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At the Will of the Buyer
The Russian economy in 2007 will not differ much from last year's. Economic growth will remain relatively high, industry will grow slowly and trade quickly. Inflation will not be noticeably lower and Russia, for the first time in a long time, will not be basking in record high oil prices.
Economic Growth
For a number of years in a row now, the Russian economy has shown rather rapid growth. Not fast enough to double the GDP by 2010, of course, but nonetheless fast. For instance, the GDP increased by 7.3 percent in 2003, by 7.2 percent in 2004, by 6.4 percent in 2005 and, according to preliminary estimates, by 6.8 percent in 2006. There are no grounds to suggest that anything will change so drastically in the Russian economy as to slow economic growth significantly and pull growth down below 6 percent. It will still be much more modest than in China, for example, but better than in the rich European countries and the United States. Russia's economy will again grow somewhat faster than the world economy as a whole. The IMF estimates that world economic growth this year will come to 5 percent.
The growth of industrial production does not look as rosy as economic growth as a whole, however. In 2003 and 2004, the rate of economic growth topped 8 percent per annum. In 2005, it half that – 4 percent, and has stayed near that level ever since then. The Ministry of Economic Development and Trade noted about Russian industrial growth in 2006 that “Sectors such as the production of building materials, petroleum products, metals and electricity showed a higher dynamic than predicted. However, those positive tendencies did not compensate for slowing growth in other processing sectors and the continuing stagnation in the production of minerals other than fuel and energy sources. The relatively unsteady growth of heavy industry (means of transport and electricity-generating equipment) was caused by serious pressure from imports, the growth of prices for imported raw materials, slower growth of chemical production and woodworking.” The growth rate in heavy industry will clear not become steadier this year and industrial growth can be expected to grow no more than by 4.5 percent.
Conditions have been just excellent in Russia for retail trade in the last few years. In 2002, it grew by 9.3 percent, in 2003 by 8.8 percent, in 2004 it jumped to 13.3 percent, and it stayed at a stable 12.8 percent in 2005 and 2006. Russia has shown itself to be a country where the citizens may not be much interested in production (it should be noted that there was a relatively low growth rate in agriculture as well as industry – its annual growth amounted to 1.3 percent), but they really like to buy. The share of goods bought in open markets is continually falling, and that of chain stores rising, that is to say that domestic trade is becoming more civilized (excepting the cultural level of the salespeople and service personnel in those stores, which clearly save as much money as possible on their personnel costs). Record-breaking growth can't last forever, of course, but retail trade turnover will grow by at least 10 percent in 2007 in any case.
The authorities' policy of incessantly raising the average salary in Russia, to reach 25,000 rubles a month in 2010,helps trade. The average salary has been rising noticeably already. It was 8555 rubles in 2005 and 10,636 rubles in 2006. Obviously that growth will have to be stepped up this year, and he average salary may reach 15,000 rubles per month. Otherwise, it will never reach 25,000 rubles by 2010. The super-significant growth of imports has also helped sales turnover. According to customs statistics, imports from beyond the CIS and Baltic countries rose by 45.2 percent in 2006. Imports from those countries will continue to grow in the new year, and will reach at least $150 billion.
Inflation and the Ruble
Inflation has a direct relationship to sales turnover. In 2006, the authorities were unable to meet their annual plan to bring inflation down to 8.5 percent. They got 9 percent instead. The Finance Ministry indicates that the rate of growth of the money mass increased substantially last year. It grew up 49 percent last year, as opposed to 38.6 percent in 2005. At the same time, Finance Ministry experts say, there were factors that had a slowing effect on inflation. In particular, the growth of the money mass in 2006 was accompanied by a more notable slowing of money circulation. “The mounting pace of economic growth plays a positive role in reducing inflation pressure,” the Finance Ministry concluded. Finally, inflation slowed last year as compared with 2005 because of the slower rate of fee increases for household utilities, 17.9 percent as compared to 32.7 percent in 2005.
Authorities plan on 6.5-8 percent for this year. They can forget about 6.5 percent already, since prices rose 1 percent in the first ten days of 2007, while the official prognosis for January is 2.2 percent. As usual, the authorities say that people are visiting stores during the holidays and spending their money, leading to rising prices. It should be noted, however, that Russian retail prices do not depend on demand so much that they will rise unfailingly because of people's willingness to spend money. The beginning of the year is simply a convenient time for sellers to adjust their prices upward. Whether buyers want to buy goods for a higher price or not is their problem. Buyers are forced to agree to because they know very well that they have nowhere else to go. Tomorrow prices will be even higher.
Inflation will most likely come to 8 percent for this year, since the authorities' anti-inflation policy is somewhat befuddled. The growth of budget outlays has to be curbed and exchange policy has to be used to fight inflation. It is assumed that the rising exchange rate for the ruble will allow the Central Bank to print less money to buy the dollars that come into the country. In addition, the growth of imports as a result of the increased value of the national currency will prevent a commodity shortage and stimulate price competition. However, Russian President Vladimir Putin said last year that there was no need to become distracted by the stronger national currency, since it has already begun to hinder national production. It can be predicted that the ruble will rise rather slowly, butt the dollar will continue to fall to almost 25 rubles. That seems to be the figure that Russian authorities find most acceptable. Obviously, 25,000 rubles a month in 2010 was chosen because it will equal exactly $1000.
