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Rosbalt, February 11, 2004

Parsing the 'Currency Triangle'

By Vlad Fadeyev, Translated by Nick Chesters

Russians are trying to adjust to fluctuating exchange rates involving the ruble, the US dollar and the euro. Many specialists already are talking about an approaching dollar crisis in the Russian economy, although even the most accomplished economists refrain from making any long-term prognoses about the world's currencies. In the period since 1992, as most people know, the dollar has become the second most important or perhaps the most important currency for most Russians. People now tend to measure everything in dollars: wages, property, big purchases, services, fines, etc. : While Russia has been unable to do much to influence world currencies, it has constantly had to adjust the value of the ruble in view of the fluctuating exchange rate between the dollar and the euro. Some 60% of the dollars coming into the country from oil sales are used for this purpose, and a substantial proportion of them are accumulated in the Central Bank's gold reserves.

Meanwhile, the dollar continues to fall. Since the start of the decline in January 2003, the US currency has fallen in value by RUR 3 -- by more than 10%. According to the Russian Ministry for Economic Growth and Development, the ruble rose in real terms by about 18.9% against the dollar in 2003.

Of course, it is too early to talk about an irreversible fall of the dollar. The dollar's decline on world markets was actually initiated by the US government as a step to bolster the US economy, particularly by encouraging exports of US goods. The American administration is also having to spend rather a lot on oil for its citizens, who are currently experiencing the coldest winter in a long time. Rising demand for fuel is exacerbated by the falling number of suppliers, who still do not include Iraq.

In Russia the inflow of foreign capital stemming from the higher prices for Russian oil - from USD 23.6 per barrel in 2002 to USD 27.2 per barrel in 2003 - has meant that the national currency is continuing to strengthen. As a result, Russia's positive balance of trade has risen by over a third, from USD 36.4 billion in 2002 to USD 48.7 billion in 2003.

European countries are not happy about the strengthening of the euro. Many heads of EU states and also the president of the European Central Bank, Jean-Claude Trichet, have expressed concern about the rise of the euro, which discourages other countries from importing goods from the EU. The G-7 summit in February may be used to reach new agreements about the dollar/euro exchange rate.

The fall of the dollar has also had a negative impact on the economy of Japan and the whole of Southeast Asia. For Russia the implications are still unclear. The Russian Ministry for Economic Growth and Development claims that the dollar's drop has led to a rise in imports. But most imports still come from Europe. Since, however, over the first eleven months of 2003, the ruble only rose 1.1% against the dollar, the Russian food and other industries did not experience any serious losses as a result of the dollar's decline.

Those who keep their savings in rubles because of inflation, which was 12% last year, did not make much money. People who opened their accounts at the beginning of last year received just 1.4% interest for the year. Those who kept their accounts in euros came off best as they made on average 4.6%. Meanwhile, those who kept their accounts in dollars at 8% interest actually lost about 11% of their savings as the dollar fell against the ruble by 18%.

On the whole, the population uses different methods to protect their savings. One of the most effective ways is to invest in property or land. Many Russians agree with President Vladimir Putin, who recommends keeping savings in ruble accounts. Until the autumn, at any rate, when George Bush and his team could try to affect the price of the dollar on world markets before the elections.

High oil prices, which will not change before the summer, mean that the dollar will continue to weaken. But a serious drop in the value of the dollar is not expected. US trade partners such as China and Japan use the dollar themselves to stabilize their economies. 'These countries will continue to buy dollars in order to contain the value of their own currency,' international financial expert Mikhkail Zadornov believes.

Caution is advised when dealing in euros. The Europeans themselves are unhappy about the currency's volatility. The euro is not rising on the strength of EU economic achievements but because of investor fears of economic weakness in the US. Savings in euros could effectively lose value much as dollar accounts lost value last year.

It is really much better to trust the ruble at present. Russian financial authorities and experts expect it to remain stable.


See also:

the original at

Expert Says Ruble to Gain Another 10-15% on US Dollar in Middle-term Rosbalt, January 16, 2004.

Banking and Finance

Rosbalt, February 11, 2004

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