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2.5. Russian Financial Markets 2.5.1. Internal Debt Market In 2006, the internal debt of the Russian Federation in securities grew in vol ume by nearly 20.8 per cent, from RUR 851.15 bln to 1,028.04 bln

(in terms of GDP, the national debt has somewhat reduced from 3.94 per cent to 3.86 per cent of GDP).

Table 25 The RF Internal Debt Structure (RUR, billion) Type of securities As of 01.01.2006 As of 01.01.2007 G 0,02 0,00 OFZ PK 0,001 0,00 OFZ PD 123,64 205,62 OFZ FK 131,13 94,83 OFZ AD 596,33 675,16 GSP PPS 0,00 0,42 GSO FPS 0,00 52,00 Total 851,15 1028,04 Source : the RF Ministry of Finance Over the period of the first three quarters of 2006, the external debt of the Russian Federation (government authorities and monetary credit control bodies) reduced from USD 82.3 54.7 bln (according to the data of the Central Bank of Russia). Thus, the absolute value of external debt of the Russian Federation re duced by 33.5 per cent. At the same time, the private sector (banks and other insti tutions) increased its debt to non residents from USD 175.1 billion to USD 214. billion ( +22.2 per cent ) over the same period. Thus, the external debt of the Rus sian Federation grew from USD 257.4 to 268.6 billion in total within nine months of 2006.

Domestic Debt In 2006, there was no such a substantial reduction in average weighted yield of the traded issues, that was noted in the ruble government debt market year ago.

Thus, according to the data at closing on December 29, 2006, the average weighted yield has been reduced to 6.39 per cent per annum as opposed to 6. per cent p.a. at the beginning of 2006.(See Fig. 12). Herewith, up to July the situa tion in the market remained quite stable, but in the second half of the year volatility was growing to a certain extent. Before July average weighted yield was kept up within the range of 6.24 per cent to 6.79 per cent per annum, while it changed to 5.36 per cent6.57 per cent per annum in the second half of the year. A special emphasis should be placed on the fact that in 2006 the parameters of investment activity has somewhat decreased as compared with the data of preceding year of 2005. The total trading volume of GKO/ OFZ bonds in 2006 made RUR 333.04 bln against RUR 355.07 bln in 2005.

Herewith, at the background of some decrease in the total trading volume in 2006, the average weekly parameters were also getting down and made RUR 6. bln as apposed to RUR 6.9 bln in 2005. The maximum weekly trading volume in RUSSIAN ECONOMY IN trends and outlooks 2006 reached nearly RUR 32.36 billion in 2005 ( as opposed to nearly RUR 24.2 bln in 2005),while the minimum was nearly RUR 993.8 bln (about RUR 993.8 bln in 2005). Thus, in the year of 2006, the maximum trading volume parameter has somewhat decreased as compared with the minimal weekly trading volume pa rameter in the market of government bonds denominated in rubles, despite the growth of maximum trading volume.

Volume of trades on GKO/OFZ (mln. rubles) Weighted-average return (annual rate) - right axis 35 000 8.0% 30 000 7.0% 25 000 6.0% 20 000 5.0% 15 000 4.0% 10 000 3.0% 5 000 2.0% - 1.0% Source : Finmarket Asset Management Company, estimates made by the authors.

Fig. 12. Market Dynamics for GKO/ OFZ bonds in In analyzing the annual market dynamics, it should be noted that market quo tations periodically moved up and down throughout the year. Thus, upon a short period of decrease to 6 per cent per annum at the beginning of the year, the aver age weighted yield of GKO OFZ was gradually growing up to July and then got sta bilized at the level of 6.5 7 per cent per annum. The process was continued till mid July, when a moderately negative trend in the dynamics of shot term up and down fluctuations was formed at the market. Let us consider in detail the monthly dynamics in liquidity in the market of government bonds, denominated in rubles.

Thus, within the first month of 2006, there were observed periods, when quo tations would go up or down, which resulted in insignificant average weighted monthly indicators. Liquidity situation was quite favorable, and only one auction was held at the primary market. Also in January the government has approved the Program of National Debt for the year of 2006, according to which the total OFZ volume was planned in the amount of RUR 186 bln, whereas in 2005 the total amount of domestic debt was planned within RUR 258.9 bln, and actually bonds were placed for RUR 182.3 bln. A session of market participants, arranged by the RF Ministry if Finance, MICEX and National Fund Association, involved in the above situation, where the Ministry of Finance has confirmed the sustainability of the pol 3-9.04. 1-7.05. 2-8.10. 9-15.01. 6-12.02. 6-12.03. 7-13.08. 4-10.09. 23-29.01. 20-26.02. 20-26.03. 17-23.04. 15-21.05. 12-18.06. 10-16.07. 24-30.07. 21-27.08. 18-24.09. 16-22.10. 13-19.11. 11-17.12. 25-31.12. 29.05-4.06. 26.06-2.07. 30.10-5.11. 27.11-3.12. Section Monetary and budgetary spheres icy domestic debt with OFZ issues 3, 5, 10 and 15. It was also declared that Ministry of Finance is prepared to stop the extra liquidity on placed securities, which might become even lower than planed in the federal budget. The need of the Ministry of Finance in internal debt is decreased, and there is no necessity in extra yield of placed securities.

A month later the major part of investors activities was moved to the primary market, where the demand was several times higher than securities offer. Inconsis tency of the demand and offer in terms of price was noted in a number of issues, and hence, placement of some securities was incomplete. At the same time, insig nificant volatility of quotations was observed in the secondary market, prices varied within a narrow range. In general, the market was supported by the stable RUR rate with some trend to its strengthening against USD, as well as sufficient liquidity level in the bank sector. As opposed to that, prices were affected by inflation expecta tions, since within the first two months consumer prices have grown by 4.1 per cent, much higher than the level of official estimates. Economic situation in general has been aggravated, what was confirmed by lower indicators of GDP, industrial production, investment and trading activities within the first month of preceding year as compared with December 2005..

In March inflation estimates made a stronger negative impact on the market, as the inflation within the first three months of the year reached about 5 per cent, whereas according to the estimates, that level should have been in the limits of 8.5 per cent by the end of the year. In this context, the Ministry of Economy and Trade has to make adjustments to the target estimates up to 8 9 per cent, wile the Ministry of Finance admits that consumer prices can be increased by 10 per cent as of 2006 results. Apparently, all the above was taken into regard in the bonds yield estimates and resulted in the market quotations. Liquidity problems in the bank sector made an additional pressure on prices. Alongside with that, one of counter inflation measures, taken by the RF Central Bank, is effective strengthen ing of RUR in nominal terms. However, that factor provides an adverse effect, sup porting RUR liquidity, and the gross yield of securities has somewhat grown as compared with February indicators.

Further aggravation of the situation with monetary liquidity and high inflation expec tations have made a stronger effect over the government bonds denominated in rubles, than strengthening of RUR against USD. The government proposed a series of counter inflation measures to be taken in the economy to restrain the greater prices growth rates, than planned ones. Some downward trend in yield was ob served in May. The dominating factors were monetary liquidity, which has consid erably raised as compared with other periods;

stronger RUR against USD, as well as lower inflation expectations due to slower rates of consumer prices growth (in May it made only 0.5 per cent against 1.4 per cent in May 2005). The situation in the primary market was also rather favorable and the auctions on government bonds placements were successful.

In June there were no expressed changes in prices of traded securities. While there was observed a negative trend in quotations in the market at the beginning of RUSSIAN ECONOMY IN trends and outlooks the month, prices have been adjusted by the end of June. The market was sup ported by the information on complete recovery of the RF debt to Paris Club of Creditors, what allowed to save about USD 7.7 of interest payments. Inflation was getting down;

consumer prices went up by 0.3 per cent against 0.5 per cent in May.

One more stabilizing factor in the market of government bonds denominated in ru bles was liberalization of the RF foreign currency legislation, planned for July 1, 2006, which could be taken into regard by the investors in their considerations on the structure of investment portfolios.

Quotations were growing till the end of July, and at that background the aver age weighted yield of GKO OFZ has decreased below 6 per cent for the first time since January and made 5.8 per cent per annum. Herewith, as can be observed in Fig. 12, the yield decrease was accompanied by the growth of trades. The basic factors of favorable dynamics were stabilization of external debt market, high liquidity, RUR strengthening, liberalization of the RF foreign currency legislation.

Rather favorable situation was also observed in August September, despite the fact that the yield came back to the level of 6 per cent per annum. Meanwhile, the volume of secondary trades has reached its peak as compared with preceding months of 2006. Among other standard factors of yield growth, the RF raised rating played an important role as well.

