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Economic Prognosis

February 04, 2008 | The Kommersant

February is here, and Kommersant Vlast is presenting its monthly economic prognosis. We will look at the following questions: where the U.S. dollar and Russian ruble will go, what prices in Russia will do, what will happen to world oil prices, and what the dollar and euro will be worth on the global currency market. But first, let’s have a look at main economic events of January.

The global stock market crisis was the main event in January which also affected Russia. On January 21, Russia’s benchmark RTS, which surged above 2,300 points in mid-January, slipped below the milestone 2,000 points, a low it has not seen since last September. On January 22, it plunged below 1,900 points, for the first time ever since last August. However, it won back some of the lost points to raise above 2,000 but quotations lost more than 5 percent in just one week anyway. On January 28, the index dropped below 2,000 points again.

The Russian stock market was going down just like other exchanges were. Japanese Nikkei 225 fell 3.9 percent on January 21 and lost a further 5.1 percent by January 22 afternoon. Hong Kong Hang Send shed 5.5 percent on January 21 and another 8 percent by next midday. Argentinean stocks dropped 6.25 percent on January 21.

U.S. stocks did not go down on January 21 only because the exchange was close for holiday. But on January 22 Dow Jones lost 499 points to 11,600, retreating from the milestone 12,000 points. In a move to curb the global stock slump the Federal Reserve System said on January 22 it would slash interest rates by 0.75 percent to 3.5 percent. But it did not have a long-term effect. On January 28, Hong Kong stocks fell 3.2 percent while Japanese securities dropped 4 percent. European stocks also lost some of their value on that day. The benchmark of major European companies FTSEurofirst 300 shed 1.7 percent, losing 13 percent in January. Chinese stocks on January 28 plummeted 7.19 percent.

Investors were selling off stocks at global markets saying they were afraid of economic recession in the United States. They said stocks are not in demand because the economic crisis makes profits of companies too low. An economic slump in America will dent growth in both developed and developing countries to some extent. In fact, everyone was speaking about American recession and possible slump last year, but then only the Japanese and Italian stock markets saw a considerable decline. America’s market was still on a rise. Markets of industrial countries showed impressive growth rates while emerging markets were buoyant mostly because with a weak dollar American investors realized that investing abroad is profitable and you reap profits in a solid foreign currency. But in January investors decided that it was the last chance to sell stocks – if you don’t sell them now, you won’t get profits from their earlier growth.

The stock crisis changed the economic world map drastically. 25 big companies cancelled their planned IPOs, which is a record number over the past ten years. Market analysts said that plans for the initial placement were scrapped because the companies did not hope to find enough buyers for their stocks. Who would buy stocks that would go on to fall?

The stock crisis pushed up gold prices which had soared last year. Gold prices were setting one record after another, and an ounce cost more than $900 by the end of January. Investors started to say that the $1,000 mark would soon be surpassed, which Kommersant predicted in its annual prognosis for the global economy. Gold was going up as it is traditionally considered the best place to invest funds withdrawn from stock markets. Meanwhile, the Federal Reserve System was cutting interest rates to fight the stock crisis, making the dollar cheaper and buying gold for the U.S. currency was becoming more affordable.

In Russia, the stock slump made investments in real estate more attractive showing that stocks are prone to fluctuations while real estate prices are on a constant rise.

Russian markets slumped as part of the global crisis but Russian authorities used an occasion to boast that Russia economy is better off than other countries. On January 28, Economic Development and Trade Minister Elvira Nabiullina was reporting a swift economic growth at a session with President Vladimir Putin: “The dynamics is still largely positive, which, of course, contrasts to what is happening on financial markets worldwide.” The president replied: “I took a look: all world markets were down yesterday except for the Russian which was up 2.2 percent. Ms. Nabiullina added: “Fundamental factors for the growth of Russian economy are quite strong to support the growth and hope that Russian markets will be stable enough against the global financial crisis.” Prime Minister Viktor Zubkov told foreign investors on the following day: “You are making business in a stable country. The world financial crisis will certainly affect a lot of companies abroad. But you are very lucky.”

1. Where will the ruble go?

The U.S. dollar rate against the ruble saw considerable fluctuations in January but was going up at some moments. On January 21, the dollar went up 14 kopeks to 24.64 rubles to grow to 24.82 rubles on the following day. But the dollar closed in January with modest 24.47 rubles.

