Russian Troubles: Strong Ruble and Expensive Oil

Oligarchs themselves import currency proceeds that brings them to ruin
From now on the government will focus on development of a weighted financial policy, Russia's Minister for Economic Development and Trade German Gref said on Friday. Indeed, this is the only thing the ministerial officials have to do as practically none of the forecasts they made has come to pass this year. Forecasts concerning the world oil prices and the ruble-to-dollar rate are among them.

German Gref said after a session of the government: "We are facing the task of development of a weighted monetary policy so that we couldn't exceed the parameters of ruble strengthening and of inflation announced for this year."

Analysts of the government were mistaken with determining the oil price per barrel: the so-called OPEC's oil basket got more substantial, and the average price of one barrel of oil from the basket reached $29.07 on August 7. At that, analysts say that starting with the very beginning of the previous week the price for one barrel of oil exceeded the upper limit of OPEC's price corridor. Under conditions when the world oil prices are higher than those forecast by the Russian government, German Gref says, a weighted financial policy is the top priority for the government. 

A statement recently made by Russia's Vice Premier and Minister of Finance Alexey Kudrin also deserves particular attention. He admitted that the dependence of Russia's economy upon the oil export has considerably increased within the past several years. In fact, Russia is now more depending upon the world oil prices than under Boris Yeltsin. What is more, the minister of finance says that high oil prices made for successful performance of the budget within the past years.

High oil prices have already caused many problems for Russia's authorities and businesses. Recently, currency proceeds of Russian exporting companies (they were obliged to sell 50 per cent of their currency proceeds) forced the RF Central Bank to print much more money to purchase all currency imported to Russia. Russia's gold and FOREX reserves speedily increased. Starting with beginning of the previous year, the Russian business elite resorted to the press and its lobbyist, the Russian Union of Businessmen and Industrialists for fighting with the obligatory sale of currency proceeds. German Gref also gave his strongest support to Russia's leading oligarchs. Now it seems that Gref and Russian oligarchs have achieved not only reduction of the norm of obligatory currency proceeds sale, in fact they have provoked a pre-crisis situation. It is the minister for economic development and trade who is to disentangle the difficult situation. 

The abundance of rubles threatens Russia with inflation and subsequent worsening of the social situation which would be unfavorable for the forthcoming elections. On the other hand, raw materialexporting companies that bring a great part of currency to Russia feel good only under conditions when the ruble devaluation with respect to the dollar is smooth. Strengthening of the ruble means for them an increase of the ruble costs in production of the goods they export and a reduction of the profits. At that, they continue bringing petrodollars to Russia, and these dollars cause strengthening of the ruble.

Unfortunately, Russia's economy (the stock market and the banking sector) can cope niether with excessive currency proceeds nor with excessive rubles. Finally, oil price increases have resulted in strengthening of the ruble with respect to the dollar. As it turned out, the government wasn't ready for the scenario as well.

In the previous week Russia's Ministry for Economic Development and Trade reviewed the forecasts concerning the ruble-to-dollar rate toward a reduction. The forecast applies to the period of the end of the year and the next year. The changes in the government policy unsettled the business elite so much that governmental officials, including German Gref, had to nearly to disavow the new forecast of the ministry on Friday.

He said it was too early to speak about revision of the forecast on strengthening of the ruble rate. "Although the problem is still urgent, it is early to speak about revision of the forecast," German Gref told Russian journalists after the session of the government. However, the minister also admitted that strengthening of the ruble-to-dollar rate exceeded 12 per cent within the seven months of the year; the ruble strengthened by more than 4 per cent with respect to the leading world currencies. The RF Minister for Economic Development and Trade admitted that on the one hand strengthening of the ruble will have a positive effect upon the increase of the population's incomes (however, the population keeps the savings mostly in cash dollars), on the other hand it will be negative for development of the industry (Russian economists say that the ruble strengthening has a negative effect upon the oil and gas sector and a positive one upon the machine-building). However, German Gref says that this situation requires "well-coordinated activity of the government and the RF Central Bank." At that, the government and the Central Bank must prevent an increase of the inflation and carry out a policy required for balanced strengthening of the ruble.

Obviously, the weighted and optimal measures will be immediately included into a draft budget for 2004 as this abrupt change of the economic situation has been hardly fixed in the budget. The government has already declared that a draft budget for 2004 will be submitted to the Duma by the beginning of the autumn session and to be adopted before the parliamentary elections.

Photo: Prime Minister Mikhail Kasyanov and German Gref