By Chris Heitzig Aloysius Uche Ordu Leo Holtz
Financial sanctions tend to hurt both the sanctioned and the sanctioner, but they also threaten to hurt countries that are financially interlinked with the sanctioned country. Recent sanctions levied on Russia by the United States and the European Union in response to Russia’s invasion of Ukraine are disrupting global trade and financial networks worldwide, including Africa. The sanctions prevent US and eurozone banks, their foreign affiliates, and Russian banks based in the US and eurozone countries from facilitating dollar and euro transactions on behalf of Russian entities. The problem for Africa is that roughly 95 percent of all trade is invoiced in these two sanctioned currencies alone. A vast majority of Africa’s Sh1.6 trillion trade with Russia is likely denominated in these two currencies.
In response to Russia’s invasion of Ukraine in early 2022, the US and EU adopted significant and largely unprecedented financial sanctions against Russia. More specifically, on February 24 and 25, the US and the EU levied sanctions on Russian banks that targeted correspondent and payable-through accounts. The sanctioned banks account for most of Russia’s financial capital and are heavily exposed to western financial systems. US sanctions on these banks also prohibit American citizens from dealing with these banks and their subsidiaries anywhere in the world.
On February 28, the US and EU banned transactions with the Russian Central Bank and the National Wealth Fund, Russia’s sovereign wealth fund. On March 1, at the behest of the US and the EU, SWIFT disconnected seven Russian financial institutions (and three Belarusian financial institutions three weeks later) from its network. On April 12, the US and EU banned direct or indirect trade in investment services, including securities and other money-market instruments. Many other countries— including Canada, the United Kingdom, Australia, South Korea, and Japan—have levied similar sanctions on Russia.
To lessen the blow of the sanctions and prop up the ruble’s value, Russia passed capital control measures. Russians are now forbidden, for example, from transferring money to foreign bank accounts. Banks and brokers are prohibited from executing cash-based foreign exchanges for dollars and euros.
These actions could pose significant difficulties to Russia’s ability to conduct trade invoiced in dollars and euros. These currencies maintain a dominant role in facilitating international financial transactions and global trade mechanics, accounting for 90 percent of import invoicing and 88 percent of export invoicing. These shares are even higher for Africa: more than 94 percent of African imports and more than 95 percent of African exports are denominated in either dollars or euros.
These sanctions alone interrupt three of the four primary ways Russian companies finance trade-related transactions with Africa. Trade may nonetheless continue to be carried out chiefly in dollars and euros. Still, in that case, Russian companies would need to turn to secondary sources (interbank markets, money markets, debt capital markets and derivative markets) or tertiary sources (cross-currency swaps) to raise enough dollars and euros to pay for goods. Russian companies may need to resort to these means to receive payments denominated in dollars and euros, and these transactions may require a foreign exchange broker to complete, as the volume of African imports is relatively large and the transactions were not expected.
Notably, other sanctions may further interrupt how Russia and Africa finance trade. The Russian financial institutions disconnected from SWIFT are not only blocked from secure telecommunications via SWIFT with American and eurozone banks but all banks, including foreign banks based outside the US and eurozone. Iran is a case in point: SWIFT sanctions on Iranian banks between 2012 and since 2019 reduced trade between Iran and Africa, even though the latter did not apply any sanctions on the former.
Western sanctions on Russia threaten to interrupt trade between Russia and Africa. At around Sh1.6 trillion per annum, Russia-Africa trade makes up a relatively small share of Africa’s total trade. Imported goods from Russia amount to Sh1.4 trillion, accounting for just 2.6 percent of Africa’s imports. In comparison, the roughly Sh233 billion annual exports from Africa to Russia account for less than 1 percent of Africa’s exports. Trade with Russia can account for a rather large share of a given country’s overall trade.
Moreover, since mostly African imports from Russia dominate Russia-Africa trade, import duties on Russian goods can locally account for a non-negligible share of trade revenue in certain countries. More immediately, key exports from Russia, such as wheat to North Africa and Ethiopia or armaments to the Central African Republic and Mali, could have local, acute effects, some of which might be felt more in terms of welfare than finance.
According to the United Nations Conference on Trade and Development, 32 percent (Sh431billion) of Africa’s wheat imports from 2018 to 2020 came from Russia.8 It should come as no surprise, then, that African countries have already seen the price of wheat explode since Russia’s invasion of Ukraine. As of late April, global wheat prices remained more than 25 percent higher than their pre-invasion levels.
