August has begun and Vlast analytical weekly is offering its traditional prognosis for the month. The following questions will be considered: what will happen to the ruble and dollar on the Russian currency market, how consumer prices will change, where world oil prices are going and what will happen to the euro and dollar on the world currency market. But first we will take a look at the main economic events from July.
The main economic event of July was probably the fact that inflation in Russia exceeded last month's indicator, reaching 1.1 percent according to the preliminary calculations of the Ministry of Economic Development and Trade, while prices rose only by 0.7 percent in July last year. Considering that inflation in June of this year reached 1 percent (compared to 0.3 percent last year), it has to be acknowledged that prices are rising noticeably faster this year. That acceleration has eliminated the lengthy lag in the inflation rate this year, compared to last. As a result, prices rose 6.8 percent in the first seven months of this year, which is an inflation rate comparable with last year's 6.9 percent in the same period. Meeting the plan for the year of 8-percent inflation looks as unlikely as it did last year, when the final result was 9-percent inflation.
At the end of July, the Economic Ministry issued a review of the condition of the Russian economy in the first half of the year. There it says that consumer prices rose 5.7 percent in the first half a year, against 6.2 percent in the first half of last year. Base inflation, which takes into account the rise of prices due to monetary factors, was 3 percent, compared to last year's 3.9 percent. The ministry noted that “Although inflation was reduced in the first half of the year on the whole, there were no stable tendencies in the development of inflationary processes in that period.” In the first quarter, everything looked fine. Consumer prices rose just 3.4 percent, while they rose 5 percent in that period of last year. However, according to the Economics Ministry, the first quarter showed only the continuing effects of the anti-inflationary factors – growth in the supply of goods, especially imports, and stronger competition in trade due to a rapid increase in the number of stores – from April-December 2006, when prices rose an average of 1.3 percent per quarter. Lower inflationary expectations also played a role, as did high growth in production and the continuing dedollarization of the economy, which led to a rapid increase in the demand for money. Finally, the slowing of inflation in the first quarter of the year was related to the slowing of the rise in prices for produce, which was due to growth in the supply of Russian potatoes and vegetables and a lower price for sugar. In the first quarter of last year, there were big problems with the supply of vegetables and, especially, sugar.
In the second quarter of the year, inflation was twice as high as in the second quarter of last year: 2.2 percent vs. 1.1 percent. The Economics Ministry emphasized that “reduced supplies of a number of food products and low competition on the foodstuffs market, simultaneously with rapidly growing salaries, were the basic causes of the increased pace of inflation in April-June 2007. Growth of the money supply did not cause inflationary pressures in the first half of the current year, as can be seen from the slowing of the growth of base inflation and lower growth rate of cash on hand.”
Prices for groceries in January-June rose 6.1 percent, somewhat less than in the same period a year ago, when that indicator was 7 percent. In January-April, groceries increased in price relatively slowly at 0.9 percent per month. But then price growth picked up and in June groceries increased in price by 1.7 percent, the biggest price hike since March 2006. Produce especially gained in price in June. Its price growth was 12.2 percent and, if vegetables are taken alone, the price growth hit 22.3 percent. In all, price for produce in the first half of the year grew by 38.6 percent. Last year in that period, they that price grew by 31.5 percent. Vegetables nearly doubled in price and the price of potatoes went up by 40 percent. Economics Ministry experts explain that the cause of the situation was mainly a reduction in imports of carrots, onion, cabbage and beets by an average of 17 percent, decreasing competition on the foodstuffs market, as well as a price increase of 40 percent for imported vegetables “as a result of the replacement of cheap imports from the CIS with more expensive imports from further abroad.”
Non-food items increased in price insignificantly in the first half year, by just 2.2 percent (compared to last year's 2.3 percent over the same time) “mainly because of the continued growth of imports, which dominated the given market. Nonetheless, in spite of the high saturation of the market, the rate of price growth did not decrease (leaving aside prices for gasoline, growth was the same as a year ago) as a result of the continual growth of solvent public demand.”
