The Euro vs. the Dollar
Russia is moving quickly from the dollar to the Euro. As a result, with increasing frequency, citizens are discovering to their surprise that the usual “u.e” (standard units) are unusually expensive. Dengi correspondents have tried to determine the market segments in which this process has gathered the most strength and find out how to minimize losses in these circumstances.
Commerce
Retailers of expensive European products, especially “luxury class” goods, are the first to respond to a change in the currency market situation. Early this year, many stores selling perfumery, clothing, and furniture had already converted their “u.e.” from dollars to Euros. Some of them even did this before changing their pricelists, which led to a 7–15% increase in the ruble price.
For example, in the Bosco di Ciliegi chain of boutiques, prices used to be shown in “boscars”, which until then had been equivalent to dollars like other “u.e.” As of the beginning of the year, “boscars” became equivalent to Euros. “The switch to the Euro happened after our partners began supplying goods priced in the single European currency,” explained Olga Yudkis, Bosco di Ciliegi’s public relations manager. “Naturally, prices in our stores increased. However, this increase didn’t affect sales. For buyers of luxury goods, the difference between the dollar and the Euro is negligible.”
Analysts note that at the beginning of the year, about one-fifth of retailers showing prices in standard units had equated them with the European currency. According to the observations of Anastasiya Varechkina, manager of the consulting department at BKG, about 40% of these stores are now doing this. “The conversion was gradual,” she emphasized. “At the beginning of the year, most retailers were selling goods that had been delivered at the old prices and were in their warehouses. The prices, of course, didn’t change and there was no drop in demand. Now, we’re seeing a certain change in the demand structure towards Asian goods, which are equal in quality to European goods but are 15–20% cheaper. Perhaps the only exception is luxury class goods, which have no real Chinese or Japanese equivalents. For a while, boutiques experienced a drop in demand because of the so-called deferred purchasing period: customers had to resign themselves to the fact that elite perfumery, clothing, or accessories were now going to cost more. But today, customers are returning to expensive stores.”
However, in certain stores, “u.e.” remained equal to the dollar. Petri Anttipa, regional director of the Finnish company Stockmann, told the Dengi correspondents that they had deliberately refrained from converting prices from dollars to Euros in their Russian department stores. “First, we didn’t want prices of our goods to increase, with the resulting drop in demand. Second, we don’t think that the Euro will increase stably. The recent decrease in the Euro rate in Russia confirms our assumptions.”
Tourism
Russian tour companies that send their fellow Russians abroad started looking closely at the Euro even before the end of last year. By February, when it appeared that nothing would stop the growth of the European currency, companies began converting tour prices to Euros one after the other. Companies that put off the conversion until summer raised their dollar prices. Companies bought all of their main tour components for Euros, and after New Year’s they were no longer able to cover the difference in exchange rates at their own expense. The small but unexpected surcharges (as compensation for the gap in exchange rates) right before a trip really annoyed tourists.
The gap continued to widen in spring, and as a result, nearly all Russians wanting to vacation in Europe during the May holidays were forced to pay for their vacations in Euros. Overall, prices for European tours increased by 5–7% in Russia. Nevertheless, many tour companies saw pluses for travelers in the conversion to the Euro: previously, receiving companies that gave their prices in dollars overcharged slightly for their services, using the possibility of exchange rate fluctuations as an explanation; but prices stabilized after Russian companies adopted the Euro.
In the six months preceding the high season, the Euro had already increased 15–17% against the dollar; and by summer, the difference in cost of even the cheapest tours to Europe and Middle Eastern resorts had become especially noticeable. Destinations popular with Russians like Cyprus and Spain were 25% more expensive compared to the previous year and had turned into expensive European resorts. This led to a change in the preferences of Russian tourists. Last year, resorts in Turkey, Spain, Cyprus, and Egypt were the leading Russian tourist destinations and prices for a vacation in these countries were approximately the same. Now, the number of people who can afford a vacation in Spain or Cyprus has decreased significantly: in early summer, tour operators were already reporting a 10–20% decrease in traffic. “This year, our sales of tours to Spain have decreased by 10%, although in financial terms our sales volume has increased by at least 5%,” said Vladimir Vorobev, president of Natali Tours.
