Last Friday, Oleg Vyugin, the Senior Deputy Chairman of the Russian Central Bank, made a soothing statement, stating a complete control over the situation on the domestic financial market. This statement reminds us of the famous satirical song by Leonid Utyosov (1895 - 1982) “Everything is OK, beautiful marquise,” which was very popular in the 30s in Russia.

Earlier, when the senior deputy chairman commented on a rise in Russia’s gold and currency reserves during the first week of December by $2.5bn, he announced that ruble “liquidity will be over in the second half of December.” He also noted encouragingly that an increase in demand for rubles was a positive factor as it meant, “the economy will grow.” Meanwhile, the gold and currency reserves continue to increase, and they added another $1.2bn over the following week reaching $71.8bn as of December 12, 2003. We can’t help recalling another forecast from Vyugin, issued at the beginning of November, that Russia’s reserves will be about $65 to 66 billion by the end of this year. It seems like the Russian government has a run of luck this year.

This situation testifies to the earlier predictions of experts who said that “the Dutch disease” of Russia’s economy was easier this year due to a 20-percent strengthening in the euro rate against the dollar, i.e. there was no sharp fall in the cost of the basket of currencies (-5 percent) although the real dollar rate dropped 20 percent against the ruble. In other words, Russia will not benefit from the external market situation next year.

Firstly, a potential for a euro rise against the dollar is close to its maximum. Secondly, the European Union is concerned about a rise in the euro rate against the dollar, and it has already started to take necessary measures. Thirdly, there are still no grounds for a significant reduction in oil prices, and finally, even if oil prices go down, the volume of revenues from Russia’s oil sales will not decrease in Russia taking into account that an 11-percent rise in domestic oil production will result in a related rise in oil exports.

Taking into account these factors, the euro rate will most likely start falling on the Russian market at the beginning of next spring or even right after the New Year holidays, and it will be going down at the same speed as the dollar. The rate of dollar fall (3 rubles a year) and an inflow of dollars from oil sales will persist. This means it is possible to forecast now that the dollar will be RUR 25 to 26 by the end of 2004. Moreover, without support from a rising euro, the dollar may go down to RUR23 due to tougher inflation measures by the Russian Central Bank.

The inflation rate is set below 12 percent this year and 10 percent next year. Taking into account active efforts of the Russian Central Bank for replenishing its gold and currency reserves in November and December 2003, its possibilities for using open market operations to counteract the effects of oil dollar revenues on the country's monetary base will reduce next year if the bank continues to observe the approved Russian monetary policy. Curbing inflation is a priority task for the Russian government and the Central Bank, and it becomes unclear in what way the government is going to prevent the ruble from strengthening by more than 5 or 6 percent, Nezavisimaya Gazeta concludes.