By Lionesses of Africa Operations Department
Lionesses of Africa prides itself on being apolitical as our central role is to guide, train and create a safe community for our incredible and inspirational membership where they can work with, and learn from, each other, but sometimes world events overtake and impact us in a way previously never imagined. The terror of war, any war, be it (as recently seen) in Syria, Ethiopia or now Ukraine is simply unimaginable for those of us sitting safe in other countries watching on CNN.
Putting aside for one moment this terror being inflicted on innocent people (and it always the innocent such as children who suffer); the wanton destruction of an entire country; the braking of international law and invasion of a neighbouring state; and the incredible bravery of an entire nation, the opportunity for this war in Ukraine to expand and engulf us all is simply too real, as President Biden made it perfectly clear the other day, we are indeed talking about the potential for World War 3.
There is hope that the West’s determination to contain not expand this war will work, although how many thousands will die before we start to see some light sadly and tragically remains to be seen. However the economic impact is already being felt around the world and no more so than in Africa. The fact is that Russia is a major trading partner for Africa, actually, that is not quite right. Russia exports about 10x more to, than it imports from Africa, so to use the term ‘partner’ is stretching it a bit. When you consider that they take minerals and in return supply grain, you can start to see why headlines in major global magazines such as The Economist’s “How the invasion of Ukraine will spread hunger in the Middle East and Africa.” (here), are increasing in number. Russia and Ukraine between them are a massive supplier of the world’s wheat (almost 30%! here) with at least 50 countries dependent on Russia and Ukraine for >30% of their wheat supply (and yes many of these 50 are in Africa). If that is not enough - Ukraine is also the world’s biggest producer of sunflower oil (here).
With that large tap turned off, prices (as shown in the Supply and Demand Chart in our title picture) have gone one way. Supply collapses, panic buying increases demand and the results we then see only too clearly at our local supermarkets. Much like the Volcano shape our title chart takes, prices have exploded. Corn, Soybeans, vegetable oils and the agricultural staples have all raced higher. Oil and Gas prices have moved one way and that has had and will continue to have a huge impact elsewhere, through increased transport costs and in the price of plastics. The question is: Is this a short war resulting in short lived Inflation, or will this be a long drawn out war with extended Inflation, eventually crippling businesses and economies and driving the globe into Stagflation - a particularly nasty state of affairs whereby prices keep on rising, yet businesses and GDP collapse and high unemployment becomes the norm.
Up until the 1970’s the view amongst economists was that Inflation and Unemployment were inversely correlated. As one rose, so the other fell. A nation could choose low inflation and high unemployment, or high inflation and low unemployment, or actually anywhere in between (as you can tell, that was when the world believed Economics was a science!). You could fine tune where you wanted your country to sit merely by using various fiscal and monetary policy tools. Simple! Then the Oil Crisis happened (1973) where Saudi Arabia first learnt to really flex their muscles and the world discovered Stagflation. Not so simple now was it?! How do you get out of a situation of rising prices, zero growth and massive unemployment? How do you persuade companies to start employing when each day the CEOs watch in horror as cash ‘exits stage left’ with increasing velocity? To invest and grow their companies? Oh, and do that Fast?! Painfully is the answer.
Economists are still unsure of how to come out of a Stagflationary period and have many various theories (yes, don’t worry we have heard all the jokes about Economists and the lack of collective conclusions!) and certainly Nixon’s route following the Oil Shock where he devalued the US$ and brought on price and wage freezes, didn’t work. The UK Govt followed the monetarist rule book between 1979 & 1984 - raising interest rates to kill inflation hoping that further unemployment rise and GDP slowing would be short lived (it wasn’t). Which means that perhaps the only solution is to sit it out. Much like a swimmer caught by a rip tide is told to float it out trying whenever possible to swim sideways and out of the ‘Rip’, keeping alive until into calmer waters, then wait to be dumped on a nearby beach, so too for businesses - however that is not always easy if your pockets are full, or your warehouse is bursting at the seams…
We wrote during Covid that first and foremost you as a CEO have to protect your company from such shocks. But what to do? The answer lies in how long you think the music will keep playing so that you can continue selling. As this war drags on, there will come a time when the music stops and if your warehouse is still full, with no one buying, the phones not ringing and no one taking your meetings, then you will be in trouble, a lot of trouble.
