Chairman of the Central Bank of Russia Sergey Ignatiev (right) with Deputy Chairman of the State Duma Credit Institutions and Financial Markets Committee Pavel Medvedev
Photo: Dmitry Dukhanin
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Central Bank Won't Give In to Imports
// Says there will be no current operations deficit in 2008
In the latest version of the draft of “The Basic Tendencies in Monetary and Credit Policy” for 2008 published by the Central Bank, the prognosis for the basic macroeconomic indicators have changed again. The Bank has doubled it estimate of the influx of capital for 2007 and increased the predicted growth of the money mass for this year. The Banks numbers also imply the surplus in current operations accounts will turn into a deficit next year unless consumer demand is sharply is curtailed sharply. But the Bank is expecting that to happen only in 2009.
The Central Bank published its latest version of “The Basic Tendencies in Monetary and Credit Policy for 2008” yesterday. It was decided after a discussion in the State Duma to develop further the last version, which was published at the end of April. Several of the reference points for it have clearly become outdated in the last two months. That is especially the prognosis for the influx of foreign capital and growth rate of the money mass.
The April version of the “Basic Tendencies,” which Kommersant has a copy of, contains an estimate of net influx of capital of $35 billion, and the June version doubles that figure to $70 billion. With that change, the Bank is no longer warning of a possible slowdown in the growth of the gold and currency reserves. It has even started to predict that that rate will increase. In 2006, the reserves grew by $107.5 billion. The prediction for this year is $114.9 billion in growth. The prognosis for capital influx 2008-2010 has been increased as well, although not as radically. The new predictions are $40billion in 2008, $45 billion in 2009 and $55 billion in 2010. The estimate grew by $10 billion in two months.
Central Bank chairman Sergey Ignatyev, his deputy Alexey Ulyukaev and Finance Minister Alexey Kudrin all spoke about how the estimates had been too conservative. Deputy Prime Minister Sergey Naryshkin even mention $90 billion in capital inflow. “The Basic Tendencies” directly links the changes in the prognosis to “an expected increase in the volume of public placement of the shares of Russian companies.” The influx of capital and related growth of the gold and currency reserves and money supply led to a reconsideration of the parameters of the monetary program, especially the growth rates of the monetary base and money mass. In April, the Bank expected the growth rate of M2 in 2007 to amount to 32-34 percent. Now it is predicting 37-39 percent.
As of June 1, the M2 growth rate had topped 60 percent annually. The document contains a stipulation, however. If the influx of capital and economic growth increase any more, M2 growth will not slow down so much. In spite of that, the Bank is counting on the milder inflation rate to continue this year and the “goal for inflation (6.5-8%) will be achieved.” In 2008-2010, the Bank predicts an M2 growth rate of 24-30 percent, with a decline in the growth of consumer prices by 6-7 percent in 2008, 5.5-6.5 percent in 2009 and 5-6 percent in 2010.
In spite of that, the State Duma Committee on Economic Policy yesterday recommended that the lower house take note of it “presents an insufficient volume of complex measures and mechanisms connected with lower inflation and holding back the strengthening of the ruble.” “The Basic Tendencies” is traditionally foggy about exchange policy. As before, the range for the real strengthening of the effective exchange rate of the ruble in 2008 is indicated as “0 to 10%.” And the Bank's policy will still be “oriented toward smoothing out sharp fluctuations of the currency exchange rate.”
Another substantial difference in the versions of the document can be found in the balance of payments. Based on data on the growth rate of imports in the first quarter of 2007 (by 35.8 percent compared with the same period last year), the Bank has reconsidered that estimate and raised it. In April, the current operations account (that is, the net balances of services and trade, income and current transfers) with the price of Urals oil set at $52 per barrel in 2009 was zero. Now it is negative: -$17.7 billion. In other words, the influx of export proceeds will stop creating pressure on the exchange rate of the ruble and revaluation may be replaced by devaluation.
It should be noted that the current account will implode sooner than the Bank thinks. The growth rate of imports in 2007 is predicted at 30 percent, while it will be reduced to the range of 10-15 percent in 2008-2010. That is significantly lower than now (its growth in April of this year over April of last year was a record-setting 45.1 percent). Either the Bank is counting on a sharp drop in the growth rate of domestic demand, or the ruble will begin to weaken in 2008.
Maxim Shishkin
All the Article in Russian as of June 26, 2007
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