Economic Forecast
Translated by
Joera Mulders
March 19, 2011
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Original appeared in Kommersant Vlast'
Author: Sergey Minayev
Images: Kommersant
Read the translator's introduction

This is a translation of the monthly economic forecast published in the weekly magazine Kommersant Vlast'.

Before we will review our predictions for the previous month and give out new forecasts for December, we will shortly review the most important economic events of November.

The most important economic event in November was most likely the significant acceleration of inflation in Russia. Between the 1st and 22th of November Russia’s consumption prices increased by 0.6%. On a daily average prices increased by 0.026%, compared to 0.016% in October 2010 and 0.01% in November 2009. This means that this year in November the prices increased almost twice as fast as in October and almost three times as fast as in November 2009.

The leaders in price increases among food products – in the first 22 days of November (since the start of the year)

Millet – 11.2% ( 51,7%)
Fresh (white) cabbage – 7.4% ( 71.5%)
Sunflower-seed oil – 5.3% (17.9%)
Buckwheat – 4.1% (154,6%)
Granulated sugar – 4.2% (18.1%)
Potatoes – 3.9% (77.5%

The authorities may explain this incredible increase of prices for many foodstuffs in 2010 by reference to global trends. It is said that the prices of raw products, among which agricultural, are increasing everywhere because of rising speculation. In his speech to the federal assembly on the 30th of November, president Dmitri Medvedev said that ‘despite the growing prices for foodstuffs, that are unfortunately taking place all around the world, we will not allow a spike in inflation. Our task for the coming three years remains to curb inflation to 4 or 5% a year.

Speculation on the decline of the dollar rate is indeed intensifying. Raw materials on the global market are traditionally traded in US currency, so when the rate of the dollar declines, the prices will rise. It should be noted of course that of the products which prices are rising in Russia only sugar may be subjected to international speculation. International speculators do not trade in futures for white cabbage and buckwheat. Still, however, the conclusion could also be that Russian traders are applying global practice to the Russian market.

The Russian authorities claim successful resistance to the destructive influence of the global market. No matter what spike in inflation we are confronted with, the authorities argue that it could have been worse and that they did not allow a more negative scenario to happen.

The authorities of the industrialized nations, on the other hand, may note that they also prevented a sharp increase of inflation, despite the growth of global prices for food products. They did even better, as their inflation is at an incomparably lower level than Russia’s. After September the increase of consumer prices in Russia reached an annual 7%, while over the same time period in Japan prices dropped by an annual 0.6% and prices increased in the US with 1.1%, in Germany with 1.3%, in France with and Italy with 1.6%, in Canada with 1.9% and in Great Britain with an annual 3.1%. [Kommersant does not mention India with 9.8% and Brazil with 4.6%]

Something interesting happened in the eurozone in November. Despite the acceleration of inflation in Russia on the Russian currency market, we saw an extreme drop in the rate of the euro compared to the ruble. The rate of the euro is dropping because of the concerns over the European debt crisis. Russia’s Central Bank normally acts in such way that the ruble will follow the same trajectory in relation to the euro as other currencies. This means that Russian citizens can also make some profit from the high inflation. We are no longer living in the early nineties, when the ruble swiftly depreciated in comparison to both prices and foreign valuta. Today, the ruble depreciates in comparison to goods, but appreciates in comparison to other currencies.

The inflation trends in November show that Russian traders grew bolder and increased their prices. It seems that they have decided that the global financial crisis has passed over, that the Russian economy is no longer under threat, that consumers are already saving money again and fully capable of paying more for their goods.

The authorities of industrialized nations would see the acceleration of inflation as a sign that the crisis has been overcome. Recently they have even began to argue that if the inflation would rise significantly, unemployment could drop. In their countries, however, the inflation is not increasing, despite all their efforts to print more money. Their local traders are clearly not as daring as their Russian colleagues.

1. What will happen to the ruble?

We predicted for November that in the interests of the competitiveness of the Russian economy the rate of the dollar would rise to a level not lower than 30.2 rubles. So it happened. At the last day of the month the official exchange rate of the dollar in Russia reached 31.31 rubles.

