Putin’s ideas are far from being new – they have already been voiced in one way or another by a number of economists. The problem is that the world powers totally lack a collective will to implement them, because the differences and contradictions between these powers are too strong, and the common will to achieve a compromise is too weak. For example, this will was not displayed at all by Russia in the period of high hydrocarbon prices, and therefore it is not clear why the hydrocarbon – importing countries should in their turn spare Russia in the present situation. The ideas of creating new international reserve currencies have been floating around for a long time now, but it should be remembered that in Europe the emergence of such currency was preceded by the creation of supranational bodies of authority either directly or indirectly elected by the population – something that can hardly be imagined, for example, in the Arab World or even in Latin America. The implementation of the idea of returning to the gold standard, which is currently also floating around, would require an immense combined political will, too, because the history of its collapse indicates that the gold standard cannot exist in a single country. Besides, it should be noted that the present crisis – as well as the previous ones - is not a global catastrophe for the population of our planet (unlike some of the entrepreneurs). And it should be remembered that investment competition between countries and between national currencies also has its advantages.
Of corse, the absence of political will to change the world financial system cannot be blamed on Putin alone. What is bad is that the Russian authorities do not admit, either verbally or by deeds, their responsibility for the crisis committed in their country, in particular for the catastrophic flight of capital and for the devaluation of the national currency, which cannot be compared with anything we have seen in the majority of developed countries. The case in point is the inertia scenario, under which the authorities would attempt to preserve the budget’s nominal obligations through devaluing the ruble.
No positive changes in the investment climate could be expected, which was once again confirmed in January by the fact of the heads of the Evroset’ trade network being placed on the wanted persons list – at one time, those persons had dared to protect the interests of their company against the law enforcement agencies who had illegally seized their shipments of goods worth many millions.
In January, the Moscow Patriarchate acquired its new leader in the person of Metropolitan of Smolensk and Kaliningrad and head of the Department for the External Church Kirill (Gundiaev), who had been the main contender to the throne of Moscow Patriarchs. Both at the Conclave of Bishops and at the Local Church Conclave, he had decisively beaten (three to one) his main competitor, Metropolitan and Patriarchal Chancellor Kliment. The unexpectedly well–mannered electoral campaign yielded the result needed by the Kremlin. (This is an example of fair play on the part of the authorities who have achieved their aim without resorting to falsifications and violence).
Inflation and monetary and credit Policy N.Luksha As of December results, the CPI in Russia amounted to 0.7 per cent, which is lower than in the relevant period of the preceding year (1.1 per cent). Therefore, the consumer prices growth within 2008 has reached 13.3 per cent, what is the peak level within the recent five years. At the background of large-scale outflow of currency from the country, the real effective exchange rate began to decline:
in December, its decline was 3.6 per cent. International reserve assets of the Russian Federation also declined: on January 1, 2009 it amounted to USD 427.1 billion. From November 11 to January 23, the Central Bank continued its policy of ruble «soft devaluation». To avoid a sharp devaluation, the Bank of Russia has executed foreign exchange interventions: in December, to support the ruble there were allocated Euro 57.4 billion and Euro 12.6 billion. To stabilize the situation in the banking sector, the Central Bank has taken several measures to increase the upper limit of loans, and removed restrictions on the maximum amount of funds provided by «currency swap». Moreover, the Bank of Russia has informed on postponement of the time frames of planned increase of compulsory reserve rate for three months.
The consumer price index in December made 0.7 per cent (against 1.1 per cent in December (see Fig. 1.). The utmost growth rates were observed in prices for food stuffs and commercial services (by 1 per cent) However, the growth of preces for fooed staffs was somewhat decresed as compared with November, when its growth made 1.3 per cent. The prices growth was noted for fish and sea food (by 2.2 per cent), fruit and vegetables (by 1.2 per cent). Herewith, prices were getting down for granulated sugar (-0.8 per cent), sunflower oil (-0.9 per cent), grits and beens (-0.5 per cent).
