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April, 2006 The Kommersant - by Sergey Minaev -
April has come and Vlast weekly presents its traditional prognosis for the upcoming month. We will pose the following questions: where will the ruble go against the dollar in April? What will the inflation rate be on the Russian consumer market? How will the dollar and the euro behave on the international currency market? But first, let us have a look at major economic events of the month.
Russia’s talks on the accession to the WTO have to be considered the main economic event of March. The Russian delegation met with their U.S. counterparts in Geneva and took part in a session of a working party which represents 58 nations and prepares a report on Russia’s trade policy determining conditions of the accession. Russia pinned all its hopes on talks in March. If the country had reached an agreement with the United States and coordinated a major part of the report on trade policy, the accession to the WTO in 2006 would be a decided matter. It has been crucially important for Russia to join the WTO, an organization which embraces most countries, this year when Russai presides at the G8 and receives major world leaders.
Yet, all the attempts failed again. The Russian delegation hoped to find an agreement on 13 sections of the working party’s report but managed to coordinate positions only on three of them. As a result, only 19 sections of 48 are now amended. Among other things, other countries are concerned about Russian customs service, and consultations on customs issues have been put off till late April. “Russia has made good progress at bilateral talks but I would like to underline the need to accelerate work on the multilateral front,” Stefan Johannesson, the chair of the working party, said. Yet, it is quite doubtful that any progress has been made at the U.S.-Russian negotiations. Both U.S. and Russian delegations, indeed, repeatedly underscored the progress at the bilateral talks but did not specify. In contrast, Russian President Vladimir Putin said at a meeting with Russian businessmen on March 29 that the United States intentionally impedes Russia’s accession to the WTO. “We have received a list of items from our American partners, which require more coordination and which we thought was settled long ago. We are being artificially held back in the negotiating process,” Putin said. The president emphasized that Russia is interested in the accession but can agree to enter the organization only if the membership is beneficial for all parties, and primarily for Russia and its economy.
Besides that, Georgian officials stated in March they were ready to review the settled agreement on Russia’s joining the WTO saying Russia did not fulfill the terms. Meanwhile, the European Union reminded that Russia does not take any steps to lift payments for flights via Siberia, which European airlines companies had been pushing for. The fact makes the agreement that Russia and the EU reached senseless. The March talks did not become decisive for Russia’s accession to the WTO. Quite on the contrary, they showed that nothing has changed and Russia is still on the brink of trade war with the rest of the world.
The position is all worse as China, a WTO member, waged trade wars with both the United States and China in March. Europeans complained that Chinese sell shoes at dumping prices and scale back autoparts imports. U.S. Commerce Secretary Carlos Gutierrez even took a trip to Beijing and called on China to liberalize its foreign trade threatening with protective measures against Chinese goods. China vehemently argued with the West claiming that anti-dumping shoe duties of the European Union run against the WTO’s regulations and infringe rights of European customers. Suffering from the situation with China, the West appears to be increasingly reluctant to accommodate Russia. Furthermore, Russia and China are very similar in the eyes of U.S. Congressmen, for example, and primarily as far as the issue of violating copyright is concerned. The Congress has passed a resolution insisting that the U.S. administration should not open the path to the WTO for Russia until Russians present irrefutable proof of effective fighting against piracy.
Should Russian join the WTO or fail to do it, consequences will be virtually the same. If the West, the United States, first of all, agrees to accept Russian to the WTO this year, this will be purely a political move. Hardly anything will change for Russian citizens as the authorities will still keep a ban on foreign banks and will wage a bogus war on piracy. Should the West persist, Russian officials will take an unbending stance emphasizing that they are unwilling to open the Russian financial market and giving the Russian economy a more civilized look. It is beyond Russia’s interest, they would claim. If you don’t want to see us at the WTO – all right, then. This is actually the position that emerging nations at the WTO took at the Doha round of talks. They make it quite clear that the West forced them to join the WTO some time ago and now insist that they have already opened their markets enough and do not need further liberalization. All attempts to build their economics in Western patterns are sure to fail, they persist.

1. What will happen to the ruble exchange rate?
We forecasted that the dollar may fall below 28 rubles on the Russian market in case of the weak dollar on world markets. The prognosis proved to be true. The dollar indeed got weaker on the international market and cost under 28 rubles on the Russian market. The exchange rate came to 27.80 ruble against $1, as of March 29.
As the dollar slipped below 28 rubles, Russians got apprehended about their dollar savings. Russia is still a country where no money has a stable price. The ruble is depreciated because of inflation while the dollar declines, pressed by the policy of the Russian Central Bank. In theory, only overseas businessmen can benefit in this situation as they sell goods in Russia for rubles and convert them into dollars later. The Central Bank is also at the winning end replenishing the gold and currency reserves. The reserves surpassed the mark of $200 billion in March, for the first time in the Russian history. A week earlier, the coffers had grown $3.8 billion of the $19.5 billion rise since the beginning of 2006.
Yet, Russian banking authorities prefers to avoid steps that can be predictable for currency stags and raise or lower the ruble rate in turns. Anyway, the Central Bank hinted in March that the further strengthening of the ruble should not be expected.
Our prognosis: we should believe the Central Bank this time that the dollar will not fall below 27.6 rubles in April.

