03:27 GMT +310 December 2018
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    Russia must choose between stronger dollar and higher inflation

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    MOSCOW. (Financial analyst Anatoly Gorev for RIA Novosti) - The dollar has taken several plunges since early this year and almost reached the projected year-end bottom of 25.8 rubles per $1. It could easily cover the distance, which is only 6 kopecks, in one trading session.

    Its continued slide has alarmed Russian economic officials, because a cheaper dollar means a stronger ruble, plummeting competitiveness of the Russian economy, and slackening growth in industrial production.

    The latter is the government's biggest concern, because the Russian economy began the year on the rise. Industrial production grew by 7.8% in February compared with the same period last year.

    Peter Westin, chief economist with MDM Bank, and Irina Plevako, an analyst at the bank, said the figure was considerably higher than the consensus forecast of 6.4%, and much higher than the 1% growth rate registered in February 2006.

    "An analysis of industrial sectors demonstrates that mining and manufacturing industries went up 4.3% and 14%, respectively, while the provision and distribution of basic services went down 2.4%. Industrial production grew by 8.6% in January and February 2007," according to MDM's analysis. "Such an impressive growth rate, combined with a powerful increase in fixed-income investment in 2006, promises a high industrial growth rate in 2007."

    For this fairy tale to become reality, the dollar must stop losing 8-10 kopecks a week. President Vladimir Putin said the other day that the alarming trend on the foreign exchange must be reversed.

    "The national currency keeps strengthening," he said at a meeting Monday with the government. "We must keep this issue in the spotlight, so as not to undercut the growth in the manufacturing sector."

    In other words, the ruble must be restrained, or else record-high economic growth will remain an impossible dream this year, a time when the Russian government needs to set records to attract more foreign investment as well as for political considerations, notably the upcoming parliamentary and presidential elections.

    However, it is extremely difficult to play for the dollar when the rest of the world is playing against it. The worst factor is news from the United States, where economic growth is slowing down, and industrial efficiency and business activity are declining. Experts said the situation there could be remedied by cuts in the basic interest rate, but the Federal Reserve does not appear willing to do this. Another negative factor is escalating tensions in the Middle East, notably the recent announcement by Iran that it was capable of starting commercial production of nuclear fuel. Such statements usually increase oil prices, and therefore, pressure on the U.S. economy.

    So, good news is scarce for the dollar. The only thing the Russian government can do in this situation is use the tried and tested method of currency interventions on the national stock market to support the dollar. But this weapon may backfire, for the Central Bank's currency interventions hold down the ruble, but they also accelerate inflation.

    Russia's economic and political authorities will have to choose between two scenarios, a bad and a worse one. The dollar's plunge may slow down GDP growth in Russia or provoke another leap in inflation. If the dollar falls below 25 rubles, GDP growth will slump from 6.5% (according to a revised forecast from the Economics Ministry) to 6%. In this case, industrial production is unlikely to grow by the predicted 5.2%, compared with 4.3% in 2006.

    If inflation, which should be kept under 8.5% this year, spins out of control, it may reach 10%, which will be especially bad for the mortgage market, because experts have explained the relatively small volume of that market in Russia by high inflation.

    Which of these scenarios will the government choose? We will know very soon. According to experts, the dollar's fall should slow, or even stop, next week because of intervention by the market's main player, the Central Bank, which will determine the new level of support for the American currency.

    The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.

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