As the crisis in Ukraine deepened with the Russian occupation of Crimea, the question is, will East African economies be hurt by the standoff? Unfortunately, the answer is yes.
Since the exiled Ukraine President Viktor Yanukovych rejected a far-reaching trade deal with the European Union and instead accepted a $15 billion Russian bailout package four months ago, the country has been rocked by protests.
But the real game changer came when Parliament impeached Yanukovych who has since fled to Russia.
While the West supports a new interim government led by the former Speaker of Parliament, Russia insists Yanukovych is the legitimate president.
The Group of Seven (G7), a forum for the governments of seven leading industrialized democracies of the World including the USA, UK, France, Germany, Canada, Japan and Italy early this week threatened to impose trade sanctions on Russia and isolate it as the 8th member that forms the G8.
There are likely effects on East African economies if Russia is to hit by trade sanctions given the country’s position as a leading oil exporter.
Two factors of international trade are at stake here; Oil and American dollars.
Russia is the second largest oil exporter, supplying more than seven million barrels a day. Any sanctions would force it to shut some of its oil taps causing shortage and a price hike.
By imposing sanctions on Russia, the West obviously wants to starve Moscow of petrol dollars which it earns from selling oil, which makes up 75% of its exports so that they put President Putin under pressure to withdraw from Ukraine in order to normalize his trade flow.
But while Russia needs to export oil to earn dollars the world also needs Russian oil and that’s why playing the card of sanctions is such a weak move by the Western G7 governments.
That move is further weakened by the fact that, China, which surpassed USA as the world’s leading importer of crude oil in 2013, is likely to continue buying Russian oil even if the West slapped sanctions on Moscow. In 2013, Chinese oil consumption outstripped production by 6.3 million barrels per day which is almost what Russia supplies per day.
Ideologically, Russia is closer to China and the latter is not likely to abandon the former. That means, as long as President Putin retains the support of China during this affair, sanctions would have no major effect on Russian international trade.
One other factor is that in 2010, China and Russia agreed to allow their currencies, the Yuan and the Rubble to trade against each other; this means the two countries don’t need American dollars for bilateral trade.
It is also hard for America to starve Moscow of dollars because Russia holds $149.9 billion worth of American treasury bonds and is ranked 9th of the top ten foreign buyers of American debt.
Therefore, with China as an assured oil buyer and also as a leading source of imports, Russia almost has nothing to worry about, but African economies do because if the West can’t buy Russian oil, they’re certainly going to look for alternatives elsewhere and smaller oil exporters would be overwhelmed by demand from USA and other industrialized economies in the process pushing prices up.
Once the price of the barrel goes up, pump prices in East Africa would also surge and this would push transport costs up which would increase the cost of goods.
If that happens, traders in East Africa including Rwanda would be forced to hike their own prices to balance the additional overheads and the final burden would as usual be met by consumers.
Rwanda imports about 20,000m3 of oil products in a month, including petrol, diesel, kerosene, and jet fuel and according to the trade ministry, on average, the country consumes 205 million litres of fuel annually with an average consumption of 17-20 million litres per month.
A hike of the global oil prices would indeed be felt by Rwandans. Already, on Monday this week, global Oil prices spiked by nearly $2 a barrel and any escalation of the crisis in Ukraine will likely to worsen the situation.
Kenneth Agutamba is a post-graduate student at the Communication University of China