Economic Prognosis

August is here, and Vlast analytical weekly, as always, is making its economic prognosis for the month. Experts will answer the following questions: what will happen to the exchange rate of the dollar in the Russian currency market; where inflation in the consumer market is going; how the world oil prices will change; and how the euro and the dollar will behave in the world markets. But first, a look back at the key economic event of July.

The fall of the Russian stock market can be easily rendered the key economic event of July. On July 18 the Russian Trading System - RTS - slashed by 3.96% - to 2135.38 points. On July 25 its drop was even more palpable - 115 points, which is 5.58%, crossing the psychological mark of 2000 points and reaching 1951 points. On July 28 Russia's stocks continued getting cheaper: the RTS index decreased 1.16%, to 1928 points. On July 29 the index crossed the 1900 mark, going down by 1.68%, and reaching 1896 points.

The situation resembled the one of this January. On January 21 Russia's stock market index RTS, which exceeded 2300 points in the middle of the month, plummeted to 2000 (at that time everyone recollected that the index had been at the same level last September), and on January 22 it was as low as 1900 points, which hadn't happened since last August. It need be said, though, that the index improved a little after it. Nevertheless, the quotations slump amounted to some 5%. And on January 28 the index fell under the 2000-point mark once again.

At that time you could explain it all with the world stock exchange crisis - the falling of the Russian stock market was simultaneous with the same processes in other stock exchanges: Japan's Nikkei 225 index slumped by 3.9% on January 21, and by the mid-day of January 22 - by another 5.1%. Hong Kong's Hang Seng index plummeted by 5.5% on January 21, and by 8% by the middle of the following day. Argentine stocks got 6.25% cheaper on January 21. The world stock exchange crisis keeps on, no doubt: at the end of July the world stock exchanges didn't do well. But you can't account for the Russian collapse with the global stock environment only - the Russian market did worse than the rest.

In particular, Dow Jones even grew somehow on July 25. It need be said, though, that it had went down by 2.43% a day before. For all that, Russia's 5.58% looked excessive reaction to the American decrease. It was only on July 28, as Dow Jones fell 1.65%, that the Russian and American stocks dropped by practically the same margin.

As to Asia's LDCs, they decreased just 2.6% (Hang Seng - 1.9%, and the South Korean Kospi - 1.7%). The Asian stocks had gotten more expensive during four days before. On July 28 the stocks of LDCs (not only those Asian) experienced a fall, which far exceeded the Russian one: Hong Kong's index dropped 1.5%, and the South African - 1.58%.

With the world stock exchange and economic crisis, investors are suspicious of stocks in any country, and Russia is no exclusion. This is the way investors see it: How can you reckon with a high performance of industrial enterprises when you can't predict what'll happen to the world tomorrow? You can rely on oil futures only. Curiously, they let you down in July - oil got cheaper considerably. It was a true blow on the Russian stock market. Russian and foreign investors got used to thinking that high oil prices bode well for Russia - one of the world's biggest oil exporters. Anyway, oil revenues get into the country, boosting the profitability of Russia's companies. If the country virtually bathes in oil revenues, we (investors) can bathe together with the Russians. And here comes the drop in prices. Perhaps, the bathing is over?

Investors were also impressed with the Russian government's claims to the Mechel company. They rendered the claims of that kind a sign that the government and Russian crude companies haven't sorted out their relationships. In this case you need to keep aside - it's unlikely to add up to the profitability of your investments.

It even came to foreign investors' fears of the Russian government's anti-inflationary measures. Who knows, what it'll ensue, they thought. Anyway, limitation of prices growth causes limitation of profitability growth. It's the thing the American experience can teach you, where the chiefs of the Federal Reserve always raise the alarm in case the profitability of companies soars, considering a surge a sign of the company's control of the market, and the inflation, consequently. Moreover, Federal Reserve former head Alan Greenspan opined that a flourishing stock market is an inflation-prompting factor itself, because those who got richer due to quotations growth begin throwing out more cash. He virtually called on the world to invest less in the American stock market - except that he didn't use the "bubble" word.

So, investors got accustomed to the situation when anti-inflationary measures do harm to quotations. And it was another reason for taking away money from the Russian stock market. However, Russia's government may find it even useful - it has reiterated that significant international capital inflows are one of the causes for the inflation in Russia.

1. What will happen to the rouble exchange rate?

The previous forecast was devoted to the developments in the world market in the first half of the year, rather than in July solely, pointing out that the Central Bank will continue pursuing its policy of the strong rouble, so, the dollar won't be more expensive than 24 roubles at the end of the year. The events in July proved that the prognosis was correct. The dollar cost 23.45 roubles at the end of the month - and it has still to work its way to reach the 24-rouble mark.

