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Economic Prognosis
April is here, and Vlast analytical weekly, as always, is making its economic prognosis for the month. We will answer the following questions: what will happen to the exchange rate of the dollar in Russia, where inflation is going, what to expect from world oil prices and hot the euro and the dollar will behave on world markets. But first, a look back at the economic events of March.
The main economic event of March has to be the latest unbelievable record set for world oil prices. American WTI oil topped the $110-per-barrel threshold. It sold for $111.80. The March record price for North Seas Brent was only slightly lower at $108.02 per barrel. For Russia, a world leader in oil production, the new highs could not be anything but the main news of the month.
The higher the price goes for the oil Russia exports, the more foreign currency flows into the country, both as petrodollars, and as speculative capital, which loves countries with good export income – there is no danger of the national currency collapsing, and not deprive anyone of the chance to enjoy the fruits of their financial speculation. (That's what happened in East Asia in 1997. In Russia in 1998, speculators who invested in the financial system suffered because of the catastrophic fall in oil prices, which were a tenth of their current level.
The faster price records are broken on the world oil market and foreign capital flows into Russia, the easier it is for the Central Bank of Russia to raise the exchanger rate for the ruble. A country with oil revenues like that cannot have a weak currency. The higher the exchange rate of the ruble is, the more justification can be seen for the exceptionally high export rate that we see now. It's all classical economic theory: exports increase in a country with a falling currency (entrepreneurs wants to earn expensive foreign currency), and import increases in countries with rising currencies.
Of course, the authorities who stimulate import with their currency policies can be criticized for causing damage to national industry, which cannot withstand the competition. That criticism was made in Russia too, although the authorities can always answer that the growth of the ruble does not particularly hinder economic growth. On the contrary, the pace of that growth is exceptional high by international standards and, as world oil prices increase, the outlook gets better and better. It can also be observed that, in America, with its continually falling dollar, is nonetheless full of imported goods, mainly from China, and economic growth there is not picking up, but slowing rapidly, and it has already come to recession and a crisis on the credit and stock markets.
Consumers in Russia, it seems, are feeling euphoric because of the world oil records and are spending money like sheiks. That is underpinning the rapid growth of domestic demand and thus the rapid growth of the GDP.
Russian consumers are, of course, acting like both sellers and consumers of oil in that they are ready to pay record prices for goods as well, just as oil buyers are not stopped by those prices, as long as they get their fuel. The record high prices for oil have been accompanies in Russia by unbelievably high inflation on the consumer market, and that inflation does not want to fall again, no matter how authorities try to convince it to. However, the continually rising exchange rate of the ruble connected with the growth of oil prices can become a key anti-inflationary instrument, if desired. The Central Bank is holding down consumer prices by refraining from printing extra money to buy dollars entering the Russian market, and the American currency is losing value naturally.
There is also a theory that the growth of import brought on by the rising ruble is an important anti-inflationary situation. The crowding of the consumer market will stimulate competition and then the sellers will no longer be able to raise prices and, most likely, will lower them. The authorities can always point to the fact that inflation has been on the upturn throughout the world because of high oil prices, as they tackle their it obstinacy in Russia. That's what the authorities are doing in the rest of the world, explaining rising consumer prices not as shortcomings in their own performance but as the influence of external situations, in this case, events on the world oil market, for which no one government is responsible.
Everything in the economy in general is changing with the record oil prices. In Russia, it has even come to intentions of lowering the VAT. In March, the discussion in the government of lowering the VAT from 18 percent to 12-13 percent really heated up. For the public, the idea should seem logical. With the country floating with petrodollars, the government can find other sources of money beside simple consumers.
The most interesting thing is that those on the oil market themselves are stating openly that the record high prices in March are not the result of any oil crisis, but simply a financial game. However, these curb do not stop their open desire to continue playing and they are forecasting in all seriousness that oil will reach $200 per barrel.
1. What will happen to the ruble exchange rate?
We predicted that the weak dollar would not recover by much on the Russian market in March and would cost under 25 rubles. The dollar in March did not strengthen. It fell below 24 rubles on the last day of February, and stayed there. On the last day of March, it cost 23.50 rubles.
Although the Central Bank traditionally tries to avoid criticism that its exchange policy hinders economic growth, and Russian president Vladimir Putin stated directly last month that it was necessary to track the influence of the exchange rate on the economy, the exceptionally sad fate of the dollar on the world currency market helped the ruble to a tremendous extent in March. The dollar has fallen to the psychologically significant level of $1.60/€. It certainly was not going to rise in Russia under those circumstances. We note that, when the dollar picked somewhat on the world market at the beginning of April, its exchange rate noticeably increased in Russia. That showed that, with all of the Russian problems, the dollar has not become completely superfluous. It can still rise from time to time.