On the whole, conditions on the Russian market are interesting. The continued high exchange rate of the ruble in relation, for example, to the dollar looks strange. How can the currency of a country with inflation of close to 10 percent annually rise in relation to the currency of a country where 3-percent annual inflation upsets the authorities. On the other hand, the rise of the ruble against the dollar and other foreign currencies stimulates imports, which, according to official declarations, is practically the only anti-inflationary factor. Where import falls, consumer prices rise quickly, and where import does not fall, prices rise comparatively slowly. (We can note that the rise in value of currencies of a country that is too heavily dependent in consumer relations is not very logical either. What foreigner needs the money of a country that clearly cannot take care of its own needs?) In any case, July showed definitively that inflation does not want to decrease and the public is spending money in a hurry, before it loses more of its value.
1. What will happen to the ruble and dollar on the Russian currency market?
June began with an exchange rate of 25.81 rubles/$, and ended at 25.54 rubles/$. Thus, the Central Bank strengthened the rubles quite decisively. As the Economics Ministry indicated in its review of the Russian economy in the first half of the year, “A significant rise in the supply of foreign currency was characteristic of the domestic currency market in the second quarter of 2007 in connection with funds attracted to take part in auction of the property of OAO YUKOS and the initial placement of shares in Vneshtorgbank. As a result, the Central Bank's monthly balance of operations with foreign currency reached a historical maximum. The dynamics of quotations of the ruble to the U.S. dollar and euro was determined by changes in the exchange rate of the two leading world currencies on the international market, the surplus of foreign currency on the domestic market and Central Bank's rate policy. In the second quarter, multidirectional dynamics of movement of the nominal exchange rate of the U.S. dollar and euro to the rubles was observed. At the end of the quarter under consideration, the official exchange rate of the dollar to the ruble dropped by 0.75 percent to 25.8162 rubles to the dollar. The official exchange rate of the euro to the rubles rose insignificantly to 34.7150 rubles to the euro.”
In general, the Russian Central Bank may continue to raise the exchange rate of the ruble (especially in relation to the dollar), making reference to the fact that the American currency is weak not only in Russia, but throughout the world, world oil prices remain unbelievably high, a surplus of dollars is still observed on the Russian domestic market and, besides everything else, raising the ruble rate is an anti-inflationary measure, the need for which is not falling, but rising. The natural limit for raising the exchange rate of the ruble is the psychologically important 25-ruble mark, which should not be passed too quickly or the public will become alarmed.
Our prognosis: In connection with unwillingness to pass the 25-ruble mark, the dollar will remain higher than 25.3 rubles in August.
2. How will consumer prices change?
The final calculations of inflation in July have not been completed yet, but preliminary figures point to an inflation rate of 1.1 percent. Thus, in the first seven months of 2007, consumer prices rose 6.8 percent, with five months and 1.2 percent left to go to the planned 8-percent mark. Nonetheless, Russian officials have yet to admit defeat officially. Rather, they say that everything is still possible. Inflation may suddenly slow down – a lot.
Of course, price growth was insignificant last August and occasionally deflation was even noted. Produce became cheaper, which has great importance in the calculation of the consumer price index in Russia, bringing a general price reduction with it. This year, however, the sharp slowdown in inflation will look too effective. It was 0.3 percent June in last year, 0.7 percent on July, 0.2 percent in August and 0.1 percent in September. Thus the August result was far from off the chart. This year, there was 1.0 percent in June and 1.1 percent in July, and 01-0.2 in August would be strange to see, most of all for the public, which has gotten used to inflation over the summer. Russia no longer resembles Zimbabwe, where the situation is so serious that people get money in the morning and run to spend it while it is still worth something. But Russian buyers are spending money with great willingness too and one reason for that is that it is noticeably losing it value. That willingness to spend money causes price rises by itself.
Our prognosis: In August, inflation will be no less than 0.4 percent.
3. Where are world oil prices going?
July was a good month for world oil prices. Both American WTI and North Sea Brent gained more than $8 per barrel in the course of the month. And as soon as the month ended, on August 1, WTI set a new absolute record high of $78.77 per barrel, passing the old record of $78.40, set when the Israelis invaded Lebanon last year.