As a result of the increase in the Euro rate, the number of “hot” tours to Europe also decreased. Tour companies sending Russians to European resorts were fixated on the rising cost of tours and did not count on buyers of inexpensive tours. As a result of price increases, Europe was attractive only to affluent clients, who were not all that interested in “hot” tours.
Education
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A trend towards paying fees in Euros is becoming noticeable in the market for paid educational services. At present, this concerns commercial higher educational institutions. According to Dengi’s information, at least two large private institutions—the Griboedov Institute of International Law and Economics (IMPE) and the Russian New University (RosNOU)—will accept fees in Euros starting in the new academic year. It is understandable that the heads of these institutions want to secure the financial side of their school’s operations against a sharp drop in the dollar rate. In the contract a school concludes with a student, fees are given in standard units. As long as the difference between the Euro and the dollar was not too extreme, there were no particular reasons for incoming students to be upset by the introduction of the Euro.
However, the situation changed abruptly as the dollar rate fell. For example, it was assumed that starting in September, the cost of a year of study at IMPE would increase in a planned way and at the same time would be converted to Euros. Fees in IMPE’s faculty of law would be 2600 Euros (in today’s terms, this is already $2900, whereas last year the cost was $2500); in the department of linguistics, the corresponding cost would be 2500 Euros ($2800 vs. $1900), and so on. That is, the difference ($400–1000) has become sizable.
Although they somehow managed to recruit more full-time students, whose primary consideration is a school’s prestige, there were problems with correspondence students. As a result, the school introduced an internal Euro rate corresponding to the spring dollar rate, i.e., the rate at the time applications were being handed in. Mikhail Ilchikov, rector and president of IMPE: “When the spread in the value of the Euro and the dollar reached 5 rubles, we introduced an internal rate. According to this rate, one Euro costs 32.5 rubles. It’s very difficult to predict what it will be in future. In any event, we don’t want an outflow of students from our institution. Students who are already studying here now and are paying in dollars will continue to pay in dollars. Students entering next year will pay their fees in Euros.”
RosNOU took another approach and calculated fees such that the ruble equivalent cost of one year of studies was comparable for those paying in dollars and those paying in Euros. According to Vladimir Zernov, president of the Russian Association of Private Higher Educational Institutions, “the cost of education at RosNOU has actually remained the same: instead of $1800, students will pay 1500 Euros.”
However, there is another nuance that may affect students at both state and private institutions. Dmitry Shevchenko, chief marketing consultant to the rector of the Russian State University for the Humanities (RGGU): “If educational programs are closely tied to the programs of EU partner institutions, it’s quite possible that certain categories of students and auditors will pay for their studies at the Euro rate in order to simplify settlements.”
Unfortunately, as the Ministry of Education’s press service explained to the Dengi correspondent, the only thing you can do in this situation is look closely at the contract and not hesitate to ask employees of the institution to answer any questions you might have. You also need to know whether the institution reserves the right to change the currency of payment and raise fees. If it does, there may be problems, and you need to think carefully about whether it is worth going there. It is even better to consult a lawyer before signing a contract.
Cars
When importers changed over to payments in Euros, there was a noticeable effect on sales of foreign cars. A clear division of this market into two currency sectors occurred in a period of six months. Against an overall increase in demand for new cars, the biggest winners were companies that resisted the temptation to convert their pricelists from dollars to Euros. These included Hyundai (5708 cars sold, an increase in sales of 4.9 times compared to the first half of last year), Opel (2787 cars, +132%), Mitsubishi (7082 cars, +99%), Toyota (8812 cars; 3 times more), Kia (5384 cars, +130%), and Suzuki (1957 cars; 2.25 times more). Today, many models produced by these companies cannot be found either in showrooms or in warehouses: you have to put your name on a waiting list, pay a deposit, and wait anywhere from two weeks to three months. And of course customers should not expect any seasonal discounts, sales, or extras (like snow tires and radio-tape decks) in this sector for the time being. It has reached the point where dealers are turning down corporate clients who want discounts for large orders. Who wants to cut prices if retail demand way outstrips supply?
