WEAKER RUBLE IS PAY RAISE FOR EXPATS
The ruble depreciated 1.1 percent to over 30 against the dollar when trading resumed after the holidays, having a mixed effect on many expats who are trying to balance savings and income in various currencies.
Many expats' salaries are set in dollars but paid in rubles, as stipulated by Russian law, and a stronger dollar will mean they get paid more in ruble terms. The ruble has increased from a high of 23.4 in August to 31.2 against the dollar on Tuesday, meaning people paid in the dollar equivalent receive 33 percent more rubles now than at the peak.
However, many companies set a fixed exchange rate for salaries to avoid fluctuations causing significant changes in employees' pay. Recently, English teachers at one school were offered the choice of receiving their pay at a fixed exchange rate of 27 rubles to the dollar or on a sliding scale between 23 and 29.
"A colleague told me that the dollar was set to appreciate substantially," said Judey Pym, a teacher at the school. "And this year it would be somewhere around 33 rubles to the dollar, maybe even higher. Even though the floating exchange rate is capped at 29, I still chose it because I know that if the forecast was true then those extra two rubles per dollar would be a pleasant addition to my wages."
Despite getting paid more in the local currency, other expats worry about the depreciation of savings they have made. Darron Reynolds, another teacher, has saved money while living in Moscow, which he plans to take back to England, but with both the ruble and pound sterling fluctuating, he is waiting for the best time to change his money back into pounds.
"Now the ruble has stopped being strengthened it is again weakening against the pound. The best rate I can find now is 47.7 (compared to 42 last year.) For me it's just a case of checking the exchange rate constantly and hoping I am able to exchange my rubles into pounds at the right time before returning to England," he said.
The appreciation of the dollar has also affected Americans who are spending their savings to study in Russia. As the dollar buys fewer rubles they are now poorer in real terms and have had to cut back their spending accordingly.
Another factor is the stability of the dollar, which some analysts have predicted will depreciate this year, causing expats incomes to change again.
"The widespread view is that dollar must depreciate in the future, and inflation in the US should help US borrowers to pay off their debts," said Ovanes Oganisian, an analyst at Renaissance Capital.
However, in the short term the ruble is likely to depreciate further as the central bank continues to pursue its policy of a managed devaluation.
"There is still potential for the ruble to weaken," Oganisian added.
By Ed Bentley
TRANSIT TROUBLES
Every year, on the 31st of December, my friends and I go to the banya... No, wait, that's a different story. Every year, since I started writing this column, on the 1st of January Russia turns off the deliveries of natural gas to Ukraine and every year the same thing happens - the big bad Russian bear stomps and accuses the Ukrainians of refusing to pay the fair price for the blue fuel. But in the end, it is forced to give in after the small but proud Ukraine puts Gazprom's contract obligations with the European countries in jeopardy by taking part of the European-bound gas for its own needs. This year the story is repeating itself for the fifth time in a row, albeit with one important change - this year Ukraine decided to put Gazprom in a really tight spot and simply put a ban on the transit of Russian gas to Europe altogether.
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I am writing this text from a place where both the global economic crisis and the cold winter weather seem distant and unreal. The chronicles of the recurrent gas conflict read like a soap opera script and give off an exceptionally strong sense of deja vu.
The circumstances are such that by the time this text actually appears in the paper, Gazprom and Naftogaz will most likely return to the negotiations table, the transit of Russian gas will be renewed, the price of gas for Ukraine will be negotiated and the process will move to the European arbitration courts where Gazprom's intermediary RosUkrEnergo is already suing Naftogaz Ukraine. Nonetheless, even the existing information provides plenty of food for thought and materials for the traditional start-of-the-year column.
On the one hand, we have Ukraine whose recent economic growth was in many ways propelled by high commodity prices and whose steel production was profitable because the price of natural gas was significantly below market prices.
Today, Ukraine is faced with shrinking global steel demand and Russia's demands for a higher gas price against the backdrop of a rapidly deteriorating economic situation. Ukraine has one major advantage - its transit position - and it is not afraid to use this wild card whenever possible because the conditions of Gazprom's contracts with its European partners are such that the Russian gas monopoly is fully responsible for the transit of fuel to the end consumers. On the other hand, we have Russia, which has ready to put all of its political weight behind one company, which in turn is ready to sell the gas below market prices as long as the payments are done through a shadowy intermediary company (RosUkrEnergo). Seeing the situation in this light puts a whole new twist on the story. It clearly shows that although Gazprom is a national treasure by virtue of owning the majority of the county's natural gas. Moreover, it is in no hurry to repay its debt to society in the form of taxes and profits from direct sales of fuel. Instead, it is a multi-tiered money-making machine, but this money doesn't end up in state coffers - not all of it, at least. The conflict raises other issues - such as the fact that there is no such thing as a market price for gas or what can be done to prevent such transit problems in the future.
The problem is that both issues have been on the table since 2005 - but no solution has been found so far. Or, rather, nobody has really looked for a solution, because half-hearted attempts to build Nord Stream and South Stream gas pipelines cannot be counted as such. Being the optimist that I am, I keep hoping for the best, but realistically speaking, it looks like various political considerations on the part of Europe and various money-making considerations on the part of Gazprom and the people who back it will once again bring the warring sides to the table to cook up some unsatisfactory solution that will last for another year until the clock once again strikes 12 and the flow of gas is turned off.