Some yield growth of the most liquid bonds was observed in October, though there were no vast scale trades. Comments of some authorized officials on exces sive RUR strengthening negative impact on the RF economy made some effect over the demand offer balance. For instance, the RF Minister of Finance has men tioned, that further RUR strengthening will provide negative effect on the Russian economy and can result in RUR devaluation after 2009. Lower liquidity in the bank sector has added to the yield growth. Only noticeable RUR strengthening against USD contributed to the situation of the end of November, when the yield of the government bonds denominated in rubles has considerably grown, regardless some liquidity problems. That growth was continued till the end of the year, and has resulted in decrease of the most liquid ruble bonds. The basic supporting eco nomic factors were the expected in 2006 high rates of economic growth and lower inflation. However, rather high volume of primary offer in the market of corporate bonds, characterized by high yield, and some aggravation of the situation in the sector of the Russian government foreign currency debt, prevented the bonds from reaching the level of potential, formed by the end of the year.

In 2006 the RF Ministry of Finance has successfully held 34 auctions on placement of GKO OFZ for the total amount of about RUR 208.1 bln (against auctions for the amount of RUR 165.7 bln in 2005). The actual placement volume amounted to RUR 188.6 bln. The yield at the average weighted price varied from 6.08 per cent to 7.06 per cent per annum (in 2005 the range of average weighted price varied from 6.22 per cent to 8.85 per cent per annum). Therefore, an ex pressed growth of government debt was observed in domestic market, accompa nied by significant yield reduction, as compared with the preceding year. As of De cember 28, 2006, the volume of GKO/ OFZ bonds market amounted to RUR 875. Section Monetary and budgetary spheres bln billion at par value and RUR 879.3 bln at market value. Duration of the GKO/ OFZ market portfolio was 5.46 years.

External Debt As of 2006 results, there was an upward trend for some bonds denominated in foreign currency (Figs 2 and 3). Thus, as of the end of December, 2006, the yield of the fifth tranche of MinFin Bonds amounted to 5.47 per cent per annum (as op posed to 5.14 per cent early in the year), the seventh tranche of MinFin Bonds 5.48 per cent per annum (as opposed to 5.24 per cent) eight tranche of MinFin Bonds 5.57 per cent per annum (against 4.76 per cent at the beginning of trades as of May 2006). The yield of RUS 30 varied within the year from 5.42 per cent to 5.5 per cent and RUS 28 bonds stayed at the level of the beginning of the year, 5.96 per cent;

the yield to maturity of RU 07 varied insignificantly and was estab lished at the level of 5.05 per cent versus 5,03 per cent early in the year, and RUS 18 bonds were traded at prices corresponding to the yield of 5.64 per cent per an num ( as opposed to 5.5 per cent early in the year ).

Several most significant factors regarding the movement in the Eurobonds market can be highlighted. The first one is extremely favorable conditions in the world oil and metal markets, as well as stable macroeconomic situation in the coun try. The second factor is the early repayment of a share of the RF sovereign debt to the Paris Club of Creditors. The third factor: it is essential that Standard & Poors upgraded the Russias credit rating in foreign currency from up to +, and rating in national currency from A to , as well as Fitch upgraded the RF sover eign credit from BBB to BBB+. The key adverse factor for the market throughout the year was the movement of the yield of the US Treasury Bonds, which was influ enced by periodical increases of the discount rate by the US Federal Reserve Sys tem, as well as the growth in inflationary processes in the US economy.

In the analysis of Russian bonds quotations dynamics several periods should be highlighted, when the market situation was variable. Thus, quotations were steadily growing up to mid July with occasional corrections. During the second pe riod, from mid July to early October quotations were decreasing, partially winning back the growth of the beginning of the year. Throughout the third period, in Octo ber December the yield was variable within a certain range. Let us consider the ba sic factors, which have influenced the dynamics of prices in the market of Russian Eurobonds. In January February favorable information on the US economy were published in the USA, what has reduced the expectations of the slow down in the economic growth rates, but supported inflation growth, especially in view of the forthcoming meeting of Committee on open markets of USA FRS. As a result, investors were selling US government bonds, what provoked trades in the Russian market as well, which nevertheless did not reach a vast scale, since the Russian bonds were substantially supported by high oil prices, demonstrated an expressed growth within January. In late January investors expectations came true, the basic rate in US was raised by 0.25 p.a. and reached 4.5 per cent per annum. The inves tors were also influenced by several developments, in particular, by the statement RUSSIAN ECONOMY IN trends and outlooks of B. Bernake, the new head of the US Federal Reserve System, though there was no new information in his words. He has mentioned, that the mechanism of the ba sic interest rate adjustment will be further applied as a balance instrument against inflation pressure. As a result of the month, quotations of the Russian bonds, de nominated in foreign currency, have been decreased.

7.0% Tranche 5 Tranche 8 Tranche 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% Source : Finmarket Asset Management Company.

Fig. 13. MinFin Bonds Yield to Maturity in Similar trends were prevailing in the market up to July. The interest rate in USA went up several times (up to 4.75 per cent per annum in March, to 5 per cent per annum in May). A greater portion of US economic statistics stated a steady eco nomic growth rate, whereas the upsurge of the world prices for energy sources created additional grounds for stronger inflation development and as a result, for further growth of interest rates. Comments of financial authorities in Europe also pointed to their intentions to raise the interest rates. In this situation one could most likely expect a downward trend in the sector of the Russian Eurobonds, what has actually happened in the market.

In July the upward trend of the Russian Eurobonds yield was replaced by an adverse tendency. The basic factor in the dynamics of the market situation was a reduced probability of further tightening of US Federal Reserve System monetary and credit policy, which effected both, the markets of the US government bonds and consequently, Eurobond markets of other countries. Moreover, statistical data, published in USA, reflected some slow down in economy and inflation stabilization.

In that situation investors were planning a decrease of interest rates in their fore casts, what also inspired price upswing. Their forecasts came true in October, when FRS made a pause in the series upgrades of interest rates. To the contrary, 10.01. 18.01. 26.01. 03.02. 13.02. 21.02. 03.03. 15.03. 23.03. 31.03. 10.04. 18.04. 26.04. 05.05. 17.05. 25.05. 05.06. 14.06. 22.06. 30.06. 10.07. 18.07. 26.07. 03.08. 11.08. 21.08. 30.08. 07.09. 15.09. 25.09. 03.10. 11.10. 19.10. 27.10. 07.11. 15.11. 24.11. 04.12. 12.12. 20.12. Section Monetary and budgetary spheres the Central bank of Europe has increased the interest rate by 0.25 p.p. up to 3. per cent per annum, but commented on low likelihood of further growth. In Novem ber and December there was no expressed dynamics in the market of Russian Eurobonds as well. Herewith, while in the US market the bonds were downgrading in December due to contradictory publications on macroeconomic data, provoked one more review of expectations in regard to the US Federal Reserve System pol icy, the Russian debt market demonstrated high resistance to that factor, though there was observed some yield upgrading in some bonds.

6.8% RUS-2030 RUS-2007 RUS- 6.5% 6.3% 6.0% 5.8% 5.5% 5.3% 5.0% Source : Finmarket Asset Management Company.

Fig. 14. Russian Eurobonds Yield to Maturity due 2030, 2018 and 2007, in 2.5.2. The market for Municipal and Subfederal Borrowings The dynamic of market development By the results of the year 2006, the consolidated regional budget was drawn with a surplus of 139.8 bn roubles (0.53 % of GDP). The budgets of subjects of the Federation were drawn with a surplus of nearly 133.8 bn roubles, the budgets of city okrugs and the intracity municipal formations of the cities of Moscow and St.

Petersburg with a surplus of 0.3 bn roubles, the budgets of municipal raions with a surplus of 9.8 bn roubles, the budgets of urban and rural settlements with a surplus of 2.2 bn roubles57.

For five subjects of the Russian Federation (Moscow Oblast, the Republic of Ingushetia, the Chechen Republic, Koriak AO, and Chulotka AO), the budget statistics on municipal formations is cited without 10.01. 18.01. 26.01. 03.02. 13.02. 21.02. 03.03. 14.03. 22.03. 30.03. 07.04. 17.04. 25.04. 04.05. 16.05. 24.05. 02.06. 13.06. 21.06. 29.06. 10.07. 18.07. 26.07. 03.08. 11.08. 21.08. 30.08. 07.09. 15.09. 25.09. 03.10. 11.10. 19.10. 27.10. 07.11. 15.11. 24.11. 04.12. 12.12. 20.12. RUSSIAN ECONOMY IN trends and outlooks In 2005, the consolidated regional budget was drawn with a surplus of 57.1 bn roubles, or 0.26% of GDP. The budgets of subjects of the Federation were drawn with a surplus of nearly 53.8 bn roubles, the budgets of municipal formations with a deficit of 9.4 bn roubles (Tables 26 and 27).