You could suppose that the environment in the Russian currency market was more than beneficial to the dollar: the American currency got stronger (against the euro) in the world market, and traditionally, the rouble in the Russian market behaves the same way the euro does in the global market. The world market prices demonstrated their ability to plunge, and the Central Bank, which is strengthening the rouble, wants to show that, with the inflow of oil revenues ever growing, the national currency can't help getting stronger. The Russian stock price went down sharply - foreign investors were far from demonstrating their devotion to Russia, and it need be reminded that the Central Bank usually takes account of international capital flows in Russia when modifying its currency policy.

This said, July once again showed that the policy of the strong rouble is beyond momentary circumstances. When everything is against the dollar, it gets weaker. But when everything plays into its hands, it doesn't get that strong either. The Central Bank's desire to avoid reproaches of the absence of anti-inflationary efforts plays an important role in this policy. As long as it's believed that the strong rouble contributes to combating inflation, let it be strong, whatever.

Our prognosis: In August the policy of the strong national currency will be maintained, and the dollar won't cost more than 23.6 roubles.

2. What will happen to the prices in Russia?

In our previous forecast, which covered inflationary developments in the second half of the year, we predicted that the inflation won't slow down considerably, and it'll exceed 13% at the end of the year. July showed that this prognosis has every chance to come true. The inflation didn't slow down sufficiently (compared to June), and within the period of July 1 to July 28 it amounted to 0.5%. It's expected to be 0.6% in July as a whole. So, it'll have reached the 9.3% mark within the 7-month period. There is 5 months left, and, to exceed the 13%, the inflation is to be 0.8% monthly, which looks quite probable.

The Russian government has proudly pointed to a trend of the inflation's going down. Since the results of July haven't been calculated yet, the Ministry for Economic Development focused on June stressing that in that month the increase in foodstuffs prices slowed down twice - 1.1% against the 2.2% registered in the three previous months. Nonetheless, the prices have grown so much that the overhauled prognosis for the year, which is 10.5% now, appears unrealizable, just like the previous ones. The new prognosis suggested that the inflation will exceed 10%, but it'll be lower than the last year's 11.9%. In July the ministry had to overhaul its forecast once again, and the next reference point is 11.8%. It means that the inflation will turn out just a little bit lower than it was last year. The President's Aide Arkady Dvorkovich consented to the ministry, "The inflationary pressure is getting weaker, we expect that by the end of the year the inflation will be within the frames set by the Ministry for Economic Development, that is it won't be higher than the last-year index."

Our prognosis: Regardless of the fact that the prices didn't grow at all during a week in July, the inflation will be low, but not zero, in August.

3. What will happen with the world oil prices?

In the prognosis for the second half of the year we emphasized that, with the world oil crisis, consumers and producers will keep on squabbling in their attempt to find out who is responsible for oil pricing, and the oil price won't be under $110 per barrel. Correct.

On July 10 the oil price rallied by $6 per barrel, and on July 11 it set another grand record - $147 per barrel. It need be added that on July 23 oil cost less than $125 per barrel, getting 15% cheaper within a short period of time. However, you should bear in mind that the $125 per barrel is 30% more than it was at the beginning of the year, and is much more than the $20 per barrel at the beginning of 2002. After it oil began getting more expensive, but on July 29 it cost only $120 per barrel. OPEC officials said that if the trend keeps on, oil can cost $80 in the future. However, they underscored that even a threat like that won't make the cartel reduce the production. Finally, on July 30 the American WTI jumped $5 within one day, and its price reached some $127 per barrel.

So, in July the oil prices fluctuated considerably, and brokers could make the most of it speculating for the rise and for the fall depending on the situation.

Our prognosis: in August speculators will continue "having fun," but oil won't cost more than $140 per barrel.

4. What will happen to the dollar exchange rate against the euro?

In our previous forecast, we stressed that currency speculators won't get so much disappointed at the euro to let the European currency cost less than $1.50 by the end of the year. The state of affairs in the world currency market confirmed our prognosis.

July broke the record of the euro's cost: on April 22 you could get $1.6019 for one euro, and on July 15 - $1.6038. Speculators presumed that the great problems in the American mortgage market were quite a reason for setting another record.

However, by the end of the month the dollar had gotten really strong, and on July 30 the European currency cost only $1.5574. The American government wouldn't stop reiterating that it was in favor of the strong dollar, and the Federal Reserve made no secret of the fact that it could raise the interest rate to fight the extremely high inflation.

Moreover, it was another sign that the economies of the Euro-zone countries are in a bad state. In July analysts stated that the economic growth in the Eurozone stagnated - there is even data suggesting that the GDP diminished in the second quarter, that is recession can follow. It's evident that the currency of such states can't be that strong.

There is one more factor playing into the dollar's hands - the slashing oil prices. Brokers have got used to the fact that the dollar exchange rate and the oil price move in opposite directions. For example, because oil exporters, who sell oil for dollars only, need to diversify their currency reserves and buy the euro.

Our prognosis: Brokers have gotten tired of July's aggressive speculation, and in August the euro won't cost less than $1.54.

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