US dollar-based economies depreciate twice since 2003

Hardly have the Russians had time to overcome the preceding fall of the American currency, as they have already been promised another. UVS bank is predicting a continuous fall in the rate of the US dollar, this time considerably more significant, reaching a rate of 24,00 rubles. The current value of the dollar in Russia is about 27 rubles. In fact, according to UVS’s calculations, this will not occur until the end of next year, but for those who keep dollar accounts or receive their wages in dollars this is no comfort. Taking into account inflation, over the course of half a year, they will lose over 20%.

The dollar rate has been falling almost continuously for three years and during this time, it has dropped over 15%. At the beginning of 2003, the rate was 31.88 rubles to the dollar, whilst the latest official rate of exchange, fixed last Wednesday by Russia's Central Bank, was 27.03 rubles. Bearing in mind inflation, which in recent years has not dropped below 10%, the dollar economy has depreciated by almost twice its value since 2003. If one compares the income of two employees working for different companies, one of whom received a salary of 1000 rubles in 2003, and the other the equivalent in rubles, it can be calculated that, taking into account inflation, the first employee’s salary has now decreased by up to 550 dollars, whilst the second, also bearing in mind the rise in prices and without indexation, now receives a salary worth approximately 830 dollars. The difference is striking. For this reason, many Russian companies are now starting to pay their employees in roubles. In the eyes of the management, this improves employees’ motivation and reduces the outflow of qualified personnel.

UVS analysts have named two key factors that they believe will lead to a fall in the rate of the dollar in Russia to 24 rubles. The first is the complete liberalization of the currency market, which, as government officials have promised, will take place early in 2007. According to UVS’s predictions, the removal of the remaining limitations will open the door to foreign investors. However, investments will be made in rubles, which means that investors will have to sell dollars on the internal market. If the Central Bank buys up dollars for 27 rubles in order to avoid strong swings in the currency rate, a huge quantity of rubles will enter the economy, which will inevitably trigger rapid inflation. The Central Bank is unlikely to act in this way, since battling with inflation has now become a crucial part of the National Plan. Therefore, the only solution is to buy dollars cheaply. With a surplus supply of currency, the rate will have to decrease. The second factor that may cause the dollar to fall in relation to the ruble is the global drop in the rate of the American currency on the world market, which analysts from UVS are expecting to see within half a year. The rate of the dollar in relation to the euro may decrease from 1.2 to 1.4 dollars to the euro by the end of the year.

A few days ago, the head of the Federal Service for the Financial Market, Oleg Vyugin, expressed his attitude to the possibility of a further strengthening of the ruble. He believes that the regulatory organs may well aim for this. “This can be achieved either via a reduction in taxes or by using resources from the stabilization fund for effective concrete budget programmes.” He explained. If things are left as they are, the stabilization fund will simply keep growing, indicates Vyugin. “If we aim to harden the ruble, pressure from competition for our enterprises will increase, but on the other hand, they will have more opportunities to buy up equipment and modernize their produce”, he says with confidence.

Russia's Central Bank is already putting pressure on the rate of the dollar, preventing it from rising. According to figures from the16th June, the volume of gold currency reserves belonging to the Russian Federation has decreased by almost two million dollars. This reduction of funds has occurred at a time when the rate of the dollar is increasing on the global market. This simply indicates that the regulator has increased the currency supply on the national market, purely to prevent the rate of the dollar from rising. The possibility exists that following the fall of the American currency on the global market, the rate of the dollar will also drop in Russia. All that remains is to await the predicted collapse. Nobody is prepared to predict whether it will hold out for long. Perhaps already this quarter, after the next meeting of the Federal Reserve System, at which the end of the period of increase in discount rate may be announced, the rate of the dollar will begin to fall.


Translated by Leila Wilmers

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Author`s name Dmitry Sudakov