Thus, in one year the surplus of the consolidated regional budget against GDP increased more than twofold by 0.27 p.p. of GDP.

Table Ratio of the surplus (or deficit) of territorial budgets to budget expenditure (in %) Consolidated regional Regional budgets Municipal budgets budget 2002 2.7 3.0 2. 2003 2.6 2.3 3. 2004 1.1 1.6 0. 2005 1.6 2.3 0. 2006 3.7 4. Source: the IETs estimates, based on the data of the Federal Treasury.

Table Ratio of the surplus (or deficit) of territorial budgets to budget expenditure in 2006 (in %) The budgets of city okrugs Local budgets of five subjects of Budgets of urban and intracity municipal Budgets of munici Russian Federation (Moscow Oblast, and rural settle formations of Moscow and pal raions Republic of Ingushetia, Chechen ments St. Petersburg Republic, Koriak AO, Chukotka AO) 0.04 1.63 2.52 2. As of 1 January 2007, the consolidated budget was drawn with a surplus in subjects of the Federation (as compared to 33 in 2005). The aggregate volume of budget surplus in those regions amounted to 190.6 bn roubles, or 6.9% of the total revenue of their budgets (in 2005 5.4%). The average budget surplus amounted to 2.5% of budget revenue budget.

The highest surplus to revenue ratio in the consolidated budget was achieved in Agin Buriat AO 22.9%, in St. Petersburg and Nenets AO 14.7% each, in Che chen Republic 13.4%, Koriak AO 12.0%, in Cheliabinsk Oblast 11.7%, in the republic of Bashkortostan 10.3%, in Krasnoyarsk Krai 10.2%, in Pskov Oblast 9.3%, in the city of Moscow 8.8%, in Tumen Oblast 8.5%. Nearly 2/3 (or 64.2%) of the aggregate surplus of the consolidated regional budget was achieved by four subjects of the Federation: the city of Moscow 35.0%, or 66.6 bn roubles, the city of St. Petersburg 16.8%, or 32.0 bn roubles, Tumen Oblast 7.1%, or 13,5 bn roubles, and Krasnoyarsk Krai 5.4%, or 10.2 bn roubles.

The substantial budget surplus in two autonomous okrugs was produces by additional budget funding in connection with the approaching merging of Agin Buriat AO and Chita Oblast, as well as Koriak AO and Kamchatka Oblast. The high surplus in breaking it into the categories of city okrugs, municipal raions, and urban and rural settlements.

The budgets of the municipal formations in these regions were drawn with the deficit of 2.2 bn roubles.

Section Monetary and budgetary spheres the budgets of Moscow, St. Petersburg, Tumen Oblast and Bashkortostan is associ ated primarily with the high growth of export prices of energy carriers.

In 2006, the consolidated budget was drawn with a deficit in 33 RF subjects (in 2005 in 54 regions)58, its aggregate volume amounting to 50.7 bn roubles, or 4.9 % of their budget revenue (in 2005 48.0 bn roubles).

The average level of budget deficit amounted to 2.7% of budget revenue. The highest deficit to budget revenue ratio was observed in the Republic of Mordovia 13.1%, in Magadan Oblast 9.9%, and in the Republic of Sakha (Yakutia) and Khanty Mansi AO 8,4% both.

More than a half, or 54.4%, of the aggregate deficit was produced by 5 sub jects of the Federation: the Khanty Mansi AO had an aggregate deficit of 20.0 %, or 10.1 bn roubles, Moscow Oblast 12.4%, or 6.3 bn roubles, the Republic of Sakha (Yakutia) 9.3%, or 4.7 bn roubles, Omsk Oblast 6.6%, or 3.3 bn roubles, Samara Oblast 6.2%, or 3.1 bn roubles (Table 30).

Changes in the structure of accumulated debt The amount of accumulated debt in the consolidated regional budget in creased in 2006 to 54,777.75 mln roubles, or 0.21 % of GDP. The increased debt resulted from the growth of domestic debt (that is, rouble denominated debt). The external debt in the regional consolidated budgets decreased by 496.2 mln rou bles, while domestic debt grew by 54,981.5 mln roubles (Table 28). As in the previ ous years, the combination of the surplus of the consolidated regional budget and the growing volume of accumulated debt can be explained by the general increase of the amount of residuals on the budget accounts and the growth of the other as sets owned by the territorial authorities.

Table Net borrowings regional and local budgets (in % of GDP) 1999 2000 2001 2002 2003 2004 2005 Borrowings of subfederal and local authorities 0.15 0.29 0.04 0.47 0.37 0.26 0.09 0. Including:

Reimbursable loans 0.11 0.03 0.04 0.12 0.1 0.02 0.03 0. from budgets of other levels Subfederal (municipal) 0.05 0.27 0.07 0.16 0.31 0.29 0.09 0. bonds Other borrowings 0.31 0.01 0.02 0.19 0.6 0.03 0. Decreasing residuals on budget accounts 0.19 0.30 0.05 0.04 0.18 0.62 0. Financing of deficit from borrowings and de 0.04 0.59 0.09 0.38 0.19 0.36 0. creasing residuals on budget accounts Source: the IETs estimates, based on the data of the RF Ministry of Finance and the Federal Treasury.

In the reports published by the RF Ministry of Finance (or the Federal Treasury) on the execution of the budgets of subjects of the Russian Federation in 2005 and 2006, the data on Evenk AO and Tai myr (Dolgano Nenets) AO are not shown separately.

RUSSIAN ECONOMY IN trends and outlooks The structure of borrowings The total volume of borrowings in the regional consolidated budget in amounted to 264,166.1 mln roubles, of which external borrowings constituted 14,964.1 mln roubles. As in 2005, the sole recipients of external loans were Mos cow city (13.7 bn roubles) and the Republic of Bashkortostan ( 1.2 bn roubles), which were refinancing the previously received external loans.

The aggregate volume of internal borrowings received by regions and munici palities amounted to 249,202.0 mln roubles. The biggest borrowers on the domes tic market were as follows: Moscow Oblast 48.1 bn roubles, Moscow city 17. bn roubles, Omsk Oblast 14.7 bn roubles, and Novosibirsk Oblast 11.7 bn rou bles. By comparison with 2005, the volume of domestic borrowings in nominal terms increased by 23.5 bn roubles, or by 10.6%, which is nearly equal to the rate of inflation.

Within the total volume of domestic borrowings of the consolidated regional budget, the issue of securities amounted to 29.4%, the loans from the federal budget to 4.4%, and other types of borrowings (primarily bank loans) to 66.2%.

In a situation of an absolute reduction in the volume of the issue of securities, the level of securitization of borrowings made by regions and municipalities went down from 36.0 % in 2005 to 29.4% in 2006 (Table. 29).

Table The structure of domestic borrowings in the subnational budgets (in %) 2006 2005 Regional Regional Regional Munici Regional Municipal consoli Regional consoli Regional Municipal consolidated pal budgets budgets dated budgets dated budgets budgets budget budgets budget budget Issue of secu 29.4 37.1 9.7 36.0 45.5 10.2 32.5 41.0 4. rities Budget loans 4.4 6.0 0.3 1.2 1.6 0.03 3.0 4.0 46. Other types of 66.2 56.9 90.1 62.9 52.9 89.8 64.5 55.1 49. borrowings Source: the IETs estimates, based on the data of the RF Ministry of Finance and the Federal Treas ury.

The highest ratio of net borrowings to budget revenue was demonstrated by Moscow Oblast 16.5%, Astrakhan Oblast 12.8%, Kostroma Oblast 9.4%, Kaluga Oblast 8.8%, Yaroslavl Oblast 7.9% (Table 30).

The biggest net borrowers were as follows: Moscow Oblast 28.9 bn roubles, Moscow 8.9 bn roubles, Samara Oblast 3.6 bn roubles, Irkutsk Oblast 2.6 bn roubles, Yaroslavl Oblast 2.1 bn roubles, Astrakhan Oblast and Saratov Oblast 2.0 bn roubles each.

