross-Border Interbank Payment System).
Perhaps it is time to consider the implications of excluding Russia from SWIFT and how would this impact both the US and Europe. If Russia and China establish an alternative system to rival SWIFT, it would create a competing currency system that weakens the US dollar. Additionally, with Russia as the second-largest energy exporter and China as the largest exporter of manufactured goods, they could easily gain support from partners in Africa and Latin America, putting Europe and the US at a disadvantage.
The Petrodollar system, which settled oil trades in US dollars for decades, enabled the rise of influential Middle Eastern countries like Saudi Arabia, UAE, and Qatar. If Russia and China collaborate, they can bypass the need for dollars in oil settlements, potentially dismantling these oil-funded powers. However, these countries have expressed an intention of joining BRICS themselves and continue to display a noticeable indifference towards their long-standing ally, the United States.
Despite the US being their primary supporter for the past five decades, both countries have declined to increase oil production. Moreover, Washington has taken note of the Saudi and UAE leaders’ avoidance of phone calls from President Joe Biden, which is seen as a clear signal the tides of change are upon us. Notably, the UAE went as far as abstaining from the UN vote on Ukraine. Beijing recently brokered a deal to restore relations between sworn enemies Saudi Arabia and Iran. This deal facilitated the “reordering of the usual alliances and rivalries,” with the US left on the sidelines.
South Africa has to contend with the global political landscape that is increasingly difficult to navigate. The decision of sticking with the new powers is not limited to historical events, as it is often argued. But the current realities determine the country’s foreign policy imperatives and economic desires. The alignment means a “second independence” from the clutches of Western powers that have forever mismanaged the economic and political relations with their former colonies. Whether the foreign policy choices are wrong or right for South Africa, the West knows what it did last summer.
Siya yi banga le economy!