What will happen to the ruble rate?

1. All of July, the dollar rate on the Russian market was rather stable, a little higher than 29 rubles. The CB has obviously decided not to make any drastic moves, especially since it is not clear what direction to head in when some Western experts demand an immediate rise in the nominal ruble rate, and others want drastic measures against the “Dutch disease” of the heightened real rate.

The currency market in Russia in July was very peculiar. On one hand, oil prices on the world market are very high and at the end of the month set records because of the situation with YUKOS. On the other hand, foreigners were selling their Russian shares – Western capital is not very hot on investing in Russia. Finally, Russian banks were hanging in the air because of the banking crisis, so they were not up to playing games with currency. In general, the currency market applied no pressure on the CB, so the CB was able to set the rated it wanted. It obviously wanted a stable rate, which is natural for any central bank in the world. A drastic rise or fall of the rate will always have supporters as well as opponents, who can blame all the problems of the economy on the Central Bank (in July, it seemed that the government was ready to do so). It would be much harder to blame the CB for ruble stability.

Our prognosis: Since August has gloomy associations for Russians, the CB will do all it can to keep a stable ruble rate. The dollar will still cost a little more than 29 rubles.

2. What is to happen to prices in Russia?

As usual, official inflation results will become known only in the beginning of August. But there are bases to suppose that July inflation will be the same as in June – 0.8%. As a result, consumer prices have grown almost 7% for the period from January to July. The early 10% plan is still not being fulfilled. In July, the CB seemed to be the only one who believed in fulfilling this plan. The government, however, does not talk directly about failure, but the Ministry of Economic Development is vaguely hinting at the possibility of it remaining unfulfilled, if, for instance, the dollar rate exceeds 30 rubles. Presidential Aide Andrey Illarionov makes distinct references to the failure of the anti-inflationary policy. In his opinion, a certain slowing down of the inflation in the first half of 2004, compared to the first half of 2003, (the yearly rates of consumer price growth for the preceding 12 months has lowered from 13.6% in May of 2003 to 10.2% in May of 2004) happened exclusively on account of the lowering of the growth rate for regulated prices. Basic inflation only increased, however. Moreover, annual rates of industrial wholesale prices have also grown considerably, from 17% in May 2003 and 13% in December to 24.4% in May 2004. All this happened because the CB increased the money supply too quickly. Yearly rates of growth of money supply M2 have grown from 45.6% in October of 2003 to 50.8% in April of 2004.

Of course, there is still hope that, in the remaining months, inflation will either stop, or the situation will change to deflation. However, in Russian conditions, it may be observed that the official statistics take wishes for reality (for instance, they pay much attention to fruit and vegetable output). If statistics decides to use more credible methods of calculations, there is usually no 0% inflation, because everybody sees that prices have not stopped growing.

Our prognosis: in spite of the failure to fulfill the plan, official inflation in August will be 0.5-0.7%.

3. What will happen to the oil prices on the world market?

Oil prices have been growing all July and, by the end of the month, Brent oil was $41 per barrel. All that considering the fact that OPEC has extracted more oil than it has in 25 years. Quotas have been forgotten, everybody extracts as much as he can. In July, the production of the 10 OPEC members formally under cartel quotas grew by 76,000 barrels a day – to 27.81 million barrels, and quotas are being exceeded by 2.31 million barrels. Saudi Arabia alone yielded 9.4 million barrels a day, which is already close to the 10.5 barrels that it is able to extract according to its own announcements. Even Iraq, with its constant diversions at pipelines, increased its output by 355,000 barrels a day to 2.1 million.

Why did prices grow? Speculators were referring to the explosive situation in the Middle East and to the fact that YUKOS may stop exporting oil. In reality, all they want is to prolong the golden age of speculation on the rise of oil, because speculative funds invested large amounts in oil. At that, strangely enough, everybody continued to repeat that oil was to become cheaper by the end of the year (as chairman of Federal Reserve Board Alan Greenspan told the Congress).