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By Marina Pustilnik
ON THE ROAD TO RECOVERY
By Ed Bentley
Russia has just suffered its "worst on record" GDP contraction, but behind the numbers economists are keen to see this as evidence that the crisis has finally bottomed out.
The worse-than-expected second quarter drop of 10.9 per cent saw an increase from the 9.8 per cent year-on-year decline between January and March, but quarterly data offered more reasons to be positive.
"Quarter-on-quarter change in GDP was about zero real growth," said Elena Sharipova, an economist at Renaissance Capital.
The investment bank is predicting a turnaround in the second half of the year, with GDP to be 4 per cent higher than in the first six months, though this would still mean a 5 per cent annual decline in the fourth quarter.
Other indicators are also suggesting that the worst is over, particularly June's year-on-year numbers for manufacturing, construction and transport outperforming May's.
"Electricity consumption went up by 4 per cent month-on-month in July, which is very unusual given the summer season," said Natalia Orlova, chief economist at AlfaBank. "This is a positive sign that the manufacturing industry is starting to accelerate."
Russia is trailing behind European powerhouses France and Germany, which posted 0.3 per cent growth, but this was put down to the additional blow of last year's oil price collapse.
President Dmitry Medvedev again called for reform to reduce dependence on crude, which accounts for the majority of Russian exports along with other commodities.
"We can't develop like this any longer," Medvedev said, Bloomberg reported "Its a dead end. And the crisis has placed us in a situation where we will have to make decisions on changing the structure of the economy."
The failure to restructure despite the high growth of the previous decade is likely to continue as natural resources continue to bring substantial funds to the national budget.
"It is going to take a lot of time, probably decades, rather than persevering with this [policy] of lowering the vulnerability to external shocks," said Yaroslav Lissovolik, chief economist at Deutsche Bank.
The Putin-era boom now appears a deterrent to reform and Sharipova believes the government "should try to avoid high growth rates" to diversify.
"A lot of the capital inflows were based on speculation on the rouble, betting that it would appreciate," she added.
Last year the currency depreciated 35 per cent in a managed devaluation and a repeat of this or rouble instability would see a decline in investment.
"The risk from a sharply lower oil price would be for these funds not to go via lending to the real sector of the economy but to go directly to the forex market," Lissovolik said.
He added that the currency was at equilibrium at the moment, while Sharipova warned the rouble could depreciate in the medium term if oil stays at $60-$70 a barrel.
Russia already lags behind other emerging markets in terms of investment and the drop in lending has seen capital formation plummet.
"In our view, this [lower investment] will dampen medium-term growth potential and make it more oil-price dependent," Elina Ribakova, chief economist at Citibank, wrote in a note to investors.
Reducing inflation is a key task for the government and Central Bank to encourage investment and stability.
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"Clearly it is necessary to [get] inflation to around 6 to 8 per cent," said Orlova.
The consumer price index remains above 10 per cent for the year and interest rate rises needed to control it would be at odds with the government's plan to promote growth.
"The priority is to boost lending and this is why the Central Bank still continues to cut the rate," said Orlova.
4. IS A SECOND CRISIS WAVE COMING?
Ed Bentley
Martin Gilman
Professor
Higher School of Economics
The question is whether the recovery in Russia will be shaped like a W or a U. Honestly, we don't know because there are so many interrelated factors at work - just as the severity of the crisis itself was compounded by the unfortunate confluence of various unfavourable developments. In principle, like other large, low-debt emerging economies, Russia should be able to recover rapidly. However, a key weakness is the still too-high rate of inflation, even if decelerating to a projected 10.5 per cent this year, which would undermine the rouble exchange rate. And of course, Russia's recovery will be sensitive to the evolution of the oil price, the strength of the dollar, and foreign demand - all factors beyond Russia's control.
Natalya Orlova
Chief economist
Alfa Bank
Economic indicators have improved in previous months: industrial output has shown recovery due to higher global demand and a number of banks have observed better payment discipline from their clients. However, fundamentals are still weak with banks' loan books continuing to stagnate, while trade sector output dropped 11.3 per cent in the second quarter of 2009 in real terms. This suggests that the second wave may still come from two areas: either from international markets due to a drop in commodity prices and deterioration of the balance of payments or via an accelerated contraction of consumption, which would push up a liquidity overhang and fuel rouble depreciation even at the high level of oil prices. Even if the third quarter brings some respite, economic statistics still highlight significant risks.
Vladimir Osakovsky
Chief economist
Unicredit
I do not like to talk about "waves" in the crisis as I feel the main question is whether or not we are about to see the start of a sustainable economic recovery. I think not. Up till now, the major driver of economic contraction has been the sharp fall in investment and external trade, whereas consumer demand - the main component of GDP - has only started to feel the heat of the downturn. Moreover, problems in the banking sector will take much longer to resolve. As a result, I think that the economy is likely to stay weak and go even weaker than now. Another sharp downturn like the end of last year is unlikely, but things might get somewhat worse.
