Author`s name Michael Simpson

Do Russians Need Strong Dollar?

The US currency will be declining until the autumn. What is to come next?
In Evian, US President George W. Bush said what everybody wanted him to say: America will carry out a policy aimed at strengthening of the dollar rate on the world markets. Japan Prime Minister Junichiro Koizumi approves of this idea. It is no wonder, because Japan was the country where dollar slightly went up with respect to the key currencies of the world. The reaction of the European currency markets was also positive, and the dollar to euro rate has slightly gone up. Meanwhile, there is little hope in Russia that dollar may go up quickly.

Russian financial analysts suppose, and PRAVDA.Ru has already reported their opinions, that the dollar to ruble rate will be reducing all the summer long. Some even say that very soon the American dollar will cost not more than 28 rubles in Russia. One of the reasons of the decline is the predicted reduction of oil prices on the world market, which hasn’t yet occurred.

The dollar to ruble rate reached its peak in February 2003 when one dollar cost 31.85 rubles. Afterwards, dollar was on a steady decline. The official dollar rate announced by the Russian Federation Central Bank for June 3, 2003 makes up 30.64 rubles per dollar. Sporadic intervention of the Central Bank seems to be ineffective to prevent the decline of the US currency.

There are several reasons explaining the situation with the dollar rate in Russia. The Russian Ministry of Finance says that borrowings of Russia's largest companies on the foreign markets have made for the dollar decline considerably. Russian companies consider the domestic bank system too small for them; this is why they prefer to borrow money abroad. However, when borrowed money comes to Russia, the companies fail to find purchasers. Nowadays, the Central Bank of Russia is considered to be an unreliable purchaser, as it has dollar problems of its own.

Higher oil prices and the necessity to buy up the exporters' currency proceeds on the domestic market allow the Central Bank to increase the gold and FOREX reserves rapidly. But at the same time, the uncontrolled ruble mass is increasing every day and all the same finds no application in Russia. This money is concentrated in the hands of a small group of the population.

In the bygone years, almost all citizens of the country performed the role of regulators of the currency market: they exchanged spare rubles for dollars and saved them. But now, when majority of the Russian population are scared with the dollar decline, nobody purchases large sums of dollars. And the Central Bank cannot buy up this sum any longer. In a little while the inflation may get out of control.

Experts hope that the situation will start changing in the autumn when oil prices finally drop, the euro rate gets lower in the world and the Central Bank resumes the operations aimed at dollar strengthening. Analysts expect that the dollar rate may recover to the level of about 31 ruble by the end of the year. But it may happen that the dollar rate won't recover.

The rapid inflation, the price growth on the consumer market and rash depreciation of people's savings may play a mean joke on the authorities in a year preceding the presidential elections in the country. Some political scientists say that left-wing forces may win a triumphant victory at the parliamentary elections, which sounds rather distressing for the government and for the president.

George W. Bush made attempts to persuade the whole of the world that the dollar would soon recover and become strong, although it contradicts the present-day requirements of the US economy. Does it now make sense for President Vladimir Putin to try and charmingly persuade the Russian population that we urgently need the dollar as a guarantee against upheavals and as an amulet for a rainy day? There is only Minister of Finance Alexey Kudrin who believes in the inconvertible ruble in Russia.

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