There were no particular causes for the new record. It is estimated that OPEC produced 26.75 million barrels per day in July, which is 150,000 more than in June. The cartel officially declines to expand production, in spite of the high prices, saying that U.S. petroleum product producers have more than enough reserves as is. In addition, the fact that the American economy is not in brilliant condition should play against rising oil prices. Economic growth is slowing and investors are made nervous by the problems with the mortgage crediting market. So there is unlikely to be any higher demand for toil in the United States.
Speculators still decided to have decided to play on American authorities' announcing a reduction of oil reserves by 6.5 million barrels due to increased petroleum product production. Thus oil may remain expensive not only from geopolitical causes, but also because of speculative funds' unwillingness to give up hope for a good profit from their investments in oil futures.
Our prognosis: In August, oil will not be cheaper than $74 per barrel after last month's highs.
4. What will happen to the euro and dollar on the world currency market?
July was a bad month for dollar prices on the world currency market. On July 2, the euro had already passed $1.36 and players on the world currency market began to talk about the euro setting new record, to replace the high of $1.3682, set on April 27 of this year. On July 10, the euro passed $1.37 for the first time since it was created in 1999. On July 12, the European currency cost more than $1.38. On July 24, a new absolute record for the fall of the dollar against was set when it reached $1.3852.
A host of reasons could be found for speculators to play against the dollar. For example, the euro passed $1.38 on July 12 after American authorities announced a fall in retail sales of 0.9 percent in June. The market decided that the American economy was in bad shape indeed if American consumers, who never failed to show lively demand, especially for imported goods, stopped wanting to shop. Consequently, the American Federal Reserve Board will not want to shake up shoppers any more by raising the interest rate to slow the economy down, and so the dollar will only become cheaper. (Theoretically, the board could suggest that, as a result of the reduction of demand for imported goods, the huge American foreign trade debt will be reduced as well, which was one of the arguments behind the IMF's urgings that the dollar be devaluated.) After Federal Reserve chairman Ben Bernanke appeared before Congress and said that he was still worried about inflation, and even more worried about the condition of the mortgage market, everyone began to sell even more dollars after what they considered practically an official refusal to raise interest rates. Only toward the end of the month did speculators decide it would be better not to get carried away, and the dollar rose to $1.36/euro.
The main economic event of July was probably the fact that inflation in Russia exceeded last month's indicator, reaching 1.1 percent according to the preliminary calculations of the Ministry of Economic Development and Trade, while prices rose only by 0.7 percent in July last year. Considering that inflation in June of this year reached 1 percent (compared to 0.3 percent last year), it has to be acknowledged that prices are rising noticeably faster this year. That acceleration has eliminated the lengthy lag in the inflation rate this year, compared to last. As a result, prices rose 6.8 percent in the first seven months of this year, which is an inflation rate comparable with last year's 6.9 percent in the same period. Meeting the plan for the year of 8-percent inflation looks as unlikely as it did last year, when the final result was 9-percent inflation.
At the end of July, the Economic Ministry issued a review of the condition of the Russian economy in the first half of the year. There it says that consumer prices rose 5.7 percent in the first half a year, against 6.2 percent in the first half of last year. Base inflation, which takes into account the rise of prices due to monetary factors, was 3 percent, compared to last year's 3.9 percent. The ministry noted that “Although inflation was reduced in the first half of the year on the whole, there were no stable tendencies in the development of inflationary processes in that period.” In the first quarter, everything looked fine. Consumer prices rose just 3.4 percent, while they rose 5 percent in that period of last year. However, according to the Economics Ministry, the first quarter showed only the continuing effects of the anti-inflationary factors – growth in the supply of goods, especially imports, and stronger competition in trade due to a rapid increase in the number of stores – from April-December 2006, when prices rose an average of 1.3 percent per quarter. Lower inflationary expectations also played a role, as did high growth in production and the continuing dedollarization of the economy, which led to a rapid increase in the demand for money. Finally, the slowing of inflation in the first quarter of the year was related to the slowing of the rise in prices for produce, which was due to growth in the supply of Russian potatoes and vegetables and a lower price for sugar. In the first quarter of last year, there were big problems with the supply of vegetables and, especially, sugar.