Competitors from the Euro sector pale in comparison: Nissan dealers sold 4233 cars in six months (+7%); Peugeot dealers, 3895 cars (+8%); and Volkswagen dealers, 3444 cars (–13.5%). Today, the currency in which sellers price their goods determines all of a car’s remaining competitive advantages. Price differences are felt most strongly in the relatively inexpensive and therefore best selling models. A year ago, you could buy the following models for $11 000 or less: Skoda Fabia, Hyundai Getz and Accent, Peugeot 206, Citroen C3, VW Polo, Ford Ka, Kia Rio and Shuma, Renault Symbol, Suzuki Swift, and Daewoo Nexia and Matiz. Today, the choice has narrowed to Japanese or Korean models in the lowest price categories and the Opel Corsa.
Sellers of expensive models maintain that their customers have not even noticed the price difference, but the “Euro factor” has appeared here as well: BMW and Audi sales decreased 10% in six months (to 1572 and 1351 cars, respectively), although sales of Mercedes have increased somewhat after last year’s drop (to 1361 cars, for a 4.5% increase). In the first half of this year, Russians bought a total of 80 000 new foreign cars, or 75% of sales for all of last year.
Roman Puchkov, press secretary for ZAO Karnet-2000 (the exclusive Hyundai importer), believes that the sales boom is being heated up by several factors, with the currency factor being the deciding one. “People are in a hurry to shed dollars faster without knowing what will happen to this currency. In the meantime, “dollar” foreign cars are also gradually becoming more expensive (mainly due to customs duties in Euros), and this also stimulates demand, since buyers are afraid that sooner or later, prices will catch up with the Euro. Therefore, in the near future, there will probably be no decrease in potential buyers of new foreign models. At the end of July, their numbers will already be swelled by those who have had to give up on buying a higher class used car because of higher duties on foreign cars more than three years old.”
Igor Gerts, general manager of Armand (Peugeot importer), is convinced that rate differences are not the only factor. In his estimation, demand fully recovers 10–14 days after each increase in the Euro rate, when buyers have had time to get used to it. “There are individual reasons for increases or decreases in sales of each model,” Gerts believes. “A surge in demand may be the result of a sudden expansion of the dealer network (Hyundai) or the entry of new models onto the market, as happened with Toyota and Mitusbishi and with manufacturers operating in Euros like Citroen (45% increase in six months), Volvo (+56%), and Renault (+47.5%).”
Ford Company is a special case. After changing over to payments in Euros in March, the company increased sales in Russia by 162% to 7375 cars. This was primarily due to sales of Russian-assembled Ford Focus cars (5244 sold in six months). Henrik Nensen, president of Ford Motor Company, gives two main reasons: availability of credit (Ford is still the only foreign car manufacturer offering Russian customers its own credit program with more favorable terms than those offered by banks) and a sales and service network that covers nearly all regions (the company now has 65 dealers). Paradoxical as it may seem, the conversion to payments in Euros even turned out to be well timed, since it shortened the waiting list for the Focus, which by that time stretched to almost six months, and the plant in Vsevolozhsk no longer had to be in such a hurry to increase production.
Market experts are all predicting that the “dollar–Euro” factor will gradually level off. On the one hand, for objective reasons, companies in the dollar sector are being forced to control sales increases; and on the other hand, car sellers in the Euro sector have already started to win back customers with the use of various marketing ploys.
As Roman Puchkov said, “we’re taking a cautious approach to increasing imports, since the car fleet should correspond to the service network. Right now, sales are ahead of network development. In addition, we can’t import and sell too many cars. First, because in order to do this, the importer has to have a large volume of available funds, and second, manufacturers have their own targets and won’t increase them specially for Russia, where quarterly sales are equal to daily sales in the US.”
Igor Gerts: “After we reached an agreement with the banks to lower the first credit installment to 10%, we increased our share of these contracts from 25% to 55%, and overall sales by 40%. Today, the first installment for the most inexpensive model is 980 Euros. With allowance for car insurance at 7.4% annually, the buyer gets a new car for 1600 Euros. As a result, we’ve started drawing clients from the section of the population that we never used to sell cars to.
