After years of burgeoning trade growth between South Africa and the US, the two nations stand at a crossroads. Angered by South Africa’s perceived support for Russia, the US is threatening to eject the nation from a lucrative trade pact. But with African critical minerals becoming increasingly integral to strategic interests, can the US risk backing away? John Basquill reports.
On December 5, 2023, a Russian vessel disappeared from radar while sailing south down Africa’s west coast. The ship, a roll-on roll-off cargo vessel called Lady R, resumed location transmissions four days later in South African waters.
It is not yet known exactly what happened during those four days, but over the following months, questions and allegations over Lady R’s activity snowballed into a diplomatic crisis between South Africa and the US.
Eyewitnesses reported seeing the ship dock at Simon’s Town Naval Base, south of Cape Town. Local press said residents saw cranes moving cargo under the cover of darkness, flanked by a heavy presence of armed guards.
Vessel tracking technology shows that two changes occurred during the period when Lady R switched off its automatic identification system (AIS) transmissions.
First, the vessel changed its reported intended destination from Dar es Salaam to Istanbul. Second, it changed draught, suggesting different cargo was now aboard, according to data provided to GTR by S&P Market Intelligence.
It went on to call at ports in Mozambique and Sudan, before travelling to Novorossiysk in Russia via the Suez Canal and Bosphorus Strait.
The vessel itself had been subject to US sanctions since May 2022, designated due to its links to Russian ship management company Transmorflot, though is under no such restrictions in South Africa.
The saga started around five months after the port call, when the US’ ambassador to South Africa, Reuben Brigety, issued an explosive briefing to reporters.
Brigety said the US was “confident” that the ship “uploaded weapons and ammunition onto that vessel in Simon’s Town as it made its way back to Russia”. A shipment of arms to Russia would be highly concerning and suggest the actions of a “non-aligned country”, he added.
South African defence minister Thandi Modise quickly denied the allegation, saying: “There was fokol on that ship.”
President Cyril Ramaphosa later commissioned an independent investigation into whether the ship was loaded with weapons bound for Russia, and as of press time the three-person panel has yet to produce its report.
But the spat has ratcheted up tension between South Africa and the US – and trade relations between the two nations are in the firing line.
US threatens trade ties
Just weeks after ambassador Brigety’s remarks, a cross-party group of US politicians wrote an open letter to secretary of state Antony Blinken, as well as US trade representative Katherine Tai and national security advisor Jake Sullivan.
The letter directly acknowledged Lady R’s port call in Simon’s Town, saying: “Intelligence suggests that the South African government used this opportunity to covertly supply Russia with arms and ammunition that could be used in its illegal war in Ukraine.”
It also raised concerns that South Africa had held joint military exercises with Russia and China, authorised a landing by a sanctioned Russian military cargo plane, and put plans in place to host Russian President Vladimir Putin at a summit of BRICS nations, due to be held in the country in August.
Taking aim at South Africa’s “damaging support for Russia’s invasion of Ukraine”, the letter threatened retaliation by way of damaging trade ties between the two nations.
The African Growth and Opportunity Act (AGOA) gives preferential market access to member states – including South Africa – when exporting goods to the US. It is due for renewal in 2025, and according to the letter, the US government “strongly support[s] this programme and support[s] its reauthorisation well ahead of its expiration”.
But South Africa’s place in that arrangement is now under threat.
“These actions by South Africa call into question its eligibility for trade benefits under AGOA due to the statutory requirement that beneficiary countries ‘not engage in activities that undermine United States national security or foreign policy interests’,” the letter said.
The US “continues to stand with Ukraine and will not accept our trading partners’ provision of aid to Russia’s ongoing and brutal invasion”, it added.
This threat might seem extreme, but the spat around the Lady R shipment should not be viewed in isolation. Carl Chirwa, managing partner at Mauritius-based financial advisory firm Ashcroft & Gray, says there is a growing trend of closer relations being developed between Russia and the African continent.
“If you look at the broader strategy for South Africa, and even all of Africa now, there has been a bit of a geopolitical shift towards Russia over the last few months,” he tells GTR. “It’s not just this one vessel. The vessel is just an incident, and there has been a larger push by Russia to consolidate gains on African soil.”
South Africa’s exclusion from a renewed AGOA would represent a sudden shift in direction from recent years.
The country is the largest non-oil beneficiary of AGOA and exports the widest array of products under the agreement, from yachts to sorbet, as well as metals and jewellery, according to a 2022 report published by US trade representative Tai.
Overall, it exported goods worth US$2.7bn under AGOA in 2021, while importing goods worth US$5.5bn, the report says. South African customs data shows the US has grown to become South Africa’s second-largest trading partner, for both imports and exports, second only to China.
As recently as July 2023, South Africa asked the US government to consider renewing the agreement earlier in a bid to accelerate investment. Trade minister Ebrahim Patel told Business Day he believed an early extension would be more beneficial than time-consuming talks on a revised version.
Metals trade between the two nations has emerged as one of the most high-growth and strategically important areas for both parties.
In 2015, the US bought around US$1bn of precious metals, and a further US$0.6bn of iron, steel and other goods, such as aluminium, copper and nickel, from South Africa.
By 2022 these figures had almost trebled, reaching nearly US$4.5bn and US$1.4bn respectively, and look set to hit similar levels in 2023, South African government data shows.
The US trade representative report predicts demand for critical minerals from Africa to “rise sharply” over the coming years, potentially quadrupling by 2050, driven largely by the transition to renewable energy.