In the second quarter of the year, inflation was twice as high as in the second quarter of last year: 2.2 percent vs. 1.1 percent. The Economics Ministry emphasized that “reduced supplies of a number of food products and low competition on the foodstuffs market, simultaneously with rapidly growing salaries, were the basic causes of the increased pace of inflation in April-June 2007. Growth of the money supply did not cause inflationary pressures in the first half of the current year, as can be seen from the slowing of the growth of base inflation and lower growth rate of cash on hand.”
Prices for groceries in January-June rose 6.1 percent, somewhat less than in the same period a year ago, when that indicator was 7 percent. In January-April, groceries increased in price relatively slowly at 0.9 percent per month. But then price growth picked up and in June groceries increased in price by 1.7 percent, the biggest price hike since March 2006. Produce especially gained in price in June. Its price growth was 12.2 percent and, if vegetables are taken alone, the price growth hit 22.3 percent. In all, price for produce in the first half of the year grew by 38.6 percent. Last year in that period, they that price grew by 31.5 percent. Vegetables nearly doubled in price and the price of potatoes went up by 40 percent. Economics Ministry experts explain that the cause of the situation was mainly a reduction in imports of carrots, onion, cabbage and beets by an average of 17 percent, decreasing competition on the foodstuffs market, as well as a price increase of 40 percent for imported vegetables “as a result of the replacement of cheap imports from the CIS with more expensive imports from further abroad.”
Non-food items increased in price insignificantly in the first half year, by just 2.2 percent (compared to last year's 2.3 percent over the same time) “mainly because of the continued growth of imports, which dominated the given market. Nonetheless, in spite of the high saturation of the market, the rate of price growth did not decrease (leaving aside prices for gasoline, growth was the same as a year ago) as a result of the continual growth of solvent public demand.”
On the whole, conditions on the Russian market are interesting. The continued high exchange rate of the ruble in relation, for example, to the dollar looks strange. How can the currency of a country with inflation of close to 10 percent annually rise in relation to the currency of a country where 3-percent annual inflation upsets the authorities. On the other hand, the rise of the ruble against the dollar and other foreign currencies stimulates imports, which, according to official declarations, is practically the only anti-inflationary factor. Where import falls, consumer prices rise quickly, and where import does not fall, prices rise comparatively slowly. (We can note that the rise in value of currencies of a country that is too heavily dependent in consumer relations is not very logical either. What foreigner needs the money of a country that clearly cannot take care of its own needs?) In any case, July showed definitively that inflation does not want to decrease and the public is spending money in a hurry, before it loses more of its value.
1. What will happen to the ruble and dollar on the Russian currency market?
June began with an exchange rate of 25.81 rubles/$, and ended at 25.54 rubles/$. Thus, the Central Bank strengthened the rubles quite decisively. As the Economics Ministry indicated in its review of the Russian economy in the first half of the year, “A significant rise in the supply of foreign currency was characteristic of the domestic currency market in the second quarter of 2007 in connection with funds attracted to take part in auction of the property of OAO YUKOS and the initial placement of shares in Vneshtorgbank. As a result, the Central Bank's monthly balance of operations with foreign currency reached a historical maximum. The dynamics of quotations of the ruble to the U.S. dollar and euro was determined by changes in the exchange rate of the two leading world currencies on the international market, the surplus of foreign currency on the domestic market and Central Bank's rate policy. In the second quarter, multidirectional dynamics of movement of the nominal exchange rate of the U.S. dollar and euro to the rubles was observed. At the end of the quarter under consideration, the official exchange rate of the dollar to the ruble dropped by 0.75 percent to 25.8162 rubles to the dollar. The official exchange rate of the euro to the rubles rose insignificantly to 34.7150 rubles to the euro.”
In general, the Russian Central Bank may continue to raise the exchange rate of the ruble (especially in relation to the dollar), making reference to the fact that the American currency is weak not only in Russia, but throughout the world, world oil prices remain unbelievably high, a surplus of dollars is still observed on the Russian domestic market and, besides everything else, raising the ruble rate is an anti-inflationary measure, the need for which is not falling, but rising. The natural limit for raising the exchange rate of the ruble is the psychologically important 25-ruble mark, which should not be passed too quickly or the public will become alarmed.