In December prices for commercial services have also increased by 1 per cent (as compared with 0.7 per cent in November 2007). In view of the New Year and Christmas holidays, as expected, prices for overseas tours (+4.4 per cent) have increased, as well as tickets for public transport (+2.9 per cent), services of culture organizations(0.9 per cent), recreational and health services (+0.8 per cent). Prices for domestic services, healthcare and sports, as well as medical services continued to grow by 1.1 per cent, 1 per cent and 0.9 per cent respectively. There was no reduction in prices in any public services in December.
In the last month of the year there was noted a rise in prices for non-food items, which have increased by 0.1 per cent, what is lower than in November, when those prices growth amounted to 0.per cent. The fastest growth was observed in medical supplies (+1.9 per cent), detergents and cleaning agents, knitwear (by 1 per cent), clothing and underwear (+0.9 per cent) and tobacco (+0.8 per cent).
Herewith, prices for gasoline was further downgrading (-7.3 per cent).
Therefore, in December the rate of consumer prices growth has demonstrated an unusual for this month downward trend. The reasons for this trend were, firstly, a marked decrease in the prices for non-food stuffs (in all groups). Secondly, a significant downfall in prices for motor gasoline, and thirdly, the slowdown in prices for fruit and vegetables - 1.7 per cent (against 5,6 per cent in December 2007). Despite the slowing growth of consumer prices in December, the CPI by the end of the year was the highest since 2002 and reached 13.3 per cent (for comparison: in 2007 it was equal to 11.9 per cent).
Low commodity prices, capital outflow from the country, as well as the overall drop in demand in the economy create the preconditions for the lower monetary supply, and other conditions being equal, reduce the rate of inflation. However, there are no less significant factors, contributing to inflation, such as the RUR devaluation, a significant increase in tariffs for natural resources monopolies, dollarization of the assets of the national residents and the growing rate of monetary turnover as a result of the transfer of funds from non-cash to the cash form due to the banking crisis. Therefore, it is early to make estimates for 2009, but now it is clear that prices will grow at least not less than in the past year. According to our estimates, inflation in the coming year will exceed 15 per cent.
Source: Rosstat Fig. 2.
The basic consumer price index4 in December 2008 amounted to 0.8 per cent (0.9 per cent for the same period of the last year ) In December 2008 the monetary base (in broad definition5) has increased by RUR 376.9 bln, to RUR 5578.7 bln (+ 0.7 per cent). The volume of the monetary base in broad definition made as of December 1, 2008 RUR 5201.8 billion. Let us consider the dynamics of the monetary base in broad definition by components.
As of January 1, 2008, cash in circulation with regard to the fund balances in credit organizations made RUR 4.4 trillion (3.9 per cent growth against December 1), correspondent accounts of credit organizations in the Bank of Russia made RUR 1027.6 billion (+59.7 per cent), mandatory reserves made RUR 29.9 billion (- 0.7 per cent), banks’ deposits in the Bank of Russia made RUR 136.6 billion (- 54 per cent), the value of shares of the Bank of Russia with credit organizations made RUR 12.billion (- 47 per cent). Therefore, in December reduction of excessive reserves of commercial banks6, started in November, has made RUR 213 bln7.
Herewith, the greatest growth rate was demonstrated by the correspondent accounts of credit organizations in the Central Bank. Apparently, it was the result of the decision of the Central Bank to open from December 1 correspondent accounts to the banks in foreign currency. Nevertheless, the rates at the interbank credit market is still high. The demand for rubles at an auction of direct REPO is also not reduced (the reasons are both, the lack of liquidity and expensive assets at interbanking credit market, and the gradual RUR devaluation).
