#15 - JRL 7271
Moscow News
July 30-August 5, 2003
Euro vs. Dollar
Andrei Ivochkin, Vremya MN That question was asked by the German weekly Der Spiegel in connection with European Commission President Romano Prodis statement that "Russia intends soon to be paid for its oil and gas exports in euros and not in U.S. dollars, as Putin is keen to invigorate ties with the EU." Der Spiegel explains: "If the euro replaces the dollar in trade with the Russians, who supply more than half of the EUs fuel and energy needs, this will signify a triumph for the Europeans and a hard blow to the United States, where government hinges on the dominance, unshakable for the time being, of the dollar as the leading currency for settling energy accounts."Such a turn in developments is seen by many Russian analysts as highly probable. They reason that the EU is the chief consumer of Russian oil and gas exports, and that it is therefore quite logical for us to accept payments for these exports in the European currency. The business gain from the switchover is also obvious: As long as the euro is stronger than the dollar, it will be simply more profitable to obtain payments in the European currency for the oil and gas we export to the EU. "This is exactly what I would do if I were in the shoes of the heads of the fuel and energy exporters," says Yulia Sidorenkova of Probiznesbank. ?However, it might be sensible to hedge our risks by denominating only part - say, 30% - of our export contracts in euro terms."
"Such a move would be highly favorable to Europe, as it would greatly strengthen the euro against the dollar, which has lately been performing poorly on the market," says Maria Radina, financial analyst with AVK-Securities. "What Russia would gain should it back the euro is not so obvious. The essence of the matter is this: Will our country keep its foreign-exchange reserves in euros or in dollars? Incidentally, here we have a hidden political motive too: Our euro option can be used by President Putin as another trump card in Russia?s foreign-policy moves; for instance, when lobbying for the interests of Russian oil companies in Iraq. However, the oil companies see the oil price level as more important than the technical details of remitting payments."
Says Mikhail Zak of VEB-invest-bank: "Opting for the euro will not happen until two to three years from now. Whether oil payments can be made in euros depends largely on the position of the OPEC countries, and above all on that of the United States on this issue. With the stabilization of the euro/dollar rate, the lessening of the exchange-rate fluctuation amplitude, and with an augmentation of the euros share in central banks reserves, the denomination of oil contracts in terms of the euro instead of the dollar will become realistic. This dollar-to-euro shift would make it possible to use just one currency in the settlement of accounts for export and import flows, thereby diminishing currency exchange rate risks and their negative impact on the balance of trade."
Maxim Shein, chief of the analysis department at Brokerkreditservice, sums up the above opinions: "The probability of a shift to the euro is very high, considering that the Central Bank of Russia has already started converting a portion of its forex reserves from dollars into euros. However, whether it is advisable to do so depends on the dollar/euro exchange rate and on the status of the two currencies. We get dollar payments for half of our oil and gas exports, while we pay for our imports mostly in euros. Hence the contraction of our positive balance of payments at a time when the euros value has been rising; moreover, the impact on our GDP has also been negative."
Thus, given the dollar?s weakness in relation to the euro, we should shift to the euro if we are to fulfill the task, set by President Vladimir Putin, of doubling our GDP by 2010.
According to Shein, our opting for the euro will entail political consequences: "Abandoning the dollar is tantamount to a curtsey to the EU and a challenge to the United States, and this might upset the prevailing balance in Russias relations with the EU and with the U.S.? For ordinary Russians, this is the first alarm bell suggesting to them that they should convert their savings either into euros or euro-denominated assets. However, there is a danger here: "Russia might face a problem if, after switching to euro settlements, the dollar begins to appreciate. This may well happen because American economic trends are far healthier than those of the EU economy."
Valery Nesterov, analyst with investment company Troika Dialog, is more cautious: "I think that a transition to the euro - if it does occur -? will not happen soon. The dollar previously fell sharply against the euro, but it has bounced back to a rate of 1.13 euros. Our belief is that the dollar could further strengthen to 1.1 euro by the end of this year, and achieve parity with the euro next year. The U.S. economy is showing signs of recovery - it is not as weak as some people imagine. The U.S. remains the world?s largest importer of goods and services. Another reason is that Russia accounts for only 16% of Europes oil imports. Furthermore, a switchover to the euro would be a politically unfriendly gesture toward the United States; Russia cannot afford to do that even for the sake of enhancing ties with the EU. The majority of oil-exporting countries that are OPEC members never expressed a wish to switch from dollar to euro in making settlements; such a shift is also opposed by the largest oil majors. The possibility of a switchover has never been considered seriously. Oil has always been traded for dollars. Grounds do exist for talking about switching to euro settlements, but only in the context of political possibilities. Such talk has been a response to the weakening dollar as a world currency on the eve of the Iraq war. Ive heard that on some European markets - Germany, for one - settlements on some Russian oil contracts are made in euros. This, however, is an exception rather than a rule."
Whatever the politicians say, economic expediency comes first. The unanimous opinion is that the Russian leadership should not influence the corporate sector in its choice of a settlement currency. Andrei Lisyev, chief of the money markets section at bank Dialog-Optim, makes this concluding remark: "Such compulsion would be harmful. Fuel and energy companies must realize the importance of reducing their exchange-rate risks for themselves. So it would be better if this process were voluntary, and consequently conscious."
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