Our prognosis: In connection with unwillingness to pass the 25-ruble mark, the dollar will remain higher than 25.3 rubles in August.
2. How will consumer prices change?
The final calculations of inflation in July have not been completed yet, but preliminary figures point to an inflation rate of 1.1 percent. Thus, in the first seven months of 2007, consumer prices rose 6.8 percent, with five months and 1.2 percent left to go to the planned 8-percent mark. Nonetheless, Russian officials have yet to admit defeat officially. Rather, they say that everything is still possible. Inflation may suddenly slow down – a lot.
Of course, price growth was insignificant last August and occasionally deflation was even noted. Produce became cheaper, which has great importance in the calculation of the consumer price index in Russia, bringing a general price reduction with it. This year, however, the sharp slowdown in inflation will look too effective. It was 0.3 percent June in last year, 0.7 percent on July, 0.2 percent in August and 0.1 percent in September. Thus the August result was far from off the chart. This year, there was 1.0 percent in June and 1.1 percent in July, and 01-0.2 in August would be strange to see, most of all for the public, which has gotten used to inflation over the summer. Russia no longer resembles Zimbabwe, where the situation is so serious that people get money in the morning and run to spend it while it is still worth something. But Russian buyers are spending money with great willingness too and one reason for that is that it is noticeably losing it value. That willingness to spend money causes price rises by itself.
Our prognosis: In August, inflation will be no less than 0.4 percent.
3. Where are world oil prices going?
July was a good month for world oil prices. Both American WTI and North Sea Brent gained more than $8 per barrel in the course of the month. And as soon as the month ended, on August 1, WTI set a new absolute record high of $78.77 per barrel, passing the old record of $78.40, set when the Israelis invaded Lebanon last year.
There were no particular causes for the new record. It is estimated that OPEC produced 26.75 million barrels per day in July, which is 150,000 more than in June. The cartel officially declines to expand production, in spite of the high prices, saying that U.S. petroleum product producers have more than enough reserves as is. In addition, the fact that the American economy is not in brilliant condition should play against rising oil prices. Economic growth is slowing and investors are made nervous by the problems with the mortgage crediting market. So there is unlikely to be any higher demand for toil in the United States.
Speculators still decided to have decided to play on American authorities' announcing a reduction of oil reserves by 6.5 million barrels due to increased petroleum product production. Thus oil may remain expensive not only from geopolitical causes, but also because of speculative funds' unwillingness to give up hope for a good profit from their investments in oil futures.
Our prognosis: In August, oil will not be cheaper than $74 per barrel after last month's highs.
4. What will happen to the euro and dollar on the world currency market?
July was a bad month for dollar prices on the world currency market. On July 2, the euro had already passed $1.36 and players on the world currency market began to talk about the euro setting new record, to replace the high of $1.3682, set on April 27 of this year. On July 10, the euro passed $1.37 for the first time since it was created in 1999. On July 12, the European currency cost more than $1.38. On July 24, a new absolute record for the fall of the dollar against was set when it reached $1.3852.
A host of reasons could be found for speculators to play against the dollar. For example, the euro passed $1.38 on July 12 after American authorities announced a fall in retail sales of 0.9 percent in June. The market decided that the American economy was in bad shape indeed if American consumers, who never failed to show lively demand, especially for imported goods, stopped wanting to shop. Consequently, the American Federal Reserve Board will not want to shake up shoppers any more by raising the interest rate to slow the economy down, and so the dollar will only become cheaper. (Theoretically, the board could suggest that, as a result of the reduction of demand for imported goods, the huge American foreign trade debt will be reduced as well, which was one of the arguments behind the IMF's urgings that the dollar be devaluated.) After Federal Reserve chairman Ben Bernanke appeared before Congress and said that he was still worried about inflation, and even more worried about the condition of the mortgage market, everyone began to sell even more dollars after what they considered practically an official refusal to raise interest rates. Only toward the end of the month did speculators decide it would be better not to get carried away, and the dollar rose to $1.36/euro.
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