Economic Forecasts

1. What will happen with the ruble's rate of exchange?

In July the dollar depreciated on the Russian currency market: as of July 1, the official rate of exchange of the American dollar was 26.94 rubles, while on August 1 the rate was 26.82. Although the fall of the dollar against the ruble did not appear to be especially significant (from time to time the dollar even rose, reaching above 27 rubles), it is clear that the Central Bank will continue to pursue its policy of strengthening the ruble.
That policy, of course, has its own justification. Since Russia on July 1 removed restrictions on the movement of capital and elevated the ruble to a fully convertible currency, it will be necessary to show that the hard ruble is not weaker than its predecessor and that it is stronger than non-free currencies, thus proving that liberalization carries no danger to the national currency. In addition, the Central Bank reiterated the notion that an increase in the exchange rate of the ruble constitutes an anti-inflationary measure – therefore even a serious strengthening of the Russian national currency with a simultaneous devaluation of the dollar could seem like a decisive blow to inflation on the consumer market. Finally, with the current record global price of oil, which in July reached unheard-of highs, the devaluation of the dollar appears to be natural: what else can be done if the flow of petrodollars into Russia continues to increase?

The strengthening of the ruble can also be read as an ideological strike. In July the State Duma scheduled a second reading of a bill that would make it illegal for government deputies and the media to discuss prices in dollars. Though the tone of the bill was softened somewhat before the second reading (for example, it will be permissible to indicate the amounts of deals between foreign firms in terms of foreign currencies), its spirit remains unchanged: it still dictates to journalists the form of currency in which they should supply economic information to their readers. If journalists must be forcibly weaned off speaking in dollars, what does that say about everyday citizens? By systematically devaluing the American currency, the government is forcing people to abandon it – and to turn instead to government gold reserves.

Our prediction: in August the campaign against the dollar will continue, and it will depreciate to 26.8 rubles.

2. What will happen with Russian prices?

Final inflation figures for July have not yet been calculated, but preliminary data from the Ministry of Economic Development and Trade (MEDT) indicates that inflation averaged 0.5-0.6%, since prices on the consumer market rose by 0.4% in the first seventeen days of the month. The MEDT attributed the increase in the rate of inflation since June, when it was 0.3%, to an increase in the growth rate of prices for foodstuffs like sugar, vegetables, and beverages. In any case, July inflation figures for this year are likely to turn out to be higher than in the past, when prices rose in July by 0.5%.

Assuming that inflation in July was 0.6%, prices for consumers during the first seven months of this year rose by 6.9%. In comparison with the first seven months of 2005, this would constitute significant progress, since the figure for that same period of 2005 was 8.5%. However, the implementation this year of a plan to deal with inflation presents many problems. According to the MEDT, "for the period of time between June 2005 and June 2006, inflation was 9.0%, which is already at the upper limit set for the whole of 2006 (8-9%)." In fact, in its plan the government had particular hope for July and August, forecasting that price growth could decline to 0% and even that overall deflation could occur. July thus presents an unpleasant surprise.

In the future, things could look even worse. Even with the relatively low rate of inflation recorded for June, all indications are that 0.3% is the base rate of inflation; i.e., it is inflation that results from monetary and currency factors, not an increase in administrative tariffs. The amount of money in Russia is growing at an accelerating rate, and in the future this will have an impact on the consumer market.

Our prediction: In August, prices will continue to rise, and inflation will be approximately 0.4%.

3. What will happen with the global price of oil?

July saw the setting of another global record for high oil prices: in the middle of the month, in connection with Israel's military action in Lebanon and with the danger that the conflict could touch Syria and Iran, American WTI fetched almost $80 a barrel, at a price of $78.40. Russian Urals set its own record as the first in history to exceed $72 a barrel. Towards the end of July oil seemed set to become slightly cheaper, but then prices again took off, at the beginning of August exceeding the mark of $76 per barrel set by North Sea Brent.

There are many other reasons for the appreciation of oil besides the conflict in Lebanon. Iran is not moving to cease its nuclear program, and in the event of international sanctions it could, as many players in the hard currency market fear, strike an answering blow by blockading the Strait of Hormuz, the conduit through which oil moves en route to Japan, the United States, and Western Europe. Disorder in Nigeria continues to curtail extraction of its oil. In the United States, the automobile season is at its peak (as Americans leave for vacations in their cars, demand for oil only increases) and the hurricane season is approaching: it is expected that Hurricane Chris has impacted the oil-producing power of the Gulf of Mexico.

As usual the International Energy Agency, pooling the emergency reserves of the leading industrialized nations, promises to fill gaps in the oil supply that result from any kind of catastrophe, as it did last year in the wake of Hurricane Katrina. However, the agency traditionally refuses to intervene to simply bring down oil prices.

Our prediction: as a result of the many factors that influence the growth of oil prices, in August oil prices will be higher than $74 a barrel.

4. What will happen with the exchange rate of the dollar against the euro?

In July the exchange rates of the dollar and the euro on the world currency market suffered significant fluctuations. On June 30 the European currency grew by more than 1%, to $1.278, after it became known that inflation in the United States was remaining extremely moderate and was not accelerating. Players in the market also knew that the Federal Reserve under Ben Bernanke was inclined to consider American inflation to be slowing down, another auspicious statistic. This means that the Federal Reserve will pause its interest rate hikes; if credit in the U.S. ceases to become more expensive, while in Europe it continues to rise, savings in dollars will become less profitable than those in euros.

On July 3 the exchange rate of the euro exceeded $1.28 on the strength of the news that the ISM index in the U.S. had fallen while the index in the countries of the euro zone had reached its highest point in six years. However, on July 12 the euro fell from $1.273 to $1.268 when it was discovered that the U.S. trade deficit for May was $63.8 billion instead of the expected $64.9 billion; in the meantime, the main danger for the dollar appears to be that the U.S. simply will not find the money to cover its outsized trade deficit.

Before July 19 the euro dipped below $1.25 since, in the conditions surrounding Israel's military activities in Lebanon and the extreme instability of the international situation, investors preferred dollars as the traditionally more reliable currency, and even more so since the U.S. is located farther than Europe from the zone of the Middle Eastern conflict. Additionally, Ben Bernanke gave indication that he will continue to keep an eye on inflation and will raise interest rates if necessary. In any case, however, the euro was back above $1.27 by the end of the month, thanks to a slowdown in U.S. economic growth. It was expected that economic growth in the U.S. would hit 3.2% of yearly calculations in the second quarter of this year, but in actuality the figure turned out to be only 2.5% – a sharp contrast to the brisk tempo of 5.6% growth achieved in the first quarter.

It is clear that marked fluctuations will continue in August. The international situation is far from calm, and in such a situation investors and speculators are rocked by their dependence on the daily appearance of statistical data.

Our prediction: the global currency market is in the grip of nervousness about the war, meaning that the exchange rate for the euro will be worth less than $1.28.