If we thought we had to be careful throughout Covid to protect our businesses, Putin’s war has taken this to a whole new level of concern.
Remember the base of your business is that you bring products in to add value and on-sell. The adding value is important, but most importantly at this time is the selling when there is such a possibility of a sudden collapse of the market for many products. Although typically inflation is a time when one pushes the boat out to buy more materials necessary for your future production, knowing that in six months time these raw materials will be significantly more expensive, if there is a potential for Stagflation, then be very careful of expansion plans. If you can get deposits from your bigger buyers as they put in their orders, then get them. Luckily many will be willing to pay deposits to ensure supply these days, and for you this will confirm your market (as best as possible). A Purchase Order is so much stronger if it comes with a deposit!
Think we are being melo-dramatic? The Financial Times on March 8th stated (here): “The rise in oil and gas prices triggered by the Ukraine conflict and western moves to punish Moscow has raised the threat of the worst stagflationary shock to hit energy importing economies since the 1970s.” Please note the FT is just talking about Oil and Gas importers - Africa also became a net importer of Agricultural products from Europe in the year 2000 (no guesses from which European countries!) and has never regained the high ground since.
In addition record Natural Gas prices have forced one of the world’s largest Fertilizer companies Yara International to cut its production to 45% of capacity (see here). Ammonia and Urea, two major components of Ferts being heavily affected by the rise in Nat Gas prices - so next season’s global crops will certainly be affected - even if one ignores the planting season in Ukraine that should start very soon. Timing as always is everything.
The ‘good thing’ (if there is any ‘good’ that comes out of war) is that oil and gas bearing countries such as Nigeria and Angola will enjoy a far higher income and if anyone thinks that the world will worry about Mozambique’s issue with local gunmen and insurgents in its new massive North-East Gas region, think again - there will be more troops per population there soon than ever seen before. The world needs power and Africa has this.
What else? “Wheat and yeast are two of Russia’s top exports to Angola and Mozambique, according to data from an economic research centre sponsored by Harvard University. In the case of Angola, they represented more than 30% of purchases from Russia in 2019, followed by stamps (eh?) and yeast, while in Mozambique, wheat represented more than 75% of imports from Russia, followed by fertilisers, which comprised 18% of the total by value.” (here).
So as always, pros and cons, and some countries will certainly come out on top, but as with all wars, it is the innocents that suffer, and whilst some governments will take in a far higher amount from Oil and Gas, unless this is used for the population as a whole, to build schools, hospitals and transport networks then this will be yet another sadly missed opportunity to uplift countries.
But is there really anything we can rely upon in these days of uncertainty? Remember economic growth depends so much on belief by the population that tomorrow life will be better which allows them to invest with ‘certainty’, the opposite, ‘uncertainty’ does not encourage us to purchase property, invest in new factories or expand our workforce… As Japan found to its cost during its ‘Decade of Depression’ that lasted in varying degrees from 1991 to 2001, then 2001 to 2011, er…then 2011 to 2021. No matter how much stimulus the government injected, people simply saved and refused to spend…
So can things get any worse? Obviously ‘worse’ is relative as the President of Ukraine sadly pointed out when asked about World War 3. However, you remember back to the massive global Supply Chain bottleneck that followed the ship ‘Ever Given’ running aground in the Suez Canal…? Its sister ship ‘Ever Forward’, has just run aground in Chesapeake Bay (here)! At least that company is reliable, even if it has a terrible ability to name its ships! As for the ‘Ever Given’ itself - the maritime app Marine Traffic showed it in the Red Sea on Monday night, fully loaded and heading toward the Suez once more…
Stay safe.