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Knights of the Vine RUSSIA


The Fall of the Dollar
Thomas Hulbert

For those who live and work here, a visit to the local currency exchange point is no longer a rewarding experience. The dollar has been the de facto currency in Russia since perestroika and for years it has been the polar star by which locals oriented themselves in a market increasingly filled with foreign goods and western services. The dollar is part of many residents sense of stability, both economically and psychologically. But the dollar has been on a slow decline since peak exchange rates in 2002, when year-end averages were over 31.30 rubles to the dollar. In the period between 2003 and the middle of 2005, the magic figure hovered around 29 rubles to the dollar. Since the beginning of this year, however, when rates seemed to stabilize at 28.50 rubles to the dollar after a slip last summer, the dollar has experienced a dramatic devaluation and in some places one cannot get more than 26 rubles for a greenback. Consumers spending dollars in Russia have no guarantees the dollar wont slip further against the rubles.

Compounding this trend is the fact that consumer prices in rubles have been steadily increasing, while most salaries, even those adjusted for inflation by reasonable employers, have remained stable. For both dollar and ruble earners, real purchasing power has been hit pretty hard. The average price for a liter of milk, for instance, has gone up some 10.5 rubles since 2004, an increase of 56%. Prices for many basic items have increased unevenly a kilo of ground beef last summer was still under 100 rubles in many places, while today most shoppers pay over 200 rubles per kilo. The prices of a few items have remained relatively stable, but good deals are rare and sale prices dont add up to real savings in the long run.

A liter of 95-octane gasoline, 11 rubles and 60 kopeks on average only two years ago, now goes for an average 18 rubles and 22 kopeks, an increase of 6.62 rubles, or 57%. Those who try to economize by riding the metro have felt the rate increases even more regularly. Commuters who buy the 30-day pass for unlimited rides for are now paying 680 rubles for the pass which only last year cost 450 rubles. The extra 230 rubles represent a 51% increase. Again, dollar earners can add almost 10% to that cost.

Some local currency exchange points, many paying a fee to use the brand name of an official bank, offer rates that differ significantly from the Central Bank exchange rates posted daily in the press and on the internet. Recently, Cory Wakefield, an intern at a local legal consulting firm, went to pay her rent for her room. Even though my landlord and I made our original agreement in dollars, he now expects me to in pay in rubles, she says. The problem is that since April, the local rates in the street are way off from the Central Bank rate, sometimes more than 1.5 rubles per dollar. My landlord wants the official rate, so it means I loose even more money.

Its clear that dollar earners are hit even harder. Thanks to the 7% average slip of the dollar since last summer, plus the regular swindle at the local exchange point, dollar earners can count on an additional 9.7% increase on top of ruble price hikes.

Many foreign and Russian companies illegally pay their employees in dollars and have for some time. However the salaries are actually paid in rubles. Some companies have established an internal exchange rate, such as 27 rubles to the dollar; however such companies are the exception rather than the rule.

Expat Solutions and Dead Ends

Some expats have found ways around the problem. A well traveled American chef Michael G., parlayed his employer into an unusual agreement before he arrived. He gets paid half in dollars and half in rubles. The dollars go directly into a bank account in America. I put my rubles under the mattress, he laughs. He has adjusted to prices in rubles because of his work, and the prices on the menu in the restaurant where he works are also in rubles. His employer fixed the rate of exchange for the ruble portion of his salary, so hes happy with that, but as his ruble salary is only half of what he earns and all of what he spends here, he isnt saving any money here.

There are alternative currency arrangements, however less common. Jeraldine F., a British journalist based in Moscow, receives her salary in pounds. Karl K., a German working in the international banking sector, gets paid in Euros. Jeraldine uses a variety of currencies to orient herself. They both keep track of the rates for the dollar and the ruble and weigh them against the currency of their salary. Its quite random, says Jeraldine about how she divines the value of her income, but it depends upon the stability of the given currency. At the moment pounds are a convenient way for me to gauge a ruble figure, as there are approximately 50 rubles to the pound. As the value of the dollar falls, I'm trying to avoid keeping any money in dollars.

Saving in Rubles?

Australian James V., currently a Moscow resident working in the mass media, also spends time swapping currencies and maintains dollar and ruble accounts in Russia as well as other accounts abroad. He sees changes in the exchange rate from another angle. They are positive insofar as my rubles are getting more dollars, lately. As the ruble shapes up to enter the bigger picture as a tradable currency, he adds, It makes more sense to have a broader outlook as opposed to a flat rubledollar perspective. His dollar salary with a high, fixed ruble exchange rate ties him to the dollar all the same, and he admits to spending more time fussing with his finances than he finds comfortable.

Very few expats, however, save in rubles, if they can afford to save at all. While expats often earn more than their Russian counterparts, their expenses are usually higher. Some of this is due to lifestyle habits, its true; but seasoned expats can cut the fat by adapting to Russian ways. Expats also have expenses that natives dont, and this especially concerns yearly visa runs. All airlines have jacked up prices due to increases in fuel costs and Aeroflot, Russias foremost economy carrier to Europe, is no exception. Aeroflot and other airlines with a foothold in Russia go a step further, though, and exploit the tactic of advertising fares in dollars but only accepting payment in rubles at a profitable internal exchange rate. In 2004, Aeroflot accepted payment in dollars at a rate of 30 rubles to the dollar, charging a ruble more per dollar than the average exchange point for the convenience of using the dollar. Today Aeroflots rate is 32 rubles for a dollar, a difference of almost 7 rubles. Round trip flights to London this July start around $600, but the ruble price is 19,200 more than 23% higher adding more than $100 to the price of a ticket!

Dropping the Dollar?

Starting this month domestic oil prices will be valuated in rubles. In addition to current legislation already coming into effect that make the ruble the official currency for salaries and retail prices, President Putin has announced that by this time next year, international sales of Russian oil and natural gas will be conducted in rubles. The Central Bank has cut the share of its dollars down to 50%. But the governmental effort to wean the Russian economy from the petrodollar is far from a sure thing, as such measures are doubtless the harbingers of ruble inflation. For the average consumer, attempts to chase the dollar out of the economy will be disorienting and no one can say if the love affair with the dollar wont make a comeback if ruble inflation catches up with the dollar slide.

Whatever hassles lie is store for Russians and expats in the near future, it is obvious that the dual currency standard in Russia no longer makes much sense. One wouldnt expect to pay for goods in the States using Chinese yuan, or for services in Europe with the Mexican peso, so why do we continue to use dollars in Russia? The psychological power the dollar continues to wield even in its decline, and the lingering distrust of the Russian banking system, are just the most evident factors that prevent any easy answer to this question, however. In the meantime, dollar earning expats and Russians will continue to suffer the most.

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