Of course, the appreciation of the dollar in Russia has been in agreement with the trends of the global markets. The Central Bank can therefore claim that its policy follows global trends. The Central Bank, however, could have also pursued a slight weakening of the ruble explained by concerns over the competitiveness of the Russian economy.

As a matter of fact, the international press is full of reports of a global currency war taking place. Countries around the world are vying with each other in their attempts to lower the rates of their own currencies in order to impede import and stimulate their export. At the G20 summit in November world leaders were completely occupied by these currency problems.

So why did Russia not pursue this trend? At the summit, no other country accused Russia of ill-intentioned weakening of the ruble. It’s unlikely that unfavorable criticism from other countries would follow. Our own producers would welcome it.

Our forecast: in agreement with the global trends in December the dollar at the Russian market will be more expensive than 31 rubles.

2. What will happen to the Russian prices?

We predicted that in November the prices on Russia’s consumption market would continue to grow by 0.5%. You could say that our forecast was wrong, because according to numbers from Rosstat, over the first 22 days already the prices rose by 0.6%.

The inflation for November did as we expected turn out to be quite significant. As a result the cumulative inflation for 2010 has already reached 7.4%. That is roughly 1% less than the 8.4%, recorded in November last year.

The authorities now have the task to make sure that by years end the price growth will not exceed 8%. If that would be the case it would still be possible to speak of a clear trend of continuous reduction of inflation in Russia. Each year the increase of prices will be less than in the previous year. This time it will not be a big cut, but nevertheless a reduction compared to the previous year. When this trend would continue, it will still be possible to reach the official goal of reducing the inflation to 4-5% within the next three years.

Our forecast: For the sake of the steadfast reduction of inflation the prices in December will grow by 0.4%.

3. What will happen to the global oil prices?

We predicted that in November, because of speculation on higher oil prices, these prices will rise above $80 a barrel. So it happened. At the end of the month a barrel of American WTI sold for $85.28.

November was an awkward period for the traders who gamble on an increase of world prices for oil. They usually follow the theory that the prices depend on rate of the dollar. The rate of the dollar increases an the prices fall. The rate of the dollar drops and the prices rise.

In November, however, the dollar appreciated. The price of oil should have dropped accordingly, but for some reason the speculation on higher prices for oil continued.
Speculators must have paid attention to the fact that November was an extremely cold month for many industrialized. Winter is ahead and that means that the demand for oil should be high, simply because of the calendar. Even OPEC has stated that the price of oil in the coming winter should not be lower than $80 a barrel. And the sheiks would know.

Nevertheless, the speculators did not completely abandon the dollar theory. They remembered it at the last day of the month, when the price dropped from $85,90 to $85,20.

Our forecast:
because of the dollar theory will not be completely forgotten of, the price of a barrel of oil in December will not be higher than $88.

4. What will happen to the rate of the euro?

We expected that in November the rate of the euro would drop. The speculators had bought their euros in October, betting against the dollar on the news that the US Federal Reserve would print even more extra money to give a boost to the economy of the US. After this decision of the Federal Reserve would have been executed, the speculators would have proceeded to sell their euros on the principle of ‘buying rumors, and selling facts’. They indeed played their game. We did however predict that they would do so with considerable care and that the rate of the euro would only drop to $1.34. The speculators, however, did not act with such care and the rate of the euro fell to $1.30.

It was the new turn in the European debt crisis which prompted (or perhaps we should say allowed) the speculators to loose their caution. The problems of the Irish banks reached such heights that the country had to request the EU for a bailout, which it received to the tune of €85 billion. Rescuing Ireland, however, may not be enough to stop the debt crisis. Next in the line are Spain and Portugal. Behind them Italy could follow.

The speculators were also prompted to sell their euros because of remarks made by the German authorities. They said that the bill for the rescue of their fellow members in the Eurozone from default would have to be paid for by Germany and that Germany could afford to save all of them.

On the whole, the mood at the global currency market at the end of November was completely against the euro. The speculators are convinced that the European currency has not fully exhausted the potential of its dip. With such a mood of course a potential dip very quickly becomes a real dip.

Our forecast: because of the European debt crisis the euro will in December not trade for higher than $1.33.