The Venezuelan state oil company has announced that it is severing business ties with the American Exxonmobil.
Photo: Reuters
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Economic Prognosis
March is upon us and Vlast economic weekly, as always, is offering its economic prognosis for the month. We will answer the following questions: what will happen to the dollar on the Russian currency market, where is inflation going, what will the price of oil on the world market be and how will the dollar fare against the euro on the world market. But first, a look at the main economic events of February.
The main economic event of February has to be the new world record oil price hit by American WTI on February 27. It eased up just over the edge of $102 per barrel, and North Seas Brent topped $100 on the same day (a price reached by WTI in the beginning of January). It was exceptionally important because oil price had begun to fall sharply – by more than $10 per barrel – in January after reaching record highs that month as well. The impression was that the $100 mark was a signal for the price to turn around and go down again. The world understood that it couldn't afford oil at that price. It slows economic growth, lowering demands and prices. The whole world is undergoing a credit and stock market crisis, America is on the brink of recession, and it might drag Europe and even the rapidly growing developing countries down with it. The impression was illusory, however. Oil prices started to rise again and reached new heights.
The explanation is that speculators on the world oil market, mainly Western investment and pension funds, which have huge sums at their disposal, have only been incited by the world economic crisis to invest more heavily in oil futures. The American stock market is going through bad times, consequently, money has to be transferred to oil – it will always be in demand, unlike stocks. Experience has shown that to be true. For example, in the mid-1970s, there was no danger of recession in the United States and Europe, rather there was recession itself, which lasted for several years. That did not stop oil exporters from taking more and more money from those countries for their oil. And there was extremely high inflation in the Western countries. Why should oil get cheaper when the prices for everything else were rising? True, the Western governments stressed that one of the main reasons for the high inflation was exorbitant oil prices. The oil exporters retorted that that was theoretical. In reality, everyone wants to receive the maximum price for his goods. We will note that it was the first time that the Soviet Union used real price setting, taking as much as it could from the capitalists and rolling in petrodollars. Soviet newspapers heaped scorn on the crisis-ridden West, describing the skyrocketing inflation and plummeting industrial production in industrially developed countries and the advantages of the socialist planned economy without mentioning that the socialist economy was overcharging the suffering free-marketeers threefold.
Now oil exporters and oil speculators are grabbing at any excuse to raise oil prices. They talk about the weather, political instability in a number of producing countries and the militancy of Venezuelan President Hugo Chavez, whose attitude toward pricing policy in OPEC can be summed up in one quotation: “Where would the rich countries be without our oil? Let them pay for their riches!” Finally universal justification for rising oil prices has been found in the fall of the dollar against other currencies. Maybe oil isn't getting more expensive. Maybe oil producers are only compensating themselves for losses relating to the fact that oil is traditionally traded in the American currency. In the U.S., they have repeatedly pointed out that, in the beginning of the 200s, when the dollar was gaining value very quickly, the oil exporters did not lower prices to compensate the currency losses of consumers. Once again, the producers have called those objections theoretical.
Once again, the Russian presidential election was held during a period of upward-bound oil prices. Vladimir Putin became president just as the period of ultra-low oil prices was ending, when $10 a barrel was considered a normal price. Price began to rise quickly and that allowed Russia to pick up the pace of its economic growth considerably. Then prices began to rise even more insistently. That allowed Russia to pay off its foreign debts, strengthen the ruble and save up monumental gold and currency reserves. Now the oil speculators are celebrating the Russian presidential elections with simply fantastic prices.
If prices remain at that level, Russia will be able to continue its rapid economic growth even as the rest of the world experiences slowed growth. The Russian stock market, quotations on which depend directly on oil prices, has been able to remain relatively stable throughout the world stock market crisis – it has not tumbles has hard as others, in any case. Of course, Russia has exceptionally high inflation, and the authorities do not know what to do about it. With a world crisis underway, Russian officials can say that inflation is high everywhere, including Europe and the U.S. And they can appeal to high oil prices too – they're not Russia's fault, and Russia is suffering from an excess of petrodollars.
1. What will happen to the dollar on the Russian currency market?
We forecast that the dollar would cost no more than 24.70 rubles in February, in the interests of fighting inflation, since the Central Bank still subscribes to the theory that a significant boost in the ruble is an inflation-fighting tactic. The forecast was correct. The dollar fell and cost just 24.18 rubles on February 27, falling 24 kopecks in one day.