Sellers in some car showrooms offer interest-free deferred payments on the difference between the dollar and the Euro. The assumption is that the buyer does not want to wait two months for a “dollar” car, but prefers to take the car “here and now” for the same amount of money and then pay small extra amounts for it over a period of six months.
Real Estate
Among the capital’s apartment sellers, only one company, Don-Stroi, has officially announced a changeover from dollar prices to prices in Euros. Gennady Sternik, a member of the National Council of the Russian Guild of Realtors, told Dengi, “Don-Stroi’s loudly publicized decision to switch to the Euro is nothing more than a veiled price increase.” Don-Stroi’s press service told the Dengi correspondent that, “by and large, that’s what it is.” So, we can assume that dollar prices for new Don-Stroi buildings will be converted to Euros on a one-for-one basis instead of at the going rate, and that the cost per m2 in apartment houses built by the company will increase by about 12%. According to Milana Zotova, deputy head of Don-Stroi’s press service, prices for the company’s new buildings are being increased systematically. The conversion to the Euro planned for September is a regularly scheduled correction to the company’s pricing policy, but one that will be presented in an extravagant form designed to attract media attention. Therefore, like any other promise to raise prices, we can view Don-Stroi’s action as a means of motivating people to buy apartments as soon as possible; otherwise, you’ll be kicking yourself later.
However, in the opinion of Grigory Kulikov, chairman of the board of Miel Real Estate (Miel-Nedvizhimost), there are no real reasons for the switch to payments in Euros on the Moscow real estate market. “Consumers are used to dollars and don’t see any other currency as an alternative. There are also purely technical factors hampering the conversion to payments in Euros. Euro cash is still an exotic item for the Russian market, and there aren’t that many exchange offices where you can get it.”
According to Andrei Aleksandrov, manager of the sales department for the realty company Kutuzovsky Prospekt, “a year ago, the Euro-to-dollar transaction ratio was 1 : 100, and now it’s 1 : 25.” Realtors consider the prospects of a further decrease in this ratio to be unlikely. In Mr. Aleksandrov’s opinion, the worst times for the dollar have passed, and realtors regard an increase in its market value as more likely than an increase in the Euro.
Nevertheless, the switch to the Euro is occurring in settlements between developers and contractors. Konstantin Zolotukhin, general manager of Spetsvysotstroi, the contractor for construction of the Edelweiss and Vertical highrise apartment buildings, told Dengi that his company “switched to the Euro three months ago, mainly because the company buys most of its engineering systems, for example, elevators, from Europe.”
At Konti, they told Dengi that agreements concluded with contactors, including agreements in Euros, had no influence whatever on the company’s pricing policy. Apartments still cost an average of $1500 per m2 in the Edelweiss and Vertical complexes and $1200 per m2 in another Konti highrise, the Continental. This is not really surprising. The gap between construction cost and selling price in Moscow averages $500 per m2, and therefore, the increase in the Euro’s market value relative to the dollar has no effect at all on selling prices in the capital.
Realty companies specializing in commercial real estate (offices, business premises, and warehouses) also regard a switch to the Euro as unlikely. According to Sergei Riabokobylko, executive director of the company Stiles and Riabokobylko, at the present time, there is not a single precedent of denominating rental rates for office and business premises in Euros. “And this probably won’t happen in the near future,” he believes.
Banking Services
From the time cash Euros appeared in 2001, banks gradually started offering their clients deposits in this currency. For the first two years, Euro deposits were not very popular; but in the last six months, clients have abruptly changed their opinion of the Euro.
At Gazprombank, the ratio of account balances in Euros to those in dollars doubled from 8% as of January 1, 2003, to 16% as of July 1, 2003. A similar trend is being observed at Avtobank. According to Elchin Guliev, manager of Avtobank’s retail client department, as of the beginning of 2003, the proportion of foreign currency accounts in dollars and Euros was 90% and 10%, respectively. “In six months, this ratio has changed to 15% in favor of the Euro,” he adds. According to data of Globex Bank, account balances in Euros doubled in the first three months of 2003. Euro accounts also increased in the following three months, although the growth rate decreased to 74%. The increase in dollar account balances was noticeably less than for Euro account balances: about 26% in the first three months of the year and 24% in the following three months.