The US is facing a significant issue as it currently relies heavily on imports for critical mineral supplies, both in terms of raw commodities and refined goods. It is at least 75% dependent on imports for 24 different minerals identified by the Congressional Research Service.
Historically, this has manifested as a reliance on China. A study published by the OECD in April 2023 finds that its member states are far more dependent on critical mineral imports from China than from any other nation.
The same study warns that export restrictions on such products have increased more than fivefold over the last decade, resulting in import dependency becoming a growing concern for governments. The OECD says member states are already assessing which commodities would have the most significant impact in the event of supply disruption or national security risks.
In the US case, as diplomatic relations with China continue to worsen, President Joe Biden’s administration has pledged to support Africa’s development into an alternative sourcing market for dozens of goods used to support the development of renewables.
“The energy transition is an opportunity for an Africa transition,” said Amos Hochstein, then a senior White House advisor involved in energy security, at a February summit in Cape Town.
A crucial question for US policymakers will be whether South Africa’s perceived ties to Russia are problematic enough to justify cutting off a possible key supplier of critical minerals.
Ashcroft & Gray’s Chirwa points out that not only does South Africa sit on huge reserves of rare earth metals, including lithium – vital for battery production as part of the energy transition – but produces other commodities, such as uranium, that could prove strategically vital in future.
“If you exclude them from AGOA, you are actually effectively giving more control over that market to Russia and China,” he says. “I don’t know if it’s smart for the US to try and apply punitive measures, rather than try to go behind the scenes and have a diplomatic solution.”
Chirwa adds: “I don’t believe it will come to that. I think they will have to come to some sort of common sense solution, because there is a fundamental shift on the ground in Africa in terms of neocolonial attitudes, and the US has to make some strategic moves… particularly given the growing influence of Russia and China.”
Economist Vera Songwe, a non-resident senior fellow at the Brookings Institution’s Africa Growth Initiative, argues the US should continue deepening its trade ties with Africa, pointing out that currently, the only African country with a free trade agreement with the US is Morocco.
Biden’s Inflation Reduction Act (IRA) of 2022 provides tax breaks for purchases of electric vehicles whose batteries contain critical minerals extracted in countries with which the US has such an agreement, Songwe notes.
“Congress and the administration could rectify this situation by amending the IRA to include not only countries with which the United States has a free trade agreement but those African nations that participate in [AGOA],” she writes in an article for Foreign Policy.
“Including AGOA-eligible countries in the IRA would provide Washington with a greater number of suppliers of critical minerals and encourage investment in sectors that are a priority for African governments.”
Impact on businesses
For trading companies and their financiers, the prospect of South Africa’s ejection from AGOA is a serious one.
Johannesburg-based lawyer Virusha Subban, head of tax and partner specialising in customs and trade at Baker McKenzie, says businesses utilising AGOA “are naturally concerned about South Africa potentially being excluded, and what this would mean in terms of their ability to trade with the US and the increased costs of continuing such trade”.
“If this does occur, structuring these transactions will become more complicated, with risk due diligence taking considerably longer to ensure compliance with any changes in law in both countries,” she tells GTR.
“Companies need to be aware of, and strategise around, potential impacts on their supply chains, and be prepared to be nimble and make changes on short notice.”
Subban adds that more widely, African business trading under AGOA should remain aware the US will likely continue using duty-free trade agreements as a governance tool, ensuring participants adhere to strict eligibility requirements.
“Duty-free trade benefits might therefore be put at risk if member countries do not adhere to these criteria. Businesses should ensure they have a risk mitigation plan in place should this outcome occur,” she says.
“AGOA or not, the US offers a huge market for South African products, and exploring opportunities to trade with the US can be lucrative for South African businesses.”
Trade finance lenders could also see costs and complexity rise if barriers to trade are reintroduced, Chirwa notes.
“If there are extra tariffs that’s a tax that becomes involved, so the amount of financing has to be grossed up at that amount,” he says. “The size of your letters of credit or your financing becomes that much larger.”
Chirwa adds that the process of structuring deals would not fundamentally change “but it might require extra layers of scrutiny to see whether there are sanctions or compliance issues”.
Where next for South Africa?
The future of the country’s trade relations hinges on the outcome of the Lady R saga. South African defence minister Modise told local reporters in late 2022 that she was awaiting more information, but claimed the goods loaded onto the vessel “were ordered long before Covid started”.
South Africa’s Daily Maverick has speculated the shipment may have in fact been an order for Russian ammunition placed in 2020 and listed in a report from the National Conventional Arms Control Committee.
It notes, however, that US ambassador Brigety’s remarks – that he is “confident that weapons were loaded onto that vessel and I would bet my life on the accuracy of that assertion” – go well beyond statements typically issued by a diplomat.
More broadly, however, it is unlikely South Africa will completely cool its links to Russia.
Ebrahim Rasool, a former South African ambassador to the US, said during a televised discussion on CGTN America in early August that South Africa is looking “to find a perfect balance between its values and its interests”, and that “it’s working out well”.
President Ramaphosa has sought to play down the conflict, saying South Africa has not been “drawn into a contest between global powers”.
Russia, for its part, is also working hard to strengthen trade ties with the African continent. In a speech to the 2023 Russia-Africa Summit in St Petersburg in late July, President Putin vowed to provide free shipments of grain to several African nations and positioned the Kremlin as an ally to the Global South.