THE Russia’s invasion of Ukraine may be happening almost 11,000km from Zimbabwe, but the impact is likely to hit close to home.
On Thursday, Russia began military operations in Ukraine. What does this mean for Zimbabwe’s economy?
Fuel prices will rise even more
Since the conflict escalated, world oil prices have risen sharply. They were already rising due to moves by oil producing countries to keep supplies low.
On Thursday, oil prices rose above US$100 per barrel, the highest in eight years.
This time last year, we were paying US$1.26 per litre for petrol and US$1.27 for diesel. Today, diesel and petrol are US$1.44 per litre. The rising oil prices mean even higher fuel prices in Zimbabwe, where government taxes already contribute a lot to costs.
Higher oil prices also increase the price of making packaging materials – such as plastics – which are a significant part of the price of goods.
According to data from Zimstat, transportation costs are the biggest driver of inflation in Zimbabwe, followed by the cost of food.
RBZ’s year-end inflation targets of 25-35% already looked overambitious. They look even more unlikely now, as higher oil prices will drive up transportation costs, and inflation. Government’s forecast of 5.5% economic growth this year also looks to be in danger.
With higher oil prices, Zimbabwe will need more US dollars to import fuel. According to the latest trade data, Zimbabwe’s biggest import is fuel and oils, which made up 21.5% of all imports in December. Imports went up by 12.7% to US$771.1 million in December as exports fell, causing a big jump in the trade deficit to US$180.3 million in December from just US$37.1 million in November.
Firming prices of other commodities such as gold – which hit the highest point this year at $1,944 per ounce on Thursday – may soften the blow for Zimbabwe. But better export earnings are unlikely to counter the impact on inflation immediately.
Russia produces 17% of the world’s natural gas, and is one of the world’s biggest producers of ammonia. Both gas and ammonia are key in the manufacturing of fertilizer. The conflict has seen gas prices rising to their highest point in years and raised concern over ammonia supplies.
Fertilizer imports account for 6.1% of Zimbabwe’s imports. The cost of importing ammonia has already more than doubled over the past year alone, according to Sable Chemicals, the country’s sole manufacturer of ammonium nitrate fertilizer.
Sable has seen gas prices rising to US$1,400 per tonne in January from US$625 in January last year.
Sanctions on Russia
UK sanctions announced on Thursday bar Russian companies from raising money in London. The measures also ban sanctioned Russian companies and businesspeople from moving money through UK banks. There are also plans to ban Russia from the SWIFT banking platform, basically making it harder for its companies to make and receive international payments.
Sanctions on Russia may affect some Russian investment in Zimbabwe.
Among these investors are Uralchem, the fertilizer giant that has recently set up in Zimbabwe and was one of the bidders for phosphate producer Chemplex.
Great Dyke Investments, which is currently developing what would be Zimbabwe’s biggest mine in Darwendale, has planned a syndicated funding program to raise US$500 million to start development. Vi Holdings, owned by Russia’s Vitaliy Machitski, holds 47.8% of the project.
GDI in 2020 picked an Italian company, FATA, part of the Danieli Group, to construct a platinum concentrator.
Alrosa, the world’s largest producer of rough diamonds, signed an agreement in 2019 with the state-owned Zimbabwe Consolidated Diamond Company (ZCDC) to jointly explore for diamonds in Zimbabwe. It has 35 prospecting special grants.
Wheat supplies may be disrupted
While wheat production has increased, Zimbabwe still has to import the wheat that bakers need to blend with what is grown locally.
Russia and Ukraine account for 40% of world wheat supplies, and the crisis has disrupted deliveries, according to the Grain Millers Association of Zimbabwe (GMAZ).
“Shipping vessels have now drastically reduced their collection/loading activities in this region as insurance companies recently declared the area war-zone-like,” GMAZ chairman Tafadzwa Musarara says.
Government recently lifted the suspension of cereal imports, and this is a chance for millers to build up stocks ahead of possible shortages, says Musarara.
“It is, therefore, prudent that we, out of an abundance of caution, import and build sufficient stocks in order to ensure that local bread flour price stability and availability remains, ceteris paribus, unaffected.”