March showed once again that the raising the rate of the ruble does not have particular anti-inflationary effect. As strong as the ruble was in recent months, inflation was stronger still.
Our prognosis: The dollar's weakness on the world market will prevent it from rising above 24 rubles in Russia in March.
2. What will happen to prices in Russia?
In our prognosis for March, we indicated that price growth in the first two months of the year was significant, and that meant that Russian traders would calm their frenzy and inflation would not exceed 1.5 percent. That prognosis was completely correct. The final statistics on inflation in March have not been issued but, in the authorities' preliminary estimates, consumer prices rose by 1.2 percent.
However, price growth in the first three months of the year reached 4.8 percent in nay case (in the same period of last year, it was 3.4 percent). Therefore, the authorities admitted in Marc that their plan for 8.5-percent annual inflation has failed. Now the estimate is 9.5 percent. Obviously, it would be a good outcome to keep price growth under the psychological important 10-percent mark.
Having made a new plan, the authorities began to push for its implementation with the same enthusiasm as they worked toward the previous on. They are emphasizing that, although the results for the first three months of last year were better and inflation amounted to 11.9 percent at the end of the year al the same, the year before, inflation in the first three months was worse, but the annual level was 9 percent. So not all is lost yet. Explaining Russian inflation as a result of world food prices has become their foundational theory. The authorities are emphasizing any way they can that everything depends on the world food market. If to behaves itself well, we will meet our inflation plan, otherwise, no. The references to the woeful influence of world oil prices have not been forgotten either. If prices continue to grow, the failure of the new plan (like the failure of the old plan) can be explained by the fact that Russia, try as it might, has not dealt effectively with the influx of petrodollars. Who could, with such records being broken?!
Our prognosis: The prices that sunk that last plan will grow by more than 0.7 percent in April by inertia.
3. What will happen to world oil prices?
We forecast that the high speculative demand for oil futures in March would remain and oil would cost over $95 per barrel. That prediction was right on the money. Moreover, an absolute record was set in March, when a barrel of WTI cost over $111.
Out of habit, players on the oil market made reference to temporary supply interruptions, geopolitical tensions, and short supplies among American oil refiners. However, commentators and market players alike began to say openly that those were only pretexts for operations for a rise. The rise itself is connected with investment and pension funds that, with a world crisis going on, chose oil futures as their principle object of investment – they weren't going to buy American stocks, after all. The funds create artificial demand for oil – not as an energy source, but as a financial instrument that promises a tidy profit.
OPEC, which has traditionally claimed to have no relation to the price of oil, even as it cut production at the slightest danger of its decline, perkily pointed out the fault of the speculators, just as it had always said. And, in spite of the record price growth, it is in no hurry to raise production, even though it occasionally agreed to do so in the past. Once again, the cartel is discussing whether oil is really expensive now or not. Maybe the oil producers are just compensating themselves for losses from the fall of the dollar, since oil is sold on world markets in the American currency.
Our prognosis: Speculations on the oil market is gradually increasing, accompanied by temporary falls in price, and oil will not rise above $115 per barrel this month.
4. What are the dollar and euro doing on the world market?
In our March prognosis, we said that, with the all-time lows reached by the dollar in February, things will continue in the same vein in March, and the euro will cost no less than $1.49. That prognosis was completely correct. Things are continuing as they were, and with a vengeance. It was just at the end of February that euro reached the long-awaited $1.50 rate, and it reached the unlikely heights of $1.60 the next month.
It became clear that the players on the currency market are rushing to take advantage of the current world credit crisis and sharp slowdown in the U.S. economy. Usually speculators pay the most attention to lowering of the interest rate in the United States, which makes purchases of dollars less profitable than purchases of euros. (by the theory that the exchange rate is determined by the difference between interest rates in different countries). President of the European Central Bank Jean-Claude Trichet drew particular attention to interest rates with his repeated statements that the European Central Bank is not required to lower its rates in course with the American Federal Reserve Board. Consequently, credit in the euro zone may not become cheaper and the euro may remain more attractive than the dollar. However, it was not completely a matter of interest rates in March. Things have gone too far against the dollar. There are no fewer economic problems in Europe than in the U.S., and European producers are constantly complaining of their losses from the strong euro. If the situation in the U.S. would pick up at least a little, the tables would be turned on the euro. Euros have to be bought in a hurry before American affairs improve, so that those euros can then be sold for rising dollars.
Our prognosis: At a height of $1.60, the euro attracts speculators like a beacon and they will have their way. The euro will not fall below $1.52 in April.
Sergey Minaev
All the Article in Russian as of Apr. 07, 2008
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Photo: Alexander Miridonov