The greatest reduction in the amount of accumulated debt was observed in Krasnoyarsk Krai by 4.9 bn roubles, in Nizhnii Novgorod Oblast by 2.1 bn rou bles, in St. Petersburg by 1.6 bn roubles, in Leningrad Oblast by 1.5 bn roubles.

Section Monetary and budgetary spheres Table The execution of the consolidated budgets of subjects of the Russian Federation in Ratio of Attracted Cost of Net borrow Budget surplus Net bor Budget revenue, surplus borrowed debt re ings to (deficit), rowings thousand rou (deficit) resources demption budget sur thousand rou to reve bles. to reve to reve to revenue, plus (defi bles. nue, in % nue, in % nue, in % in % cit), in % 1 2 3 4 5 6 7 Central Federal Okrug Belgorod Oblast 29 484 991.76 1 615 443.06 5.48 3.84 3.05 0.80 55. Briansk Oblast 17 602 562.54 195 708.94 1.11 14.08 1.81 12.27 162. Vladimir Oblast 21 514 145.62 491 021.71 2.28 0.05 0.79 0.84 34. Voronezh Oblast 30 435 574.02 453 109.44 1.49 7.50 1.44 6.06 96. Ivanovo Oblast 17 598 473.14 130 194.82 0.74 1.71 0.30 1.40 41. Tver Oblast 24 276 982.69 162 631.36 0.67 4.28 3.28 7.55 489. Kaluga Oblast 17 428 075.24 1 402 107.61 8.05 14.00 8.79 5.21 109. Kostroma Oblast 10 239 314.04 679 101.85 6.63 22.62 9.37 13.26 141. Kursk Oblast 16 707 865.59 301 239.29 1.80 0.66 0.34 1.00 18. Lipetsk Oblast 27 935 248.32 646 410.12 2.31 6.44 6.26 0.18 270. Moscow Oblast 175 166 922.03 6 299 496.49 3.60 27.49 16.48 11.01 458. Orel Oblast 11 181 582.93 251 151.27 2.25 1.43 0.89 0.53 39. Riazan Oblast 17 727 957.73 323 485.86 1.82 8.22 2.37 5.85 129. Smolensk Oblast 13 619 936.64 327 285.37 2.40 3.42 1.71 5.12 71. Tambov Oblast 15 203 434.33 294 919.40 1.94 3.42 1.32 2.10 67. Tula Oblast 23 789 184.02 1 401 707.76 5.89 34.53 6.36 28.17 107. Yaroslavl Oblast 26 447 297.54 1 890 399.90 7.15 16.37 7.94 8.43 111. Moscow city 757 936 696.98 66 606 909.18 8.79 4.18 1.18 3.01 13. Total 1 254 296 245.15 55 857 420.50 4.45 8.68 3.74 4.96 83. North Western Federal Okrug Republic of Karelia 15 158 667.26 1 057 344.49 6.98 13.69 6.13 7.56 87. Republic of Komi 30 071 168.79 670 319.23 2.23 1.12 0.03 1.09 1. Arkhangelsk Oblast 27 470 667.82 337 842.82 1.23 4.45 0.28 4.17 22. Vologda Oblast 32 684 358.61 506 973.59 1.55 1.67 0.63 2.29 40. Kaliningrad Oblast 20 782 886.55 156 177.57 0.75 8.62 1.02 7.60 135. Leningrad Oblast 37 096 265.98 2 488 579.26 6.71 1.69 4.10 5.79 61. Murmansk Oblast 29 151 834.53 141 683.50 0.49 6.88 0.87 6.01 178. Novgorod Oblast 12 054 297.59 286 838.19 2.38 0.12 0.97 1.10 40. Pskov Oblast 11 107 536.40 1 035 094.49 9.32 1.09 6.31 7.40 67. St. Petersburg city 218 096 278.88 31 961 300.62 14.65 1.86 0.74 2.60 5. Nenets AO 7 650 921.80 1 126 908.51 14.73 0.00 0.00 0.00 0. Total 441 324 884.22 36 768 341.77 8.33 2.90 0.61 3.51 7. Southern Federal Okrug Republic of Dagestan 27 095 641.55 545 436.04 2.01 0.00 0.00 0.00 0. Republic of 11 079 032.31 526 164.44 4.75 8.67 2.27 10.94 47. Kabardino Balkaria Republic of Kalmykia 4 665 809.76 68 007.66 1.46 7.72 1.30 6.42 89. Republic of North 11 418 024.51 104 126.89 0.91 9.63 1.89 7.75 206. Osetia Alania RUSSIAN ECONOMY IN trends and outlooks 1 2 3 4 5 6 7 Republic of Ingushetia 6 438 992.64 16 956.75 0.26 0.00 0.00 0.00 0. Krasnodar Krai 81 032 699.06 5 133 373.90 6.33 1.00 0.51 0.49 8. Stavropol Krai 35 720 169.22 1 237 746.31 3.47 3.90 0.88 3.02 25. Astrakhan Oblast 15 644 980.75 1 222 172.57 7.81 49.83 12.84 36.99 164. Volgograd Oblast 39 839 761.98 690 523.52 1.73 10.52 2.37 8.15 136. Rostov Oblast 59 641 367.30 1 510 089.89 2.53 0.18 0.00 0.18 0. Republic of Adygeya 5 708 000.36 162 094.83 2.84 0.35 2.75 3.10 96. Republic of Kara 6 248 318.64 77 117.17 1.23 26.32 3.48 22.84 282. chaevo Cherkessia Chechen Republic 31 624 049.42 4 247 709.56 13.43 0.00 0.00 0.00 0. Total 336 156 847.50 11 391 964.21 3.39 5.47 1.12 4.35 33. Volga Federal Okrug Republic of Bashkor 83 565 631.02 8 635 577.68 10.33 3.28 1.57 1.90 15. tostan Republic of Marii El 10 464 294.32 143 259.12 1.37 7.16 2.06 5.10 150. Republic of Mordovia 14 356 730.25 1 885 905.16 13.14 0.00 0.74 0.74 5. Republic of Tatarstan 88 326 860.15 2 064 567.36 2.34 8.73 0.11 8.85 4. Republic of Udmurtia 25 339 742.02 1 102 825.24 4.35 4.07 0.05 4.02 1. Republic of Chuvashia 19 171 874.22 499 010.92 2.60 6.21 4.84 1.38 185. Nizhnii Novgorod 59 242 672.46 4 295 302.71 7.25 7.52 3.54 11.06 48. Oblast Kirov Oblast 21 649 798.63 336 218.93 1.55 8.67 4.62 4.06 297. Samara Oblast 67 696 875.17 3 142 590.83 4.64 8.39 5.35 3.04 115. Orenburg Oblast 35 793 475.32 193 883.83 0.54 0.39 1.03 1.42 190. Penza Oblast 19 743 330.90 55 462.64 0.28 10.58 0.91 9.68 322. Perm Oblast 56 572 339.83 2 334 274.74 4.13 1.13 0.56 0.57 13. Saratov Oblast 32 904 692.51 823 946.95 2.50 13.82 5.98 7.84 238. Ulianovsk Oblast 20 419 309.01 1 212 795.80 5.94 0.11 4.28 4.39 72. Komi Permiak AO 3 393 009.86 21 986.75 0.65 0.07 0.71 0.78 109. Total 558 640 635.67 10 880 094.37 1.95 5.89 1.07 4.84 54. Ural Federal Okrug Kurgan Oblast 13 448 299.19 256 332.85 1.91 5.41 2.56 2.84 134. Sverdlovsk Oblast 97 882 319.84 6 771 737.58 6.92 0.41 0.18 0.59 2. Tumen Oblast 159 368 409.34 13 509 541.07 8.48 0.01 0.23 0.24 2. Cheliabinsk Oblast 66 866 623.62 7 792 056.19 11.65 0.86 0.45 1.31 3. Khanty Mansi AO 121 064 671.80 10 119 699.34 8.36 0.65 0.18 0.47 2. Yamal Nenets AO 64 621 447.15 347 585.97 0.54 3.17 0.74 2.43 137. Total 523 251 770.94 18 044 888.63 3.45 0.87 0.04 0.84 1. Siberian Federal Okrug Republic of Buriatia 21 361 222.34 191 613.66 0.90 9.03 0.95 8.08 105. Republic of Tyva 7 540 373.50 42 924.79 0.57 0.00 0.48 0.48 84. Altay Krai 35 892 424.96 900 063.30 2.51 4.55 3.64 8.19 145. Krasnoyarsk Krai 99 687 940.60 10 201 968.87 10.23 6.43 4.99 11.42 48. Irkutsk Oblast 50 372 002.51 1 854 726.60 3.68 17.04 5.19 11.85 141. Kemerovo Oblast 63 420 573.99 2 604 559.91 4.11 2.55 0.92 1.63 22. Novosibirsk Oblast 51 633 127.34 1 580 010.03 3.06 22.66 1.81 24.47 59. Omsk Oblast 41 626 420.45 3 340 427.34 8.02 35.33 3.00 32.33 37. Tomsk Oblast 25 897 683.36 373 069.88 1.44 26.73 0.63 26.10 43. Chita Oblast 22 299 648.60 512 741.13 2.30 2.38 1.04 3.42 45. Section Monetary and budgetary spheres 1 2 3 4 5 6 7 Republic of Altay 7 343 323.21 87 769.43 1.20 4.00 0.39 4.39 32. Republic of Khakassia 8 906 297.63 43 408.69 0.49 0.42 0.32 0.74 66. Agin Buriat AO 17 391 010.92 3 988 694.54 22.94 0.04 0.04 0.00 0. Ust Ordyn Buriat AO 2 886 066.00 88 044.54 3.05 1.88 1.88 0.00 61. Total 456 258 115.42 10 124 745.42 2.22 11.91 0.61 12.51 27. Far Eastern Federal Okrug Republic of Sakha 56 028 624.58 4 713 991.13 8.41 14.02 3.29 10.73 39. (Yakutia) Primorskii Krai 42 170 346.62 1 155 056.55 2.74 1.59 0.59 2.17 21. Khabarovsk Krai 38 940 124.46 1 401 150.66 3.60 20.26 0.06 20.32 1. Amur Oblast 20 781 029.01 490 177.97 2.36 10.43 4.55 5.88 192. Kamchatka Oblast 15 810 492.39 958 415.24 6.06 33.16 5.87 27.29 96. Magadan Oblast 10 294 903.30 1 021 789.99 9.93 8.95 6.98 1.97 70. Sakhalin Oblast 24 269 286.14 393 427.53 1.62 9.47 0.52 9.98 31. Jewish AO 4 646 637.75 182 989.03 3.94 0.54 0.51 1.04 12. Koriak AO 5 864 167.60 703 846.64 12.00 33.42 6.28 39.70 52. Chukotka AO 9 590 995.91 138 037.89 1.44 34.62 2.15 36.77 149. Total 228 396 607.75 3 209 866.04 1.41 14.16 1.51 12.66 107. Total, federal ok 3 800 139 793 189.73 3.68 6.95 1.44 5.52 39. rugs 881. Source: the IETs estimates, based on the data of the Federal Treasury.