2. What will happen to Russian prices?
We suggested that inflation in March may reach 1.4 percent as the recent inflation situation in Russia had been greatly reminiscent of the one in 2005 when the rate was more than 1 percent. Apparently, the Economic Development and Trade Ministry expected the same thing. At any rate, Minister German Gref mentioned in his economic report to President Vladimir Putin the following. “We forecast that inflation will amount to 0.6 percent by the end of March, which is half as much as was planned and half as much as the February rate.” Our speculation and the economic ministry’s initial evaluation proved to be inaccurate. The authorities say that inflation was lower than 1 percent in March, which means a dramatic slowdown or even a halt in price hikes in Russia.
We can certainly surmise that Russian traders got ashamed of their vim in the first two months of the year when prices grew 4.1 percent and decided to take a respite. Even if the inflation does not reach 0.6 percent and the rate of the three months totals 5 percent, the planned 8.5 percent of the annual inflation will still remain a dream. As a matter of fact, German Gref now expresses only a hope that inflation in 2006 will be lower than in 2005. The rate was 10.9 percent then so the authorities can expect, say, 10.5 percent, which is the figure the European Bank for Reconstruction and Development predicts for Russia.
Russian officials got engaged in a heated discussion on the nature of inflation in Russia in March. Anatoly Chubais, the head of RAO UES of Russia, made it clear that the inflation depends on monetary factors rather than on growing prices on the natural monopolies market. German Gref replied: “At the end of the day, monetary factors are really decisive for inflation… But the influence of tariffs in natural monopolies is crucial here.” Finance Minister Alexey Kudrin said, on the contrary, that if the economy does not get additional money, rising prices on gas and electricity will increase expenses of households reducing their spendings on other goods and services.
Our prognosis: sellers of goods and services will not be looking for causes of inflation in April but will simply drive up prices at any suitable occasion. Inflation will exceed 0.6 percent.

3. What will happen to world oil prices?
We indicated in our forecast for March that oil prices would surpass $57 per barrel despite good reserves of oil producers. Market players are too nervous, and oil cannot be cheap in these circumstances. The prognosis was on the mark. Oil cost over $60 per barrel all the month through, going up $1.91 on March 28 and touching the notch of $66 per barrel. It concerned U.S. light crude oil while Northern Sea’s Brent cost some $65. Players at the world oil marked pushed prices up referring to unrests in Nigeria and events in Iraq and Iran. Hiroyuki Kitakata, director of commodities business at Barclays Capital in Japan, said: “The main drivers were geopolitical issues and I think sentiment is still more bullish than bearish.” The approaching summer car season in the United States played its part as well.
Oil producers were so satisfied with the prices that the OPEC decided against scaling back production at a conference on March 8, despite speculations about a declining demand. Kuweit’s Oil Minister Ahmad as-Sabah said that the country “would face overproduction in the second quarter. It will amount to 1.5 or 2 million barrels a day from April to June.” He made it a point, however, that the OPEC should preserve its aggregate quotas of 28 million barrel a day “to keep prices more stable.”
Our prognosis: geopolitical tensions will remain in April, investment funds will invest heavily into oil driving it above $60 a barrel.

4. What will happen to the dollar-euro exchange rate?
We predicted that the euro would not to fall below $1.18, since the appointment of Ben Bernanke as the new head of the U.S. Federal Reserve System and a possible hike in U.S interest rates were no longer a surprise. The prognosis came true. The dollar began to decline early last month. The euro climbed to $1.20 from $1.18 on March 2 alone. The U.S. and European currencies closed the month at that level
Quite predictably, the Federal Reserve System raised the interest rate to 4.75 percent on March 28, which was the highest boost over the past five years. Everyone understood that the new head of the Feds would start out showing the adherence to the policy of Alan Greenspan who had been known to use hikes in interest rates to battle inflation though it was low in the United States under Mr. Greenspan irrespective of the changes. On the contrary, a rise in interest rates to 2.5 percent in the Euro-zone had a considerable impact on the currency market. Market watchers thought that the time of the permanent growth of European interest rates has come as the rate was last increased in December. There is also a good pretext for that – inflation in the Euro-zone is going up. The inflation rate reached 2.2 percent annually last December growing to 2.4 percent in January but falling to 2.3 percent in February. As European Central Bank is supposed to keep inflation at the level lower than 2 percent, it is bound to raise interest rates. None of 54 economist Dow Jones Newswires contacted for predict a decrease in interest rates. 12 of those surveyed said the rates will be preserved till the end of the year, 18 people think the rates will be boosted to 2.75 percent while 18 believe the rates will climb to 3.0 percent.
Our prognosis: the euro will rise above $1.19 following the growing attention to the European interest rates.