World Oil Prices
World oil prices last year were a pleasant surprise for all petroleum-exporting countries, including Russia. They almost hit an unbelievable $80 per barrel. But then the world market decided that was excessive and prices should not be so high. International pension, investment and speculative funds, which are the main players on the market, began to unload oil aggressively, forcing the price down to $51 per barrel this month. The OPEC countries first cut back production and then, as usual, began to quarrel among themselves about whether to continue the cutback or not. Real world oil production remains non-transparent, so no one knows how much oil is being produced, so there is no need for the market to believe that OPEC really reduced its quota. Then prices will continue to fall and OPEC will only suffer from its move. Furthermore, if some of the members of the cartel do their duty and reduce production, that may still not force prices up (especially if other countries are not meeting their obligations), and they will simply lose money. Finally, if OPEC does reduce production and the world believes it, it could be taken as evidence that there is an excess of oil in the world and there is no fuel crisis. In previous years, record price growth took place exactly because oil producers falsely convinced the world that it was on the brink of another oil crisis and had to beef up reserves before prices rose to $100 per barrel.
So far, the mood of the world oil market is not one of crisis. Therefore, the WMF, which in December forecast prices over $70 a barrel for this year, is now saying $52, that is, about what it costs now. The Russian Economics Ministry will soon release its own forecast for the year, based on the assumption that a barrel of Urals will cost on average $61, that is, about the same as last year. (Urals is significantly cheaper than Brent and WTI.) But oil prices are likely to be significantly lower than in 2006, and Brent and WTI will cost less than $60. Russia will have to live, for the first time in several years, with oil prices that are not breaking records.
“The Government Will Do Everything Possible to Maintain Stability”
At the request of Vlast analytical weekly, experts answered four questions: what will the exchange rate of the ruble be in 2007, the pace of inflation, world oil prices and the dollar against the euro.
Alexander Livshits, deputy general director of the Russian Aluminum Co., deputy prime minister and finance minister in 1996 and 1997:
1. By the end of the year, the ruble's relation to the dollar will be 27 rubles/$1, but that is only if the Central Bank does not beat the economy with the mallet of a strong ruble.
2. I think that the annual figure for inflation will not exceed 8 percent.
3. The price for Brent oil will not differ much from its present level and probably will be $55 per barrel.
4. The relation of the dollar to the euro is hard to predict, but there is a likelihood that it will hover around $1.30/ˆ1.
Andrey Nechaev, president of the Russian Financial Corp., minister of the economy in 1992:
1. The exchange rate of the ruble will be 25.5 rubles/$1. According to all current forecasts, oil prices are not expected to fall, and the inflow of petromoney will have the biggest influence on the ruble's exchange rate.
2. The Economics and Finance Ministries expect inflation to remain in the range of 7-8 percent. But since not one of their forecasts in this field has been correct, I am inclined to suggest that the real number will be around 8.5 percent.
3. Much will depend on the situation in Iran. The withdraw of American forces from Iraq will affect the price as well. Therefore, a pessimistic forecast is $70 per barrel, and optimistic is $40.
4. The American economy will not make us happy. The Bush administration will fight the Democratic Congress, so there is no perspective for the dollar to strengthen. Then the Americans will face presidential campaigns, so the relation will be about $1.35/ˆ1.
Anatoly Dmitrievsky, director of the Institute of the Problems of Oil and Gas, member of the Russian Academy of Sciences:
1. The exchange rate will be 25.9-26 rubles/$1. The government would like to change that, but it has little influence over it.
2. The influx of money from the export of energy sources and the steady development of the economy will encourage inflation. It will reach 5 percent in the first half year.
3. The price of oil will not be lower than $50 a barrel or higher than $70. OPEC will hold it at the $60 level. A price of $50 is possible if OPEC overlooks something.
4. The exchange rate of the euro depends to a significant degree on American policies. Now they have put pressure on Iran and it will convert to the euro. And there is Chavez, with whom other Latin American leaders may unite. Therefore, the relation will grow to $1.35/ˆ1.
Sergey Kogogin, president of the United Automakers of Russia, general director of KamAZ:
1. The strengthening of the ruble will continue to 25.5 rubles/$1. It probably won't be fast. The dollar will be further forced out of circulation and it will weaken not only in Russia, but throughout the world.
2. Inflation will not exceed 7-8 percent. I am sure the government will do everything possible to maintain stability in 2007.
3. If the political situation does not change in the world, the price of oil will remain at the level of $60 per barrel. I don't think that it will go lower than $45. And growth to $90 can occur only in the event of military action.
4. The fall of the dollar against the euro will continue and it is possible that the euro will cost $1.40-$1.50. Probably not more.
Sergey Minaev
All the Article in Russian as of Jan. 22, 2007
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