Domestic bond loans In 2006, the prospectuses of bond loans issued by 27 subjects of the Federa tion and 16 municipal formations were registered (as compared to 25 regional and 13 municipal loans in 2005). The total volume of bonds to be placed in amounted to 73.3 bn roubles, against 81.2 bn roubles in 2005 (decrease in nominal terms by 7.9 bn roubles), having gone down in one year from 0.37% to 0.28% of GDP (Table 31).

Although the volume of debt securities issued by regions and municipalities decreased by comparison with the previous year, in 2006 the volume of the market for subfederal bonds increased, in real terms, by 8.1% from 161.1 bn roubles in 2005 to 189.8 bn roubles. This was explained by the increasing duration of debt securities: the issue volume, as before, remained higher than that of the bonds re deemable during the year.

Table Volume of issue of subfederal and municipal securities (in % of GDP) Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Issue 0.63 0.77 0.47 0.31 0.19 0.17 0.27 0.46 0.47 0.37 0. Redemption 0.47 0.56 0.48 0.36 0.46 0.23 0.10 0.15 0.19 0.28 0. Net financing 0.16 0.22 0.01 0.05 0.27 0.07 0.16 0.31 0.29 0.09 0. Source: the IETs estimates, based on the data of the RF Ministry of Finance and the Federal Treas ury.

The following entities registered their issue prospectuses at the RF Ministry of Finance in 2006: the Republic of Chuvashia, the Republic of Komi, the Republic of Sakha (Yakutia), the Republic of Bashkortostan, the Republic of Karelia, the Re RUSSIAN ECONOMY IN trends and outlooks public of Marii El, Krasnoyarsk Krai, Volgograd Oblast, Tomsk Oblast, Irkutsk Oblast, Moscow Oblast, Yaroslavl Oblast, Lipetsk Oblast, Nizhnii Novgorod Oblast, Voronezh Oblast, Belgorod Oblast, Tver Oblast, Samara Oblast, Kirov Oblast, Kaluga Oblast, Tambov Oblast, Irkutsk Oblast, Kurgan Oblast, Penza Oblast and Tula Oblast, the cities of Moscow, St. Petersburg, Ekaterinburg, Novosibirsk, Vol gograd, Kazan, omsk, Astrakhan, Blagoveshchensk, Briansk, Voronezh, Lipetsk, Magadan, Yaroslavl and Orekhovo Zuevo, as well as Klin raion, Odintsovo raion, and Noginsk raion of Moscow Oblast.

The biggest issuers of debt securities were as follows: Moscow Oblast, whose aggregate issue amounted to 18.7 bn roubles, or to 25.6% of the aggregate vol ume of territorial issues;

Moscow city 17.4 bn roubles, or 23.8%;

Samara Oblast 4.5 bn roubles, or 6.1%;

Irkutsk Oblast 4.2 bn roubles, or 5.7%, and St. Peters burg 4.1 bn roubles, or 5.5%. Thus, the five biggest issuers produced 61.2% of the total volume of placed regional and municipal bonds.

Besides, big issues were placed by the following entities: the Republic of Sakha (Yakutia) 2.5 bn roubles, Yaroslavl Oblast 2.4 bn roubles, the Republic of Tatarstan 2.3 bn roubles, Nizhnii Novgorod Oblast 2.0 bn roubles, and the Re public of Bashkortostan 1.5 bn roubles (Table 32).

Table Placement of subfederal and municipal securities in Issue volume, Issuers share in total Ratio of issue vol Federations subject thousand rou issue volume, in ume to domestic bles % borrowings, in % 1 2 3 Central Federal Okrug Belgorod Oblast 1 020 000.0 1.4 90. Briansk Oblast 300 000.0 0.4 12. Voronezh Oblast 500 000.0 0.7 21. Kaluga Oblast 1 300 000.0 1.8 53. Lipetsk Oblast 1 800 000.0 2.5 100. Moscow Oblast 18 740 516.5 25.6 38. Tambov Oblast 100 000.0 0.1 19. Tula Oblast 1 500 000.0 2.0 18. Yaroslavl Oblast 2 411 027.5 3.3 55. Moscow 17 433 218.9 23.8 97. North Western Federal Okrug The Republic of Karelia 500 000.0 0.7 24. St. Petersburg 4 058 466.3 5.5 100. Southern Federal Okrug Astrakhan Oblast 500 000.0 0.7 6. Volgograd Oblast 1 236 454.8 1.7 29. Volga Federal Okrug Republic of Bashkortostan 1 519 600.0 2.1 100. Republic of Marii El 499 136.2 0.7 66. Republic of Tatarstan 2 300 000.0 3.1 29. Section Monetary and budgetary spheres 1 2 3 Republic of Chuvashia 1 000 000.0 1.4 83. Nizhnii Novgorod Oblast 2 000 000.0 2.7 44. Kirov Oblast 600 000.0 0.8 32. Samara Oblast 4 500 000.0 6.1 79. Penza Oblast 800 000.0 1.1 38. Ural Federal Okrug Kurgan Oblast 500 000.0 0.7 68. Sverdlovsk Oblast 172 800.4 0.2 43. Khanty Mansi AO 507 000.0 0.7 64. Siberian Federal Okrug Irkutsk Oblast 4 150 230.0 5.7 48. Novosibirsk Oblast 300 000.0 0.4 2. Tomsk Oblast 68 962.1 0.1 1. Far Eastern Federal Okrug Republic of Sakha (Yakutia) 2 500 000.0 3.4 31. Amur Oblast 75 500.0 0.1 3. Magadan Oblast 450 000.0 0.6 48. Source: the IETs estimates, based on the data of the Federal Treasury.

So far, a high level of securitization has been observed predominantly in re spect of biggest issuers: Moscow 99.2% and St. Petersburg 100%. Borrowings exclusively in the form of issue of securities were made by Lipetsk Oblast. The level of securitization of borrowings in Belgorod Oblast amounted to 92.4%, in the re public of Komi to 87.7%.