A temporary rise was because the Russian stock market saw a lot of quotations declining in the global stock crisis. Foreigners were selling Russian stocks and changing rubles for dollars. The Central Bank then decided to reflect the changes in the exchange rate at least to not to let whose willing to sell rubles to sell them too cheaply. But by the end of the month the Central Bank decided to make the ruble-dollar rate reflect developments on the global currency market where the American currency slumped after two cuts to U.S. interest rates.

The Central Bank should have been firm fighting inflation from the very start of the year when Russian traditionally sees prices soar. That is why cutting the dollar rate too much was inappropriate. It would look like the time after the 1998 economic crisis when prices were growing as the ruble was falling. The Central Bank still believes that a strong ruble is a good weapon to keep consumer prices down.

Our prognosis: the government’s strategy of battling inflation will not let the U.S. dollar rise to more than 24.7 rubles in February.

2. What will happen to Russian prices?

Final inflation data for January are not available yet, but the Russian Statistics Agency estimated that consumer prices went up 2.3 to 2.4 percent. January has once again dealt a heavy blow on the inflation target which is 7.5 to 8.5 percent this year. The January blow was so painful and memory of the last year’s embarrassment when the government got 11.9 percent instead of 8 percent is still so fresh that authorities have already mentioned a possible review of the plan.

The idea of administrative control over prices cropped up again as the government announced that they had come to an agreement with producers and retailers to keep prices from rising for “socially important goods”. Other ways to curb inflation are not clear. Prime Minister Viktor Zubkov said at a government session on January 31 that the Finance Ministry, the Central Bank and the Economic Development and Trade Ministry have different views on how different factors influence prices and added that “so far none of the agencies has presented clear enough suggestions how to keep inflation within the target against the planned growth of utilities rates and railroad transport fees.” The prime minister proposed to adopt a policy of replacement of imports so that higher prices on foods are not imported from world markets.

3. Where will oil prices go?

World oil priced finally hit the historic $100 a barrel at the start of January. But pension and investment funds, main players on the world oil market, decided have a break later on. They needed to sell some oil futures to get their yield from earlier price growth. As a result oil prices were plunging well below $90 a barrel in January. Justifying this bear speculation investors said that a slowdown in U.S. economy and a danger of an economic slump do not only send American stocks down and provoke a world stock crisis but they are also cutting U.S. demand on oil.

But everyone forgot about these thoughts by the end of the month, and prices pick up again, adding 6 percent in five days. On January 30, a barrel of WTI was traded for more than $92. But on January 31 investors decided they should not go too far making oil prices lose $1. However, we should not expect a drop of oil prices. With the global stock market crisis, oil futures are the thing to stake on. What is more, the dollar is going down as U.S. authorities try to help the stock market out by slashing interest rates, which justifies any increase of oil prices. So, the growth of dollar oil prices makes up for a declining American currency.

Our prognosis: in February, bear speculation with oil futures will not let oil prices rise higher than $88 a barrel.

4. What the dollar will be worth against the euro?

In January, the main aim of stags on the global currency market was to push the rate to $1.5/?1 which is as symbolic as $100 for a barrel of oil. The game against the dollar was quite a success and the euro has moved very close the anticipated level several times, going higher than $1.49.

All events in global economy were against the dollar. U.S. officials announced that the country’s economy added as little as 2.2 percent in 2007, the lowest figure in the past five years. Investors lost any optimism about prospects of the American stock market. In the global stock crisis Dow Jones dropped below the milestone 12,000 points. Demand on the U.S. currency which investors need to buy stocks on American trading floors was going down.

To add to that, the Federal Reserve System slashed interest rates twice in an effort to give a boost to the stock market – first by 0.75 and then by 0.5 percent cutting the rates to 3 percent. The Feds were hoping it would push stocks up as investing money in them will yield more profit than keeping this money in the bank. What is more, with cheap loans companies will be more profitable and yield more on their stocks as a result. But stags on the world stock market know that the exchange rate of a currency is determined by a difference in interest rates in different countries. If an interest rate drops, so will the exchange rate. Consequently, it is now time to sell dollars until they get even cheaper tomorrow. What is more, market players are sure that there are more interest rate cuts to follow in the United States.

Our prognosis: $1.5/?1 will remain the main target of the game against the dollar, and the single European currency will buy no less than $1.47.

Sergey Minaev

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