To estimate the degree of these disruptions to African trade, we rely on several data sets. Chiefly, we rely on data from Boz et al. (2020), which has unilateral trade invoicing data for 14 African countries. To date, this is the most representative data set assembled on the currency of invoicing for Africa. We combine trade invoicing data for these countries (32 percent of Africa’s GDP) with UNCTAD bilateral trade data between Africa and Russia and UNCTAD’s Trade Analysis Information System (TRAINS) database. The latter database, which contains import duties by product and country, contains Russia-specific data for a subset of our sample. We choose four large economies in this sample to highlight.
The trade invoicing data reveal heterogeneity in the dollar and euro use across African economies, but usage is generally high for exports and imports. Although outliers exist, such as Eswatini, where trade is largely conducted with other currencies, dollars and euros tend to account for a vast majority of import invoicing and export invoicing for African countries.
Let’s assume that the share of each African country’s trade (and for each product) with Russia invoiced in dollars and euros mirrors its share with the rest of the world (for Africa, these figures are 94 and 95 percent, respectively). Although several other foreign currencies mediate African trade, such as the British pound sterling and the Chinese renminbi, neither African currencies nor rubles are popular currencies to conduct trade because of the risk of exposure, namely, the cost of holding the currencies when they lose value. This makes foreign exchange fees between them expensive and uncompetitive compared to dollars and euros.
Furthermore, let’s assume that all Russia-Africa trade invoiced in dollars or euros risks being disrupted by these and related sanctions. We believe that the share of Russia-Africa trade conducted in dollars and euros serves as a lower bound for the share of trade disrupted for our sample:
Dollars and euros are not the only currencies that carry sanctions. Russian accounts and transactions in British sterling, Japanese yen, Australian dollars, and other commonly-used currencies also faced sanctions.
Trade would be denominated in local currencies if exchange costs and foreign currency risks were higher than dealing in local currencies. Yet, for the Russian ruble and many African currencies, the exchange costs and foreign currency risks could be quite high in normal times.
Since Russia invaded Ukraine in February 2022, the ruble’s value has fluctuated tremendously, at one point losing nearly half its value. The ruble’s volatility is not likely to appeal to African trade partners.
The invoicing data from Africa are from 2018, but evidence suggests that the share denominated in euros and dollars has only risen since 2018.
The situation is still changing on the ground, meaning sanctions could expand in severity and country coverage.
In mid-March, sanctions were expanded to include Belarusian financial institutions. Allies of Ukraine have warned that sanctions could be imposed on China should it support Russia in its invasion.
Because TRAINS tariff data primarily covers tariffs on imports rather than exports, we are restricted to looking at African trade revenue disruptions stemming from import duties. In the end, the trade revenue disrupted from import tariff lines is likely very close to the total trade revenue disrupted. In general, countries tend to derive most of their trade revenue from import tariffs rather than export tariffs. Additionally, African imports from Russia account for 87 percent of trade between the two parties. These reasons suggest that the trade revenue from export tariffs may be a tiny share of the total trade revenue generated by trade between Russia and Africa. As with disrupted trade, estimates for trade revenue disruptions should be interpreted as a lower bound for actual disruptions to trade revenue for imports and exports denominated in all sanctioned currencies (not only euros and dollars).
While most African countries tend to invoice trade in dollars or euros, the volume of trade with Russia varies widely, which means there is wide variation across countries in terms of the share of trade disrupted by sanctions. In Egypt, for instance, we estimate at least four percent of trade is at risk of being disrupted, whereas in Mauritius, this figure stands at just 0.1 percent. On average, we find that sanctions threaten to disrupt at least 1.8 percent of African trade.
Africa’s export portfolio with Russia differs distinctly from its import portfolio, meaning disruptions will impact some goods more than others. Cereals will be the main import affected, accounting for 35 percent of disrupted imports (Figure 5). Notably, a decline in cereal imports due to sanctions and rising food prices stemming from supply reduction raise concerns of food price hikes in Africa and, thereby, general concerns for food insecurity. In addition to cereal, petroleum products and metals account for 17 and 12 percent of disrupted imports. A majority of disrupted exports will be food-related items: Fruits and vegetables together account for nearly 50 percent of disrupted exports, while coffee and tea are responsible for an additional 11 percent.