The aggregate volume of net borrowings on the market of subfederal and mu nicipal securities, earmarked to cover the deficit budget, and the refinancing of debt against bank credits amounted in 2006 to 36.5 bn roubles, having increased on 2005 (20.9 bn roubles) by more than 1.5 times (Table 33).

Table Volume of net borrowings on the market of domestic subfederal and municipal securities, thousand roubles Consolidated regional budget Regional budgets Municipal budgets 1 2 3 Net borrowings 36 489 742 35 161 627 1 328 Attraction of resources 73 288 653 66 524 832 6 763 Redemption of debt proper 36 798 911 31 363 205 5 435 Net borrowings 20 887 596 16 939 894 3 947 Attraction of resources 81 220 540 75 016 756 6 203 Redemption of debt proper 60 332 944 58 076 863 2 256 Net borrowings 47 880 300 44 470 128 3 410 Attraction of resources 79 436 708 74 995 965 4 440 Redemption of debt proper 31 556 408 30 525 837 1 030 Net borrowings 41 908 199 40 043 511 1 864 Attraction of resources 61 712 635 59 012 901 2 699 Redemption of debt proper 19 804 436 18 969 390 835 Net borrowings 17 696 530 17 153 760 542 RUSSIAN ECONOMY IN trends and outlooks 1 2 3 Attraction of resources 29 141 777 28 169 158 972 Redemption of debt proper 11 445 247 11 015 398 429 Net borrowings 6 601 447 6 667 592 66 Attraction of resources 15 123 785 14 226 931 896 Redemption of debt proper 8 522 338 7 559 339 962 Net borrowings 1 877 328 2 286 175 408 Attraction of resources 13 042 220 10 090 208 2 952 Redemption of debt proper 14 919 548 12 376 383 2 543 Source: the RF Ministry of Finance and the Federal Treasury.

The majority of the regions regularly issuing debt securities were continuing this activity in 2006. Since 1999, bonds have been issued every year by Moscow, St. Petersburg, the Republic of Chuvashia, and Volgograd Oblast. Since 2000 by Tomsk Oblast, the Republic of Komi, and Ekaterinburg. Since 2001 by Irkutsk Oblast (Table 34).

Table Registration of prospectuses for the issue of subfederal and municipal se curities in 1999 Issuer 1999 2000 2001 2002 2003 2004 2005 1 2 3 4 5 6 7 8 Moscow * * * * * * * * St. Petersburg * * * * * * * * Republic of Chuvashia * * * * * * * * Volgograd Oblast * * * * * * * * Tomsk Oblast * * * * * * * Republic of Komi * * * * * * * Irkutsk Oblast * * * * * * Moscow Oblast * * * * * Republic of Sakha (Yakutia) * * * * * Yaroslavl Oblast * * * * Krasnoyarsk Krai * * * * Republic of Bashkortostan * * * * * Republic of Karelia * * * Lipetsk Oblast * * * Nizhnii Novgorod Oblast * * * Voronezh Oblast * * * Belgorod Oblast * * * * Tver Oblast * * * * Samara Oblast * * * Kirov Oblast * * Republic of Marii El * * * * Kaluga Oblast * * Tambov Oblast * * Irkutsk Oblast * Kurgan Oblast * Penza Oblast * Tula Oblast * Khabarovsk Krai * * * * Novosibirsk Oblast * * * * Kostroma Oblast * * * Republic of Kabardino * * Balkaria Republic of Udmurtia * Leningrad Oblast * * * * Yamal - Nenets AO * * Krasnodar Krai * Briansk Oblast * Khanty-Mansi AO * * Murmansk Oblast * * Republic of Mordovia * Section Monetary and budgetary spheres 1 2 3 4 5 6 7 8 Sakhalin Oblast * Kursk Oblast * Stavropol Krai * Primorskii Krai * Municipalities Ekaterinburg * * * * * * * Novosibirsk * * * * Volgograd * * * * * * * Kazan * * Klin raion, Moscow Oblast * * Odintsovo raion, Moscow * * Oblast omsk * * * Noginsk raion, Moscow * * Oblast Astrakhan * Blagoveshchensk * Briansk * Voronezh * Lipetsk * Magadan * Orekhovo Zuevo, * Moscow Oblast omsk * Yaroslavl * Yuzhno Sakhalinsk * * * Krasnoyarsk * * * Novocheboksarsk * * * * Cheboksary * * Angarsk * Vurnarsk raion, Republic * of Chuvashia Shumerlia, Republic * of Chuvashia Ufa * * * Barnaul * Perm * Nizhnii Novgorod * Kostroma * * Arkhangelsk * Dzerzhinskii * Source: the RF Ministry of Finance.

The credit potential of territorial authorities Credit rating The substantial fall in the ratio of accumulated sovereign debt to GDP (asso ciated with high rate of economic growth in Russia, early redemption of foreign debts by the federal government, and the stregthnening, in real terms, of the rou bles exchange rate), as well as the growing volume of the Stabilization Fund and the gold and foreign currency reserves in recent years, have all accounted for Rus sias growing credit rating among other countries. At the same time, the credit rat ing of territorial authorities has also been growing. In 2006, Moscows international credit rating went up, alongside the sovereign rating of the Russian Federation, to the level +, as estimated by Standard&Poor's and Fitch, and since November of last year has stayed at the level Baa2, as estimated by Moodys.

RUSSIAN ECONOMY IN trends and outlooks Besides, Moodys estimated as being at the level of sovereign credit rating the credit rating of the city of St. Petersburg. Standard&Poor's and Fitch estimated the rating of St. Petersburg as being two grades below the sovereign level, or , which, however, also placed it in the category of investment level. The other Russian regions and municipal formations did not manage to meet the in vestment level credit rating of either of the rating agencies (Table 35).

Table Standard&Poors international credit rating as of early Issuer In foreign currency / Forecast In national currency / Forecast Sovereign Ratings Russian Federation BBB+/Stable BBB+/Stable Ratings of regional and local authorities Balashikha raion B/Stable B/Stable Bashkortostan BB/Stable BB/Stable Bratsk B/Stable / / Volgograd Oblast B+/Stable B+/Stable Vologda Oblast B+/Stable / / Irkutsk Oblast B+/Stable / / Klin raion B /Positive B /Positive Krasnodar Krai BB /Stable BB /Stable Leningrad Oblast B+/Positive / / Moscow BBB+/Stable / / Moscow Oblast BB/Positive BB/Positive Nizhnii Novgorod BB /Stable BB /Stable Novosibirsk B/Positive / / Omsk B/Stable / / Samara Oblast BB /Positive / / St. Petersburg BBB /Stable BBB /Stable Sverdlovsk Oblast BB/Stable BB/Stable Stavropol Krai B/Positive B/Positive Surgut BB /Stable / / Tatarstan BB /Stable BB /Stable Ufa B+/Stable B+/Stable Khanty Mansi AO autonomous BB+/Positive / / Okrug Yamal Nenets Autonomous Okrug BB+/Stable/ / / Source: Standard&Poors.

The regulation of state debt in regional budgets Against the backdrop of an improving budgeting situation in the majority of subjects of the Russian Federation, the process of stale debt regulation became more intensive. According to the data published by the RF Ministry of Finance, the volume of stale (non regulated) debt against the liabilities of regions as of October 2006 had gone down, by comparison with October 2005, more than twice by 7. bn roubles in nominal terms, or from 14.2 to 7.0 bn roubles. By comparison with Section Monetary and budgetary spheres October 2004 (29.0 bn roubles), stale debt decreased by more than four times, amounting to only 0.22% of the budget revenue of the Federations subjects, or less than 0.03% of GDP.

The most serious situation in respect of non regulated debt against debt li abilities was observed in the following regions: in Tumen Oblast 2.6 bn roubles, or 1.8% of budget revenue, in Samara Oblast 1.3 bn roubles, or 2.5% of budget revenue, in Irkutsk Oblast 1.1 bn roubles, or 2.9% of budget revenue.

Besides, the arrears of receivables in regional budgets continued to decrease at a high rate, having been reduced in 2006 by 23.1 bn roubles, and amounted, as of the years end, to 57.9 bn roubles. One in one tenth of all the regions the volume of debt increased by the aggregate value of 2.2 bn roubles.

