Sanctions to disrupt Russian mining operations in Africa but not seriously affect African states

By Almot Maqolo

HARARE – The African continent is home to substantial reserves of copper and cobalt in the Democratic Republic of the Congo—DRC—Zambia, South Africa and Zimbabwe, diamonds in Botswana and Angola, platinum in South Africa and Zimbabwe, uranium in Namibia, Niger and South Africa, gold in Ghana, South Africa and Sudan, iron in South Africa, manganese in South Africa, Gabon and Ghana, bauxite in Guinea, lithium in Zimbabwe, coal in South Africa and Mozambique, natural gas in Algeria, Egypt and Nigeria and petroleum in Nigeria, Angola, Algeria and Libya.

Rich in natural resources, the African continent has attracted a large inflow of investment in recent years. Although extraction of Africa’s reserves has been largely hindered by weak domestic governance structures and policy impediments, the continent is set to remain one of the major suppliers of a number of commodities in the coming years. Sanctions against Russia—which have largely been more severe than initially expected—will disrupt Russian mining activities in SubSaharan Africa, without having a serious negative impact on domestic mining sectors themselves, according to the Economist Intelligence Unit (EIU).

Sanctions are penalties imposed by one country on another, to stop it acting aggressively, or breaking international law. They are among the toughest actions nations can take, short of going to war. Since Russia’s recognition of the non-government-controlled areas of the Donetsk and Luhansk oblasts in Ukraine on 21 February 2022 and the unprovoked and unjustified invasion of Ukraine on 24 February 2022, the European Union has imposed a series of new sanctions against Russia. Western countries continue to increasingly introduce widespread sanctions – targeting individuals, banks, businesses and major state-owned enterprises and exports, among others.

“Sanctions—which have largely been more severe than initially expected—will disrupt Russian mining activities in Africa, but are not expected to have a serious negative impact on the African domestic mining sector,” stated EIU. Russia’s central bank assets have been frozen, to stop it using its $630bn (£470bn) of foreign currency reserves. This caused the rouble to fall 22% in value, pushing up the price of imported goods and leading to a 14% rise in Russia’s inflation rate. The rouble has since recovered, but mainly due to measures by Moscow to prop it up. The United States has barred Russia from making debt payments using the $600m it holds in US banks, making it harder for Russia to repay its international loans.

“Sanctions on Russian miners (including both metals and energy producers) in Africa will create manageable downside risks, which are outweighed by risks to the upside stemming from steep increases in commodity prices.” But, given that most Russian mining operations in Africa are joint ventures that rely in part on Russian financing, it is possible that sanctions will cause disruption to mining operations and output levels as Russian funding is limited or cut off entirely. “We expect the disruption to projects in which Russian miners own stakes to be temporary, and the high prevailing price of most commodities will ensure that there is no shortage of buyers in the market for these concessions,” reads the report.

On the other hand, sanctions are poised to limit the ability of Russian miners to repatriate profits and receipts from the possible sale of concessions. “Currently, there remain options available for Russian miners to repatriate profits and clear foreign currency and international transactions, through unsanctioned Russian banks or foreign divisions of unsanctioned Russian banks.” Therefore, incomplete sanctions allow Russian miners to continue to operate in Africa, albeit with increased difficulty and probably at a higher cost. The risk of a widening of sanctions—which as at March 14th do not directly affect Russian firms’ African operations—in the near term is high.

Analysts expect Russian miners to be able to find ways around these sanctions and continue operations before possible solvency issues force them to liquidate and sell their concessions at a discounted valuation. Russia’s invasion of Ukraine in late February 2022 resulted in a rapid increase in commodity prices globally; most notably for energy products—oil and gas—and metals such as aluminium, nickel, copper, palladium and platinum. As Russia is a major producer of several base metals EIU forecast that commodity prices will remain elevated for the duration of the conflict, building on coronavirus-related price growth in 2021.

The March 8th ban on Russian hydrocarbons exports by the US and the UK, coupled with delays to the Iran nuclear deal, is expected to further upward pressure on oil prices. Oil prices are seen averaging US$116.3/barrel during 2022, up from US$70.4/b in 2021. Africa contains about 12% of total global oil reserves, 12% of natural gas reserves, more than 80% of platinum group metals and more than 40% of the world’s gold. Above all, the disruption to commodity markets will benefit African oil and gas producers.