One reason for the change in the ratio of Euro accounts to dollar accounts, besides the strengthening of the Euro rate, was an increase in the interest paid on these deposits, so that interest rates on Euro accounts were virtually the same as the rates on dollar accounts.
Nevertheless, in the estimation of bank analysts, the number of Euro accounts will not increase significantly in the near future. Elchin Guliev believes that, “by the end of the year, the proportion of Euro accounts at our bank will increase from 15 to 20%.” According to Konstantin Gringloz, head of Avangard Bank’s retail services department, considering market trends, there are no reasons for a further increase in the proportion of Euro accounts. “Private individuals hold mainly dollars in their hands and in their bank accounts, and switching accounts from one currency to another entails significant conversion losses. The only thing that might change the situation is a large currency market fluctuation,” he explains.
Retail lending is the most dynamically developing banking service. However, only a handful of banks involved in lending grant credits in Euros. As before, most banks are oriented toward dollars. Despite this, bank analysts believe that the ratio within the group of lending currencies will change in the direction of the Euro and that the volume of loans in this currency will increase. Sergei Uryupichev, manager of Impex Bank’s lending and investment department, believes that, “the share of credits in Euros will increase, but I don’t think it will be more than 20% in the next six months.”
Avangard Bank forecasts an increase in Euro lending volumes, given identical interest rates on Euro and dollar loans. According to Aleksandr Kovalev, acting head of the bank’s economics department, the ratio between currency and ruble loans will remain at the current level for a short time; at the same time, the Euro will most likely squeeze the dollar within the currency group. This is not surprising. With the recent downward trend in the Euro rate relative to the dollar, it is more advantageous for clients to take out loans in Euros.
A trend towards an increase in Euro card accounts has also occurred on the plastic card market. The ratio of Euro- to dollar card balances at Gazprombank was 7.3% as of January 1, 2003, 11.4% as of the end of the first quarter, and 14.8% as of July 1, or double the January figure. Valery Torkhov, vice-president of Avangard Bank, anticipates that, “by the end of the year, the number of Euro accounts at our bank will pass the 10% mark.” The increase in the number of Euro cards is related to the fact that more Russians go to Europe than to the US, and holders of dollar cards have to pay for conversion when making purchases in countries in the Euro zone.
However, so far, most plastic cards in Russia are salary cards. Dollar and ruble cards make up the lion’s share of this market, with preference given to dollars. In Mr. Torkhov’s opinion, “the statistics for these cards are biased; so the statistics for credit cards are much more interesting, because they’re not connected with salary plans.” Despite the fact that credit cards are a relatively new product on the Russian market, there is also an observable trend towards an increase in Euro credit card accounts. According to Valery Torkhov, the number of active credit cards had reached nearly 3000 by the beginning of June. “At the same time, about 5% of the cards had accounts in Euros; 87%, in dollars; and more than 8%, in rubles. Here you can see a trend towards relative growth in Euro and ruble accounts,” he says.
Currency rate movements on the world market are interesting in this connection, although analysts are divided on this issue. In the opinion of Nikolai Kashcheev, the main specialist at Trust and Investment Bank (Doveritelny i investitsionny bank), the highly nonuniform development of Euro zone countries works against the Euro: “A strong Euro is bad for France and even worse for Portugal. The European economy is more inert and is politically incapable of carrying out more reforms. As a result, the Euro is always potentially looking down. The US has a real share market. If it grows, the dollar will grow along with it. But in any case, the Euro will be above par until the end of the year.”
In the opinion of Denis Korshilov, head of the conversion operations department at Citibank, the situation is currently becoming worse in Europe but is improving in the US. “We see the prospect of further strengthening of the dollar to a near-term level of $1.10 to the Euro,” he says. “The market will look at how stable improvements in the US are. You also have to consider that a high Euro is negative for Europe and that this plays a role in determining the rate as well.”