Table Stale (non regulated) debt against liabilities of subjects of the Federation Ratio of stale (non Volume of stale (non regulated) debt to regulated debt)* budget revenue, %** Central Federal Okrug Belgorod Oblast 137 867 0. Briansk Oblast 39 Kostroma Oblast 105 322 1. Kursk Oblast 77 982 0. Moscow Oblast 9 280 0. Tver Oblast 151.4 0. Yaroslavl Oblast 709 612 3. North Western Federal Okrug Kaliningrad Oblast 7 187 0. Novgorod Oblast 33 549 0. Pskov Oblast 414 Southern Federal Okrug The Republic of Adygeya 35 700 0. Volgograd Oblast 36 154 0. Volga Federal Okrug The Republic of Bashkortostan 31 311 0. The Republic of Chuvashia 14 450 0. Nizhnii Novgorod Oblast 2 190 0. Orenburg Oblast 367 528 1. Samara Oblast 1 341 794 2. Saratov Oblast 1 170 Ural Federal Okrug Kurgan Oblast 84 781 0. Tumen Oblast 2 571 397 1. Siberian Federal Okrug Irkutsk Oblast 1 050 000 2. Novosibirsk Oblast 3 120 0. Far Eastern Federal Okrug Primorskii Krai 377 750 1. * Data as of 1 October 2006.

RUSSIAN ECONOMY IN trends and outlooks ** The relation of stale (unregulated) debt as of 1 October 2006 to a regional (non consolidated) budgets revenue of the year 2006.

Source: the IETs estimates, based on the data of the RF Ministry of Finance.

2.5.3. Stock Market According to the results of the year, the Russian Stock Market in 2006 grew significantly, like in preceding year. Such a rapid growth of the Russian Stock Mar ket was caused by several key factors, namely fairly favorable conditions in the world markets of oil and metals, which allowed the revenues of the budget system of the Russian Federation to significantly exceed the estimates, the same is true with regard to the Stabilization Fund of the Russian Federation. Moreover, in sum mer of 2006 the RF has completely recovered its debt to the Paris Club of Credi tors. All those factors contributed to upgrading of the sovereign rating of Russia with the leading rating agencies;

thus, Standard & Poors and Fitch have upgraded its rating by one point to the level of + within the year. The macroeconomic situation was also favorable, combating with the inflation was successful and con sumer prices did not go beyond the forecasted range. In July 2006, the Russian government has taken actions on further liberalization of foreign currency legisla tion, what has also contributed to the market dynamics, since the last barriers for capital movement were removed.

Internal corporate news played a significant role as well. According to the out comes of the first two three quarters of 2006, financial performance results of most companies involved in the raw materials, telecommunication and some other sectors were considerably beyond the indicators of 2005, which made such com panies more attractive in terms of investment. In addition, developments in electric power and telecommunication sectors (like Svyazinvest privatization) contributed to the upward movement of that sector securities. Liberalization of Gazprom and IPO Rosneft shares, actively traded for population, became a significant factor for the market.

In the past 2006, the Russian RTS Stock Market grew by 731.58 points from 1190.34 to 1921.92 points, which accounts for 61.46 per cent of the index value at closing on January 10, 2006 (against 85.26 per cent in 2005). Thus, in 2006, the stock market again dem onstrated a fairly impressive growth as opposed to the preceding year. The mini mum growth of RTS index in 2006 1190.34 was recorded in the first trading session of the last year, while the historical maximum 1921.92 points was at tained on December 29. Regarding investment activity in 2006, it grew as opposed to the previous year of 2005. In particular, the trading turnover in the classic stock market in the RTS amounted in 2006 to nearly USD 16.5 bln with an average daily turnover of USD 65 mln, which was far beyond the corresponding figure of (nearly USD 7.65 bln with an average daily turnover at the level of USD 30.86 mln).

Hence, the trading volume has been nearly doubled in 2006 as opposed to the cor responding indicator of 2005.

Several distinctive periods can be highlighted in the market movement. In the period between January February the market grew from 1190.34 1516. Section Monetary and budgetary spheres points under the RTS index, which was followed by a short term correction in the mid March, when the RTS index rolled back to reach 135126 points. As illustrated in Fig. 15, despite the short period of correction, the movement of the RTS index was accompanied by rather high trading volume during that period. The next period was accompanied by a steady growth of RTX index growth, which reached its historical peak on May 6 (1765.35 points). Herewith, before early May, the market was grow ing at the background of higher trading volumes than in the second half year, when the market was recovering from deep correction. Thus, in the period between January May the average monthly turnover in the classic stock market in the RTS amounted to nearly USD 1469.5 bln, while throughout the rest of the year it re mained at the level of USD 875 bln. That period was followed by a deep correction, continued till mid June and accompanied by downgrading of RTS index to the minimum level in the year (1234.82 points).

Source : the RTS Stock Exchange.

Fig. 15. The RTS Stock Exchange and Trading Volume in Then, the rest of the year of 2006 can be split in two sub periods. The first one includes the market recovery up to the level of 1650 points of RTS index, followed by a decrease and then by further growth till the end of the year, when RTS index has again reached its historical peak of the level of May 2006 (1853.24 points).

Making an analysis of monthly dynamics of the Russian stock market, one should note that despite long vacations in January, the investors activity in the stock market was rather high, which allowed the basic stock indicators to reach his torical peak values. Sberbank of Russia, LUKOIL, and RAO UES of Russia with their RUSSIAN ECONOMY IN trends and outlooks prominent stock indices were in high demand. An extremely important event for the Russian stock market in terms of its liquidity, attractiveness to investors and further growth prospects became Gazprom open trades of its shares in MISEX, which be came the leaders in trade volume since the first days of trades without any restric tions. External macroeconomic factors were also favorable: US index ratings, world oil prices and ADR prices for Russian bonds were growing by steady high rates.

In February the impact of those factors, accompanied by increased liquidity in the bank sector, contributed to high rates of Russian securities prices growth. A significant effect on the market dynamics in general was provided by the RAO UES of Russian shares, the upward movement of which took place due to positive news on reforms in energy sector. Thus, in his comments on the reform, the President of Russia has supported the idea to attract investments in the sector, both, domestic and external ones. Rostelecom shares have also demonstrated an expressed growth upon M. Fradkovs signature of Regulations on utilization of the RF consoli dated telecommunication network resources to support the functioning of special nets as a necessary provision for privatization of Svyazinvest. Among external con ditions, further growth of oil prices should be highlighted as a primary factor.

The first correction in the stock market happened in early March. Reduction of oil prices in the international market, strengthened expectations of interest rates in USA, as well as a number of technical factors (relative overestimation of some Rus sian companies) provoked a decline in the domestic stock market. However, the period of decline did not last long and from the middle of the month the quotations started to move upwards under the impact of positive news in the RF (LUKOIL statement on acquisition of a part of its own shares, a discussion, held in Moscow by Big Eight country members on the issues of global telecom safety, a notifica tion on a tentative date for Rosneft IPO), as well as external market news (expan sion of basic stock markets).

Steady market growth was continued in April, when the market has reached its historical peak. An outstanding impact on the stock the market was provided by Gazprom, which has made an application to the US Committee on Securities to get a registration in ADR program of the first level, as well as Nordnickel shares, which positive dynamics was supported by analytics recommendations, based on the upward trend of nickel prices in the international market. Moreover, Gazprom got an upgraded rating in MSCI index, which is used by a lot of prominent foreign mar ket participants as a reference point for formation of their portfolios in developing markets. The stock market was also extremely sensitive to external macroeco nomic factors. Thus, in the tensed situation, created by Iran nuclear program, the world oil prices have come up close to the level of USD 70 per barrel, and the Rus sian Urals brand to USD 65 per barrel. In that background, the markets of highly industrialized countries demonstrated variable dynamics, contributing to minimiza tion of unfavorable factors effect in the domestic market.

After May 6, when RTS index has reached its peak of 1765.35 points through out the period under review, the upward trend has been replaced with a decline, followed by a large scale correction. Within nine trading sessions RTS index has got down from the maximum peak level of 1318.5 points, what makes about 33. Section Monetary and budgetary spheres per cent in relative terms. Basically it was caused by the outflow of assets of exter nal investors from all emerging markets, including Russia, due to upgrading of the US interest rate up to 5 per cent per annum and statements on the prospect of tightening of FRS policy. Moreover, the growth of quotations of the majority of Rus sian securities, observed for quite a long period, could not last forever. The decline in the world oil market (black gold price in New York has decreased from USD to USD 70 per barrel) and non ferrous metals can be also considered as the grounds for vast scale sales of shares. By late May prices have won back some of the downfall in the background of improved situation in the world markets and in formation on prospective merging of Severstal and Arcelor companies.

