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Russian Economy: Strategies and prognosis

Yesterday, on the 17th of December a Moscow investment company AVK presented an analytical review on topic “Russia 2004: strategies and prognosis”. Chief of the macroeconomics and budget analysis department Valentine Okulov presented his report.

In the beginning of his speech, Okulov noted that factors influenced the Russian market in 2003 help us to analyse future of financial sector and its subsegments. He also underlined that “speaking of Russian market, we have to confess that the dominant basis of its development is oil”.

Then Okulov pointed attention to the need to define oil prices for 2004: “We think that the price will decrease the next year, because supply still exceeds demand worldwide. For oil of Ural class, Russian oil in other words, price level is expected to be around $24 a barrel”

According to the expert, there was now price decrease in 2003 because of high risks for Russian economy. “So, if the prices will go down, we have to foresee macroeconomic figures. Our analysis shows that risks will only appear if the price will get to $20 a barrel, and GDP growth would slow down substantially. In all other cases, quotations will be sufficiently high, however doubling of GDP by 2010 is impossible”, he emphasized.

The next question Okulov talked about was position of ruble in 2004: “Results of all preceding years show that if Russian oil costs more than $25-26 a barrel, then in three months American dollar costs less in ruble terms, and visa versa.”

He pointed out that currently dollar exchange rate is lowering, and hence oil prices rise. At the time they are around $28 a barrel, and from this it is possible to say dollar will continue to fall at least until March-April 2004.

According to Okulov, if the oil price falls next year, then in the end of 2004 dollar would cost 30.5 rubles at best. If the price remains relatively high, dollar will cost 31-31.5 rubles.

Then he said that in addition to analysis of the market as a whole, its separate segments need to be analysed too. “It is segment of euroobligations, which is very important as it defines the country’s position at world market, and how it looks in the eyes of international capital. Then, situation at the inner market has to be analyzed, as it defines opportunities for budget borrowings. And the main segment to point out – is how Russian companies’ shares would behave”.

Orlov said that if we analyse these segments carefully, it becomes clear that situation at the international euro obligation market depends largely on whether Russian agencies are given investment ratings. If they are given such, prices for Russian euro obligations would go up substantially, and speculators would earn great money, and Russia would look much better in the eyes of foreign investors. He also underlined that domestic debt and federal borrowing obligation markets are such investment markets where normal people feel danger after default of 1998.

“This market was unpredictable in 2003, in a sense that interest rates fell down suddenly, and prices for Russian obligations rose greatly. This happened because earnings in foreign currency flooded Russia, and Central Bank had to buy these dollars and generated rubles”, the expert commented.

In conclusion, Okulov voiced opinion that interest rates would not fall further in 2004, and there will not be such an income of currency, so the situation would become normal, like in 2001-2002 years.