Source: RF Central Bank Basic index of consumer prices is an indicator of the inflation level without regard to seasonal price reduction (fruit and vegetable products) and to administrative measures (tariffs for government-regulated services, etc.). It is estimated by the RF Statistics Service The RF monetary base in broad terms with no regard to the cash issued by the Bank of Russia and the balance of Compulsory Reserve Accounts on credit organizations in national currency, deposited in the Bank of Russia, taking into account the assets of correspondent accounts and bank deposits, allocated in the Bank of Russia.
The excessive reserves of commercial banks with the RF CB refers is the amount of correspondent accounts of commercial banks, their deposits with the RF CB and the CB bonds of commercial banks.
We’d like to remind, that the monetary base in the broad definition is not a monetary instrument, it reflects the obligations of the Bank of Russia in national currency. The monetary base in narrow definition is a monetary instrument (one of indicators of the volume of monetary offer), which is under total control of the CBR.
The growth of the volume of cash in circulation in December by 3.9 per cent at the background of mandatory reserves reduction by 0.7 per cent has led to the expansion of the monetary base in narrow definition (cash+ mandatory reserves) 8 by 3.9 per cent (see. Fig. 2).
The volume of international reserves of the Central Bank of Russia in December has decreased by 28,6 per cent and amounted to USD 2009 427.1 billion by January 1. Therefore, since the crisis beginning in late December there have been spent around 30 per cent of gold and foreign currency assets to support the ruble. Within three weeks of January the amount of international reserves has decreased by 7 per cent, to the level of USD 397.5 billion9.
In December, the outflow of foreign currency from the country was continued and made in the IVth quarter USD 130.5 bln. The net outflow within 2008 is estimated at USD 129.9 bln.
Therefore, the bulk outflow was observed in the last quarter of the year. Moreover, in December prices for energy resources were low, what provoked further low inflow of foreign currency reserves to Russia. As a result, RUR real effective exchange rate stopped growing, having dropped down by 3.per cent against the level of preceding month. The real effective RUR rate index made 138.310 (See Fig. 3). As a result of the year, RUR strengthening in real terms in the two-currency basket has reached 4.5 per cent as compared with 5.1 per cent in 2007.
As of December results, the USD has strengthened against RUR by RUR 1.80, from RUR 27.6 to 29.4. The EURO rate at the end of December has increased to RUR R 41.4. As a result, ruble has downgraded against the two-currency basket11 by 3.60, which value has grown from RUR 31.2 to RUR 34.8.
Indicators of Ruble`s Exchange Rate Dynamics Official USD/RUR exchange rate (end of period) Official EUR/RUR exchange rate (end of period) Value of the two-currency basket Real effective exchange rate index (right scale) Source: RF Central Bank, authors’ estimates Fig. 3.
Since the second half of December and through January 22, the Central Bank continued its policy of «RUR smooth devaluation», having expanded the range of ruble value in the two-currency basket several times per week. Since September to the end of December the basket value has been increased by nearly RUR 5. Dollar and Euro have reached the historic peaks against the Russian currency.
As of January20, 2009 according to the estimates, made by S. Ignatyev, the Head of the Central Bank.
The level of January 2002 is accepted as 100 per cent.
The level of January 2002 is accepted as 100 per cent.
Two-currency basket is the RF Central Bank operational indicator in its foreign currency policy. Currently the share of EURO in the currency basket makes 45 per cent, USD – 55 per cent.
RUR Jul Jul Jul Jul Jan Apr Jan Apr Jan Apr Jan Apr Oct Oct Oct Okt Herewith, the Central Bank has been supporting the ruble, making foreign exchange interventions. For example, in December the USD sales have been doubled as compared with November and amounted to USD 57.4 billion, while Euro sales were increased four times and totaled to Euro 12.6 billion. On January 23 the Bank of Russia has informed, that the adjustment of boundaries two-currency corridor is being completed. The upper limit of the corridor is setup at RUR 41, what at the current rate of USD 1.3 for Euro 1 corresponds approximately to RUR 36 for USD 1. The established RUR rate, according to the Central Bank, will be supported in the coming months, provided the price of oil does not drop below USD 30 per barrel.
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