Estimates for disruptions to revenue
Estimates for disrupted trade revenue are comparably high for some countries, even relative to overall trade revenue. In Egypt, more than Sh81 billion in import duties are at risk of disruption; similarly, more than five percent of all trade revenue of Senegal’s import duties risk disruption. Our analysis suggests that, for some countries, sanctions on Russia could cause upwards of 5 percent of all trade revenue to be disrupted due to dollar/euro sanctions alone. This figure, which could fall in the tens of millions of dollars, is too small to take priority, yet too big to dismiss entirely.
Because import portfolios and corresponding duties differ widely across African countries, the trade revenue lost by import also differs. In Angola, for example, 59 percent of the projected eight percent of disrupted revenue is in weapon import duties alone. In Egypt, vehicles and telecom equipment account for 21 and 12 percent of disrupted revenue. Taxes on petroleum imports seem to generate a significant share of tax revenue in many countries for which we have data. In Senegal, petroleum duties account for nearly two-thirds of all trade revenue with Russia.
Broader impacts of conflict and sanctions
In the short term, the most devastating trade-related impact for Africa will be the disruption to importing Russian and Ukrainian cereal grains. Russian food products are a leading staple of Africa’s imports from the country, making up more than 5 percent of the continent’s food imports. Disruptions to Africa’s food systems can inflate local food prices, particularly in North Africa, where many economies rely heavily on cereal imports. Africa already has one of the highest food insecurity rates globally, with 452 million Africans enduring food insecurity. Coupled with Africa’s increased reliance on imported staple foods over the years, any disturbance to Africa’s food system threatens the health and wellbeing of African households.
Despite the relatively low level of exports to Russia, the overwhelming concentration of African exports to Russia in the agricultural sector, mainly fruits and vegetables, suggests trade interference will be most pronounced among African farmers, agro-processors, and agro-businesses—whose need to find new markets will be time-sensitive given that food products are perishable.
Due to ballooning fertilizer costs and record-high global food prices, we speculate net welfare losses for consumers and agricultural producers, despite higher market prices, given their exposure to higher operating costs. However, exporters and agribusinesses may gain from the volatility in global agricultural markets as they skirt direct exposure to the extraordinary increases in the prices of key farming inputs. Meanwhile, governments and philanthropic organizations may feel pressure to intervene with food subsidies and aid to alleviate food insecurity and the unravelling of human development among vulnerable populations.
The chaos in the oil market is a resource boom for Africa’s ten oil-producing countries, including Algeria, Angola, and Nigeria. However, the challenge of convincing parliaments to invest the windfalls in sustainable economic development rather than an opportunity to delay urgently needed reforms remains. For oil importers, however, the price hike is reminiscent of the fuel, food and financial crises of 2008-2009, and the impact for these countries may actually be worse this time around.
Potential (or lack thereof) for a new global reserve currency
Russian firms will eventually lack access to enough dollars and euros to continue settling the same volume of transactions they did previously. At this point, African businesses will face a choice in their transactions with Russian firms: utilize alternative forms of currency or find other business partners—the choice matters. The latter option faces switching costs and rising costs of doing business. The former approach faces financial risks, including currency risks and exchange costs.
Suppose, for instance, that African businesses choose the first option. The most appealing alternatives to the dollar or euro are perhaps the Japanese yen, pound sterling, or Swiss francs—which all carry sanctions prohibiting their use by Russia. Of the unsanctioned currencies, the ruble itself would certainly be an attractive option to Russian businesses. However, it is unlikely that their African counterparts would find it attractive. The volatility and uncertainty surrounding their ruble’s value would pose significant risks to financial institutions that would help settle transactions between Russia and Africa, and these risks would be passed on to businesses in the form of higher exchange costs.
Another option is the Chinese renminbi. As the currency of the world’s second-largest economy and one of the five currencies underpinning the value of the IMF’s special drawing rights, the renminbi certainly has the clout to assuage the concerns of financial institutions settling transactions. In fact, China’s Cross Border Interbank Payment System (CIPS)—which offers secure messaging, clearing, and settlement services for cross-border transactions denominated in renminbi—is a growing rival to SWIFT. However, the degree of renminbi available for settling foreign transactions is relatively small. According to the IMF, as of the last quarter in 2021, renminbi accounted for less than 3 percent (Sh39 trillion) of foreign exchange reserves globally.