In the opinion of Sergei Pchelintsev, deputy head of the currency and finance department at ING Bank, the dollar will weaken. “The deficit factor plays a role here, that is, the US trade and budget deficits. The only option for strengthening the dollar is an acceleration of economic growth in the US,” he believes. “But in my opinion, this option is too optimistic. Today, the dollar is increasing because the US stock market is growing. So, we can consider two alternatives. First, a decrease in interest rates and taxes in the US will do their job, unemployment will decrease, and the economy will grow. In this case, the rate will be $1.05–1.07 to the Euro by the end of the year. If there is no recovery, the rate will be at the level of $1.15 to the Euro by the end of the year. The choice of alternatives will be made in the next few weeks.”
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PERSONAL OPINION VALERY PANYUSHKIN
The Right of a Nation to Self-Financing
Any European will tell you that since the Euro was introduced, everything has become more expensive. It’s because businessmen are the kind of people, who if they need to round off anything, they round it off to their advantage. In Italy, for example, there is a sacred measure of the well-being of the nation and the standard of living—the price of a cup of coffee in a bar. If this price increases, parliamentary hearings on some important law can unceremoniously grind to a halt and for several days there are discussions on TV about what an outrage it is that coffee has become more expensive, and we’ll probably all go begging. When the Euro was introduced, coffee prices went up by about 20%, and the average Italian had to trust the word of the director of the European Central Bank, that this was not a jump in inflation, but just rounding up. You never round in our favor, scum!
Any European will tell you that the 500ˆ bill is disaster. Because everyone at least once in his or her life will put a pair of pants with money in the pocket into the washing machine, and then—remember, mother always said never touch money until it’s dry—fish the bits and pieces of the damned banknote out of the wet pocket. You’ll agree that at today’s rate, washing your pants with Europe’s largest banknote in the pocket is nearly six times more annoying than washing the largest American banknote.
Any European will tell you that they had their own money before, and now it’s common. I really don’t know how you relate to common money; maybe it makes you a communist.
But I’ll tell you something. I came from Russia. I had dollars in my pocket. Do you know, that when I opened a bank account here and they asked me if I wanted to open an account in Euros, I agreed. Big mistake. Because when payday came, the office transferred money to my account, and it was a lot less in Euros than it was in dollars, so I felt like they’d demoted me.
Anyway, it always turns out that when I arrive in Europe, my Euro bank account is empty but I have dollars in my pocket. And they become so much less if I exchange them for Euros! Somehow, it’s too high a price to pay just for the chance to make snide remarks about how the American president doesn’t know a thing about the economy.
The main thing is, you’re standing in a bank and thinking that the Euro is just about equal to the dollar. Then the young lady behind the counter smiles at you and besides a commission, charges another 10% just because Mohammed Atta, Osama bin Laden, George Bush, and Colin Powell exist.
–Listen, miss, take this 10% from Colin Powell!
–You’re right signor, the Euro has risen frightfully. I’m even ashamed to exchange it.
You’re standing there thinking that now you need to renew all agreements in Euros and change all money to Euros and forget about the dollar, and on the same day, for sure Iraqi oil will start flowing along new routes, some new war will start, or they’ll pass some law about genetically modified products. In short, something macroeconomic like this will happen so that they’ll no longer take my 10% when I change dollars into Euros, but when I change Euros into dollars.
Just don’t think I’m being greedy. I don’t begrudge the ten for Colin Powell. Judging from all his hard work at the UN, he needs it more than I do. And don’t think I’m some sort of nationalist. I just think that before people were Germans, Italians, French, Dutch, but now they’ve become FOREX players, even those who have known from childhood that this is hell on earth. In other words, I’m not even upset that Europe has become a lot more expensive in the past six months. It would have been nice if people had remained different. Not only in their level of prosperity.
Aleksei Baibakov, Andrei Bakeev, Varvara Vasileva, Konstantin Vorontsov, Oleg Kuzminsky, Dmitry Ladygin, Ekaterina Lyubavina, Ekaterina Safarova, Nataliya Tyutyunenko
All the Article in Russian as of July 21, 2003
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Photo: Sergey Miheev
