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Some positive signs, but the overall picture remains bleak

There are several encouraging signs for the Russian economy. The seasonally-adjusted money supply (M2) increased in February, the first time it has grown since last August.

The stock market has increased, in both ruble and dollar terms, and the latest purchasing managers surveys for both manufacturing and services are at their strongest balance since October. Far from falling further, the ruble has held its ground in nominal terms against the dollar and euro basket, while infl ation meant that the real effective exchange rate increased by 8.9% in March. Most importantly, the price of crude oil has broken through the psychologically important $50 level.

The Russian government also seems to have recognized the need for a fiscal stimulus with the announced package tax cuts and increased spending expected to pump $90bn into the Russian economy. The crackdown on tax havens and banking secrecy announced at the G-20 summit should also encourage citizens who had been holding money in countries like Switzerland to consider moving their money back into Russia. Russia’s still substantial reserves of foreign exchange, and relatively low levels of external debt, mean that the chances of a repeat of 1998 are remote.

However, much more positive news is needed before a genuine recovery can be announced, especially since official estimates suggest that the Russian economy contracted at an annualized rate of 7% in the first quarter of this year. Although the increase in the nominal money supply is positive news, it still fell at a six-month annualized rate of 22.5%. This is far below the 15% to 25% increase that is needed to be consistent with both the inflation target and trend growth. In any case the real money supply is still falling. This means that monetary stimulus is still desperately needed. Unfortunately officials at the Central Bank of Russia still seem paralyzed by infl ationary fears, overlooking that producer price inflation has been falling. This means that in the short run there will be considerable resistance against the necessary cuts in interest rates.

The increase in the manufacturing and service sector PMIs hides the fact that the balances of both are still below 50, indicating that both sectors are still contracting. Industrial production figures also continue to take a hit, falling by 13.7% in March compared with a year ago. The upward momentum in oil prices is unlikely to be sustained. Indeed, given that the long-term real trend of oil prices is around $50, and most of the world economy is still in recession, prices are more likely to fall back to the $40-45 dollar level than increase beyond $55.

So, what does this mean in terms of investment advice? I don’t think that there have been enough signs of improvement to justify any changes to my pessimistic views on the Russian ruble. As noted above, I continue to believe that a devaluation and an easing of monetary policy is both necessary and inevitable. Therefore it would be prudent to minimize one’s ruble holdings. However, when the government and monetary authorities start to loosen monetary policy, the stock market will become an extremely attractive investment. Given that sentiment may be improving already, particularly brave investors should consider immediate investment in the stock market.

The Evolution of Human Consciousness

On April 7 at ELE (English Language Evenings www.elemoscow. net), Robert Stewart, a New Yorker teaching in Moscow at the Moscow Waldorf School gave a lecture entitled: The Evolution of Consciousness as Pictured in the History of Art. Robert’s thesis is based on four points: i) that there is a revolution of consciousness represented in Art. ii) Art is a Western invention that did not exist before the 15th century, before which Art was a quintessential part of religion, not something separate, which can be sold or itemized. iii) The Renaissance is something that occurred in southern Italy only, and the term cannot be applied to artistic development throughout Europe at the time. iv) Using concepts and a philosophy connected with Rudolf Steiner, Stewart associated the Art of Paleolithic man with touch and vision. Egyptian and Greek Art, according to Stewart was predominantly concerned with movement and balance, Byzantine Art with smell and taste, Renaissance Art with vision, warmth and hearing through Romanticism, language and concept through Modernism and Post-Modernism. In this final stage, Art is now concerned with ideas.

Perhaps less controversially, Stewart split the development of art into two main streams: Aplollian and Dionysian. Thus the accurate and geometric Art of Piero della Francesca, Leonardo da Vinci, Raphael, even the impressionists which Stewart links with ‘the sunlight without’, was contrasted with Dionysian ‘soul light within’ which Stewart links with movements such as Baroque, Romanticism, Expressionism and abstract expressionism.

The lecture was well attended, Stewart’s fascinating thesis, illustrated with a slide show, can undoubtedly be challenged on many fronts, unfortunately there was little time left for discussion after the talk ended.