In contrast, dollars and euros accounted for nearly 80 percent of all foreign reserves. China’s strict capital controls make it difficult for investors to acquire large, liquid quantities of renminbi. While China is Africa’s top trading partner, it remains to be seen whether Africa could raise enough renminbi to finance all of Africa’s trade with Russia, especially when Russia, whose annual trade exceeds Sh78 trillion, is in hot pursuit of RMB itself. Indeed, early evidence suggests that the share of global transactions processed in RMB fell from 2.7 percent in December 2021 to 2.2 percent in March 2022. Renminbi may end up playing a much more prominent role in settling cross-border transactions, but it will likely take time to grow into its new role.
A weakness similar to the one faced by renminbi plagues cryptocurrencies. Not only is there not enough available cryptocurrency to finance Russia’s trade, not enough cryptocurrency to do so even exists. Russia’s annual trade volume almost exceeds the market capitalization (in US dollars) of the world’s most popular cryptocurrency, bitcoin. Even if Russia and its trading partners were to convert enough rubles into bitcoin to finance their trade, it would result in the value of bitcoin rising so high that it would not be worth settling such transactions.
Sanctions could disrupt upwards of 1.8 percent of African trade—mostly concentrated in imports—and, under a worst-case scenario, disrupt upwards of 5 percent of African trade revenue. African policymakers must be agile in addressing worsening food insecurity caused by soaring food prices and disrupted trade with Russia. We also argue that disruptions could destroy old partnerships and create new ones. The sanctions offer opportunities to strengthen ties with Russia and offer opportunities to draw closer to the US and Europe. Regrettably, a middle ground appears to be quickly evaporating in the face of war.
Policy recommendations
Firstly, African financial institutions should raise funds apart from dollars and euros to facilitate trade. These institutions could be national (central banks) or regional trade finance institutions like the African Export-Import Bank. Demands for currencies other than dollars and euros may likely increase in the coming years to finance the nearly Sh1.6 trillion of annual trade with Russia. Moreover, these institutions should hedge their exposure risks in these countries by hedging exposure in those currencies by, for instance, buying foreign currency swaps.
Secondly, African governments should help companies find alternatives to Russian goods where logistically feasible. Sanctions will likely raise the cost of doing trade with Russia. High transaction costs may price Russian companies out of export and import markets for certain goods. For these goods, policymakers should facilitate new partnerships for African companies by eliminating informational and infrastructural barriers.
Thirdly, relevant African ministries and legislatures should mitigate food insecurity through subsidies and, where possible, increasing food supply. Sanctions may directly reduce the quantity of the food exported to Africa, but supply chain disruptions caused by the war may indirectly increase the price of food commodities like cereal and wheat sold across the world, including Africa. Regional policymakers should coordinate with food organizations in the region to ensure that even the poorest consumers have access to food despite the elevated prices.
Fourthly, African governments should prepare for revenue shortfalls by broadening tax base. The risk of lost revenue is of a magnitude that is too small to prioritize, but too large to ignore. The lost revenue comes when finances are tight, and debt sustainability is dwindling for many countries on the continent. Policymakers should consider revenue duties stemming from trade with Russia as a vulnerable source of income when budgeting in the near future. They can insure against these disrupted duties by accelerating efforts to bring more companies and individuals into the tax base through formalization and digitization. Policymakers should be mindful to not raise VAT and GST on food products during this time when the prices of some staple goods remain high.
Lastly, political and business leaders should take advantage of rapidly evolving global trade relations. With the US and Europe looking to ween off many Russian goods and outright banning others, there is an opportunity for Africa to step into the void left by Russia. The US and Europe see Africa as a more politically viable long-term exporter of gas. There is an excellent opportunity for projects like the Trans-Saharan Pipeline to attract external financing. At the same time, global interest rates remain low (and, despite recent increases, are likely to remain well below their levels during the Great Moderation). External financing need not—and probably should not— come in the form of increased debt. At a time when broad outlooks on equities remain lukewarm, energy projects could entice a fraction of the estimated $120 trillion held globally by institutional investors and commercial banks. Funding could also come internally from resource revenue windfalls or externally from public partners looking to divest from Russian oil and private companies looking to take advantage of trans-Mediterranean governmental cooperation on energy matters. ( (Brookings)
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