Russian War and the African Economy

A Key Geopolitical Event Has Emphasized Why African Banks Must Embrace Crypto

This research was sponsored by Luno, a platform that allows users to buy, save and manage cryptocurrencies.

Russia’s devastating invasion has produced consequences not only for developed economies like Europe and the U.S., but also for emerging economies such as those in Africa. It is difficult to predict what economic impact this military conflict will have.

Then again, these events allow us to learn and innovate our way through the future. The removal of Russia from the global payment system SWIFT and the devastating effect on its economy should put the developing world on its toes.

African countries must begin rethinking their financial systems. In addition, policymakers must put measures in place so that these regions can withstand any geopolitical crises that might put their economies at the mercy of the West.

Already, the Russian crisis has what it takes to punch holes in African economic activity. Professor Lord Mensah, who works in the department of finance at the University of Ghana business school, weighed in on how these crises have affected the African continent. He outline four major ways this turmoil impacted Africa’s economies:

#1. Trade: Most African countries import oil, and Russia is the second-largest producer of this raw material. As the conflict continues, we should expect that fuel prices will not go down to the $60 per barrel most African countries budgeted for, which in the long run will lead to a budget deficit.

#2. Wheat + Fertilizer: A lot of our wheat is coming from Ukraine, says Mensah. The disruption in the supply chain increases wheat prices, hence the costs of the cereal commodities should go up. Russia is also the primary fertilizer supplier to the continent for agricultural activities. Farmers will have to resort to poultry droppings, which are the only local alternatives.

#3. Systems of Transactions Settlement: Putin is currently demanding payment in gold or rubles from the buyers of Russian oil. Countries that have neither need to convert their U.S. dollars or yuan to the ruble, which will have a negative implication for the greenback’s value. Since most African countries have their international reserves in the U.S. dollar, a very weak value for the fiat currency will have a devastating impact on the continent’s monetary activities.

#4. Asset Valuation: Most African countries are fond of quoting their assets in U.S. dollars. A weak dollar will have a negative impact on these assets. Ghana, South Africa, Sudan, Mali, and Burkina Faso are exporters of gold. Russia is again directing countries without rubles that want to buy oil to resort to using gold. They buy the precious metal below the prevailing market price, which is a significant blow to the revenue generation capacity of the aforementioned countries, says Mensah.

As one of the exceptional FinTech innovations of the 21st century, crypto is an outstanding hedge against geopolitical risk. Because traditional cryptocurrencies like bitcoin are decentralized, no one government can control them.

Africa and its leaders must think about crypto and appropriate regulation as early as possible. Crypto provides the nations of the continent with enormous potential to restructure their economies and be truly independent.

Central banks must find common ground to work with crypto/blockchain industry participants instead of leaving them out of their plans.

Integrating various African central bank digital currencies (CBDCs) with blockchain platforms like Ethereum would go a long way toward helping the artists of our land easily convert their native currencies to create artwork and make it available for global consumption; something that will draw utility to any CBDC.

The digital cedi, the digital shillings, and the various CBDC projects taking place on the continent must be integrated with different blockchain platforms to make them useful to their citizenry.

Earlier this year, the African Continental Free Trade Area (AfCFTA) launched the Pan-African Payment and Settlement System (PAPSS): a centralized payment infrastructure for intra-African trade and commerce payment. We believe there is currently too much innovation in FinTech for such a system to be necessary.

The key stakeholders behind AfCFTA might take a cue from Project Dunbar, which aims to create a multi-CBDC platform that would enable international settlements involving different central banks. If they developed something similar, but integrated the platform with Ethereum, it could prove highly beneficial for crypto industry participants.

Despite the massive growth in Africa’s financial sector within the last decade, most members of the population are still deprived of basic formal financial services due to the perception of high fees, general sense of mistrust in the banking system and too much paperwork.

To address this problem, banks could use crypto to attract more customers. By offering decentralized financial services like peer-to-peer lending, the cryptocurrency industry could level the playing field by providing greater access to the unbanked.

This could benefit not only consumers, but also small- to medium-sized enterprises by reducing financing gaps.

On the plus side, the internet penetration in Africa is relatively high, and a large segment of the population uses smartphones.

Policymakers on the continent cannot continue to overlook the innovations within the crypto space. The earlier we embrace these innovations the better.

We believe that blockchain technology has come to stay. Any effort to ban them or intervene in its operations will face resistance from the teeming young people whose lives the technology is transforming on the continent.

This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. The author of this article may hold assets mentioned in the piece.

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