Events on the American currency market made it easier for the Central Bank. There, the dollar sank to $1.50/€ for the first time ever, so its movement in Russia toward the low 24-ruble mark seemed logical. If it's so bad in the U.S. that the Federal Reserve Board, in spite of growing inflation, is willing to lower interest rates for the sake of uphold production, why shouldn't the U.S. currency take a dive in Russia too? Russia's economic growth is coming along nicely. Inflation is terrible, especially after January, so raising the exchange rate of the ruble will serve to constrain inflation. If you try, you can even imagine that the slight slowing of price growth in February, compared with January, is the result of the dollar's significant drop on the Russian currency market. The fall of the dollar on the Russian currency market in February was so significant that the Central bank may want to stop it now. The Bank wants to avoid accusations that its excessively decisive strengthening of the ruble is harming the competitiveness of Russian business. On the other hand, the weakness of the American currency worldwide might convince the Bank to let it slide further in Russia.
Our prognosis: In March, the dollar will not pick up significantly and will cost less than 24.50 rubles.
2. Where is inflation going?
We suggested that inflationary inertia has reached last year's level so soon that February price increases will remain significant, over 1 percent. The final results for the month are not in yet, but consumer prices rose 0.3 percent in the first week of the month and, according to officials' preliminary data, inflation for the month will be 1.1-1.2 percent. So our prediction can be considered right.
In spite of the very high monthly inflations, the authorities express satisfaction that this February's price growth was no higher than last February's. The same could not be said in January, when it was 2.3 percent this year, and 1.7 percent last year. Price growth has stabilized, and that gives hope that the annual plan of 8.5 percent may be met.
In the battle to fulfill the plan, the government has taken decisive steps. It set up am anti-inflation group made up of ministers, heads of federal services and other high-placed officials, including the chairman of the Central Bank (subject to approval). The group will develop special measures to contain consumer price growth. But if the inflation plan fails this year too, they can always cite the world economic crisis.
Our prognosis: Price growth in the first two months of the years was so significant that Russian traders will curb their zeal in March and price growth will not exceed 1.5 percent.
3. What will the price of oil on the world market be?
We wrote in February's prognosis that, although oil became somewhat cheaper in January, there was no reason to expect to get any cheaper than that and speculation on oil futures in February will not let the price go below $88 per barrel. On the contrary, a price increase could be expected, since conditions on world stock markets leave only oil futures for the speculators to play on. We were completely right. The price of oil, after topping $100 per barrel for the first time ever at the beginning of January, did it again at the end of February. Moreover, it made it to $102 per barrel. Market players point out that OPEC obviously will not decide to expand production at its March 5 conference, the Venezuelan state oil company has announced that it is severing business ties with the American Exxonmobil and political instability in Nigeria is interfering with oil exports. That is, anything that shows there is not enough oil on the world market. They have forgotten their January discussions, after the price of oil shot to $100 and then quickly receded to $90, about shrinking world demand due to the stock market crisis and the possibility of recession in the U.S.
Obviously, investment and pension funds are simply looking for excuses to justify their continuing speculation on a price rise. In January, they made a profit on the sale of oil futures, in February it was time to buy them again, in hopes of further price rise.
Our prognosis: In March, the speculative demand for oil will continue and oil will cost over $95 a barrel.
4. How will the dollar fare against the euro on the world market?
We suggested that movement against the dollar in February would result in the euro overcoming the $1.50 mark and the euro would cost no less than $1.47 in any case. Our prognosis was fully justified. On February 27, the euro passed $1.50 fir the first time ever.
Many experts predicted a $1.50 rate for the euro at the end of 2004, when it was at $1.36 and the benchmark seemed just month away. But, in 2005, the dollar rose, and ended the year at $1.18/€. In 2006, the dollar began to fall again and ended that year at $1.31/€. The weakening of the dollar continued in 2007 and it was clear by yearend that the expectations of 2004 would come true after all. In January of this year, the euro toped $1.49, coming short of $1.50 each time by tenths of a cent. And then it happened. The fluctuations in the dollar's exchange rate from 2004 to 2006 showed that speculators are as ready to play against the dollar as for it. In the end, the European economy is not in such fine condition that the euro can take much abuse. This is just a lucky moment for playing against the dollar. Fed head Ben Bernanke made it clear that the interest rate will have to be lowered again to stimulate the American economy and the European Central Bank said its interest rate may be cut.
Our prognosis: They will continue to play against the dollar in March, under the influence of its new record low. The euro will not fall below $1.49.
Sergey Minaev
All the Article in Russian as of Mar. 03, 2008
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