4. What will the dollar-to-euro rate be?

In July, currency speculators had a field day with the euro and dollar. First, the euro began to rise, and hit $1.24. Then it began to fall, and dropped to $1.20. The European currency probably rose in July because it fell in June, after the change in the interest rate in the United States. While everyone was waiting for the interest rate to be raised, it was possible to make money on the rising dollar. At the end of June, when the interest rate hike actually happened, it was too late to get in on the dollar action, and the dollar fell. But it fell too much, and so, at the end of the month, the game began again with the rising dollar, and the euro went back to $1.20.

Note that chairman of the US Federal Reserve System Alan Greenspan showed enviable calm as he reported to Congress on the condition of the dollar. In particular, he stated that the dollar strengthened its position somewhat on the world currency market in the first half of the year. Thus, he also answered those experts who have been predicting the collapse of the American currency because of the gigantic deficit is the current US trade balance (the Americans just don’t have enough foreign currency to pay up…). Further, Greenspan said that their foreign currency was in sufficient supply; there is no foreign demand for American stocks, but there is a great foreign demand for American securities. Thus, the deficient is completely covered. In each of the first four months of this year, America received on average $82 billion from securities sales. Considering that $50 billion is required every month to cover the deficit, by the end of the year, only $35 billion in securities will have to be sold. Just the European market will suffice for that, even though the main purchasers of securities are the Japanese and Chinese.

Our prognosis: since the world market is not overly concerned by the American deficit, the euro will be cheaper in August, $1.22.

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Igor Kogan, chairman of the board of OrgresBank:
The tendency of previous months will continue in August. The CB will continue its policy of supporting the dollar against the ruble. The dollar will grow a little as compared to July, to 29.1-29.2 rubles.

Inflation may fall to 0.5%. The growth of prices traditionally slows in August. Last year there was even deflation, mainly related to prices for agricultural products.

The price of Urals oil, most likely, will be around $32-37 per barrel. The same factors as in July will effect it: instability in the Middle East, the small oil reserves of the United States, diminished production by Russia because of the authorities' actions to bankrupt YUKOS.

After Alan Greenspan announced that the interest rate was to be raised again, the dollar rose. Most likely, the euro will cost $1.197-1.232. But the US trade balance will be published at the beginning of August and that could affect further developments.

Viktor Baranov, president of the Union of Independent Gas Producers:

The exchange rate for August will remain at around 29 rubles to the dollar. I see no reason for it to change. Any way, the CB is doing everything it can to hold the rate stable. I do not expect the ruble to rise either this month.

I think inflation may range between 0.5 and 0.7%. Price growth is usually zero in the last month of summer.

Oil is sure not to get any cheaper. What's happening with YUKOS is not an economic stimulant. Therefore, even if there is some upward movement, there is no need to expect big changes.

The rate of the euro against the dollar will return to its starting point. I think $1.20/euro is likely. I see no anomalous changes ahead for it.

Oleg Bogomolov, Academic, Russian Academy of Sciences:

In August, the ruble exchange rate will be relatively stable at 29.0-29.4 rubles to the dollar. The CB will do everything it can to prevent drastic changes. August has always been associated with crises in Russia, and business does not want to see rate fluctuations.

Inflation in August will exceed the suggested threshold by a little and be around 1.3-1.5%. Rising prices for energy resources and gasoline will have an unfortunate influence on inflation.

World oil prices in August will remain at their present levels. There are no economic or political signs that those prices will change.

The dollar will slowly give way to the euro in August. That drop will only be by pennies, so it is not worth paying much attention to. The whole world is now orienting its economy to the euro. Only we are building our economy on the dollar.

Anatoly Aksakov, deputy chairman of the State Duma Committee on Credit Organizations and the Financial Market:

The ruble exchange rate will remain where it was in July, 29 rubles to the dollar. The economy is developing in the direction of a stronger ruble; hard currency receipts from oil sales are huge. But the CB should control ruble strengthening.

The rate of inflation should be minimal – from zero to 1%. That is because people buy less food and clothing in August, with the result that there is less pressure on the market.

The price for oil will be no higher than $35 per barrel. The YUKOS situation will calm down a little and major price changes will not occur. At the same time, oil prices will not drop below $30 per barrel.

The euro will cost about $1.20. Business activity in August will be significantly lower. August is vacation season all over the world, so no big changes in the euro-dollar rate will occur.