East: Fall Of Dollar Could Have Big Impact On Eastern Europe, Rus sia

ChrisD(RJ) chrisd at russiajournal.com
Sun Jun 30 02:18:32 PDT 2002


East: Fall Of Dollar Could Have Big Impact On Eastern Europe, Russia By Kathleen Knox

Since the beginning of the year, the dollar has lost nearly 10 percent of its value against Europe's single currency, the euro, and it has also lost ground against other major world currencies, such as the yen and the South African rand. This week, the dollar nearly reached parity with the euro, its weakest

level since 2000. The dollar's weakness could have far-reaching implications

for the U.S. economy, for growth in the eurozone, and for economies in other

parts of the world, including Central and Eastern Europe.

Prague, 28 June 2002 (RFE/RL) -- The mighty dollar: a safe haven in times of

economic troubles, a currency to trust when things get rough. Confidence in the greenback has reflected a belief in the strength of the U.S. economy, the powerhouse of global growth.

But something unusual has been going on lately. Since the beginning of the year, the dollar has lost nearly 10 percent of its value against the euro, Europe's single currency. Just a few months ago, one euro bought only 88 cents, but this week it nearly managed to reach parity. The euro hasn't been

that strong since February 2000, just after it was launched and began its steady slide against its heavyweight competitor.

What happened?

Well, some high-profile accounting scandals have taken the sheen off the American model of capitalism. One caused the collapse of the energy-trading company Enron, and there were revelations this week that communications company WorldCom had inflated its profits by nearly $4 billion. Arguably, savers are also withdrawing their money from the U.S. because they are losing confidence in how the current U.S. administration is handling the economy.

To be sure, growth in the U.S. is still outpacing sluggish Europe and moribund Japan, but in the world of the financial markets, confidence and that mysterious factor, market "sentiment," count for a lot.

The implications are wide-ranging. If the dollar's weakness is part of a wider crisis of confidence, consumers in the U.S. could take fright and slash their spending, leading to lower growth. And higher import prices could stoke inflation and push up interest rates.

What is the possible impact on Eastern Europe? Economists say much depends on how the dollar's drop affects the eurozone.

The flip side of a weaker dollar is a stronger euro. This could damage the competitiveness of the eurozone's exports by making them more expensive, harm the economies of the eurozone and lead to slower growth.

If so, that could mean less appetite in Western Europe for exports from Central and Eastern Europe. Many European Union applicant countries heavily depend on exports to eurozone countries, especially Germany.

This is how Joe Smolik of the UN's Economic Commission for Europe assesses the impact on Eastern Europe: "It looks like for Eastern Europe the effects will be largely negative, we would say at this point. And it's coming at a time when we see East European growth slowing down anyway. And these negative effects of slower Western growth, or the possibility of slower Western growth, would have a negative impact on exports, and we would expect an even

faster slowdown."

But not everyone agrees that a weaker dollar is bad news for Central and Eastern Europe. For one thing, it means cheaper imports of goods that are dollar-denominated: chiefly oil and gas and other raw materials. And that could help keep down inflation.

It's also not a dead certainty that the weak dollar will harm the eurozone or global growth. Some economists say the European Central Bank and the Bank of

Japan -- two of the world's most important monetary authorities outside the U.S. -- will act to prevent the weaker dollar from harming their exports' competitiveness.

And there's another possible positive effect: The weaker dollar could actually help the U.S. economy, and hence the rest of the world.

Anais Faraj, an economist in London with the Nomura banking group, is one of

the optimists. "If the dollar weakens enough to support the U.S. economic recovery -- because that's clearly what they need, they need a slightly more

competitive exchange rate -- then I think the eurozone can live with a stronger euro and maintain reasonable export growth plus stronger domestic spending. That's the virtuous scenario for Central Europe, that a stronger euro will rebalance the world economy away from the U.S. and towards the eurozone," Faraj said.

For the poorer countries of the region, particularly in the Caucasus and Central Asia, there is one benefit to the dollar's current weakness, but it could remain on paper only.

Take the so-called CIS-7, a grouping of the poorest countries that includes Armenia, Azerbaijan, Georgia, Kyrgyzstan, Moldova, Tajikistan, and Uzbekistan. They owe a combined external debt of more than $11 billion, mostly to lenders such as the World Bank. Since much of that debt will be in

dollars, the cost of servicing it, or paying the interest on it, will now be

less.

But as Dafne Ter-Sakarian, an analyst with the Economist Intelligence Unit in London, put it: "Most of these currencies are so weak and the debt burdens they have are so enormous, it's not going to make much difference. They are so poor that 'cheaper' debt servicing doesn't help that much."

For Russia, the euro's strengthening is more important than the dollar's weakness, since it imports most goods from Europe. That's the view of Chris Weafer, head of research at Troika-Dialog, a Moscow investment bank. What's happened is that while the euro has been relatively weak, Russians have been

able to buy up relatively cheap European consumer goods. That might be good for them, but Weafer said it's been bad for the Russian economy. It has helped boost inflation and slowed down domestic industrial growth. Now that the euro is stronger, those goods are becoming more expensive. "Therefore, it's positive in the sense that as these goods become more expensive, consumers in Russia should start buying more domestic products and therefore, we might actually get a boost out of this for domestic producers. So on balance, it's actually positive for Russia, as it might force people to start buying more domestic-manufactured goods rather than cheap European goods, which they have been doing for the past few years," Weafer said.

Weafer said the weaker dollar could mean lower revenues for Russia on its main exports. But in practice, he said Russia is just increasing oil output.

The problem could be if the weak dollar combines with a fall in the price of

oil, said Nik Malyshev, a Russia expert at the Organization for Economic Cooperation and Development. "There are two parts to the equation: the price

of oil and then the value of the dollar. If the price of oil is growing faster than the value of the dollar is falling, then Russia is better off. But say the price of oil falls as well as the exchange rate, then that would

hurt," Malyshev said.

Of course, the scenarios these economists have been talking about assume that the dollar won't begin to fall sharply and spark a stock-market sell-off.

As Laurence Meyer, a former U.S. Federal Reserve governor, put it: "It's not

the direction, it's the speed." If the decline is gradual, that's fine, he's

quoted as saying in "The Wall Street Journal." But if it becomes a free fall, he said, that can "turn into more of a problem."



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