Further market dynamics was characterized by high volatility. While in the first half of June correction was continued and the market moved close to the minimum level during the year, in the second part of June quotations started to move up wards again. The downfall of early June was caused by rather high interest rate risks, coming from USA, due to which the net capital outflow from emerging mar kets within mid May to mid June accounted to USD 13.4 bln, or 5.1 per cent of total amount. Recovery of the market at the end of the month was based on extremely high oil prices, raised to the level of USD 74 per barrel and favorable macroeco nomic indicators of the RF.

In July there were no expressed dynamics in the stock market. Quotations of the most liquid securities were variable, but throughout July some growth was ob served. Lower market volatility was caused by reduced negative expectations of in vestors in regard to further US FRS policy, based on the published report, inform ing on completion of the period of increased interest rates, expected shortly due to some slow down of economic growth in USA in the background of stable prices. In line with that, some strengthening of geopolitical factor was observed in the world stock market dynamics: expanding military conflict in Middle East discouraged the growth of quotations of industrial countries. On the other hand, that factor has boosted up oil prices, bringing them up to the historical peak again, which is tradi tionally favorable to the Russian market. Among the significant internal factors there should be highlighted Fitchs upgrading of the Russias sovereign rating and IPO of Rosneft, which became the largest primary placement among the Russian companies, and the gains accounted to USD 10.4 bln. It should be noted that the company was the first in Russia to give an access to its shares for the population.

In August trading activity in the Russian stock market was restored after the summer stagnation. However, the greatest demand was focused on blue chips of (Gazpom and Sberbank of Russia). In one of scheduled meetings of FRS the inter est rate was maintained at the level of 5.25 per cent per annum, which has posi tively effected both, the US and RF stock markets. Nevertheless, a noticeable downgrading of world oil prices started in August and continued in September (Brent price has declined from USD 75 to USD 60 per barrel, Urals from USD to USD 55 per barrel), which negatively effected quotations of oil companies. In September the market was supported by positive dynamics in US and other stock markets and a number of positive corporate news on electric power industry re RUSSIAN ECONOMY IN trends and outlooks form, upgrading of several Russian companies international ratings, including telecom companies. As a result, in late September the market decline has stopped and gradual growth of prices has begun.

On the one hand, declined oil prices were still providing some pressure on the prices. On the other hand, in the background of a number of positive factors, such as stable interest rate in USA and its expected decrease, upgrading of the world stock indices, the market became more resistant to the oil factor than it was in August September. Among domestic factors, that made an impact on the market, there should be noted IPO of some Russian companies (TMK, OGK 5), where the demand for securities was much higher than the offer, demonstrating a high attrac tiveness of Russian companies to the investors.

In November the growth was continued and its rates have increased. Due to that fact, RTS index has again reached historical maximum of 1853.24 on Decem ber 15 (same level as in May). The grounds for such expressed growth were pre pared by improved situation in the international oil market, where the black gold prices has growth again to the level of USD 63 65 per barrel in view of OPEC deci sion to reduce oil extraction volume and increased demand for fuel in cold season in USA. Securities of telecommunication and electric power companies were in high demand of the investors due to positive results of discussions of energy sector reform in Presidents Administration.

December of preceding year was not an exception;

there was a traditional pre New Year rally in the stock market. Bonds were growing due to improved situation in the oil market, in the international stock markets, as well as positive news background. Herewith, securities of companies that do not belong to primary commodity market were in high demand among investors: Sberbank of Russia, RAO UES of Russia, Rostelecom.

In 2006, like a year before, most liquid Russian shares grew significantly in value (Fig. 16). Last year, for example, returns on investments in OAO Rostelecom were most favorable, with the yield being 223.47 per cent (as opposed to 28.18 per cent in 2005).. Such high growth rates were caused mainly by expectations of in vestors for Svyazinvest prospective privatization. Some lower profitability was demonstrated by shares of OAO Sberbank of Russia, which gained 165.38 per cent (against 156.92 per cent in 2005). Next to OAO Sberbank were shares of GMK Norilsk Nickel, which gained in value 161.7 per cent (versus 12.36 per cent in 2005). Rather high returns on investments were demonstrated by RAO UES of Rus sia, which gained 154.72 per cent (against 53.07 per cent in 2005). As concerns other leading companies, their shares gained less: OAO LUKOIL 47.82 per cent (100.34 per cent in 2005), Surgutneftegaz 40.37 per cent (49.23 per cent in 2005), Tatneft 40.06 per cent (127.87 per cent in 2005), Mosenergo 36.43 per cent (4.76per cent in 2005), Gazprom 36.26 per cent and Rosneft 23.98 per cent. The lowest growth rates among the blue chips were noted on shares of Gazprom Neft (former Sibneft), the value of which has grown in 2006 only by 16. per cent.

Section Monetary and budgetary spheres 225.0% 200.0% 175.0% 150.0% 125.0% 100.0% 75.0% 50.0% 25.0% 0.0% Change in price (%) Data source : the RTS Stock Exchange.

Fig. 16. Blue Chips Price Dynamics in In 2006, among the second echelon companies whose shares gained maximum values, were OAO Chelyabinsk (447.95 per cent), TKZ Krasny Ko telschik (439.1 per cent), Pskovenergo (423.53 per cent) respectively. How ever, trading activity of the above listed companies remained low. For example, transactions were made on the shares of OAO Chelyabinsk, 26 transactions on the shares of TKZ Krasny Kotelschik, and 34 transactions on the shares of Pskovenergo RAO Gazprom was the leader by trading turnover to account for 39.8 per cent of the total trading volume in the RTS in 2006. Apparently, such an upswing can be explained by open trading of Gazprom shares. The leader is followed by RAO UES of Russia, accounting for 16.7 per cent against 25.86 per cent in 2005. The next company is OAO LUKOIL, to account for 13.9 per cent (29.55 per cent in 2005). The shares of Norilsk Nickel and Sberbank were ranked accordingly as number three and four to account for 5.9 per cent (9.7 per cent in 2005) and 4.8 per cent (5.6 per cent in 2005) of the total trading volume in the RTS in 2006. Hence, in 2006, trans actions on the shares of the five abovementioned issuers accounted to nearly 80. per cent of the total trading volume in the RTS, which significantly exceeded the relevant indicator of 2005 (71.28 per cent).

According to the data as of December 29, 2006, the top five list of companies by capitalization was as follows: Gazprom USD 272.25 bln, Rosneft SD 83. bln, LUKOIL USD 74.18 bln (against USD 50,5 bln in 2005), Sberbank of Russia USD 65.6 bln (USD 24.89 bln in 2005), Surgutneftegaz USD 54.7 bln (USD 38. Tatneft GMK LUKoil Rosneft Russia Gazprom Russia NorNikel RAO UES Mosenergo Rostelekom Sberbank of Gazprom Neft Surgutneftegas RUSSIAN ECONOMY IN trends and outlooks bln in 2005).There were no expressed changes in the companies rating in terms of capitalization as compared with 2005. It should be noted that the four most capital ized companies of Russia belonged to the oil and gas sector against three compa nies in the previous year, which is explained by extremely favorable conditions in the primary commodity markets in 2006. Sberbank of Russia had the highest capi talization among the companies that do not belong the primary commodity market, like in the previous year.

Futures Contracts Market Every year FORTS market (Futures and Options on the RTS) is steadily grow ing, and celebrated, and the year of 2006 was not an exception. For example, the turnover of futures and options contracts in the futures market totaled nearly RUR 2 708.5 bln in the previous year, as opposed to RUR 711.54 bln in 2005. In other words, the turnover of the futures contracts (FORTS) market in 2006 has grown nearly three fold as compared with the corresponding figures of the previous year.

Participants of the market entered into nearly 5 million transactions to amount to 89.6 million contracts (nearly 1.96 million transactions and 54.87 million contracts in 2005). The average daily volume of open positions on standard contracts was RUR 64.6 bln, 2.24 million contracts, to grow 2.6 times in rubles and by 37.2 per cent in contracts as compared with 2005. During 2006 the volume of open posi tions reached maximum level to the amount of RUR 147.8 billion (on December 12) and 4.19 million contracts (as of the same date). A share of futures transactions was the largest in the segment of futures contracts in 2006 to account to nearly per cent of the total trading volume or RUR 2 397 bln (RUR 630.53 bln in 2005), while the value of option transactions amounted to only RUR 311.4 billion (as op posed to RUR 81.01 billion in 2005). Hence, a share of options transactions by trading volume remained in the last year at the same level as compared with 2005.

Some dynamics was observed in the ratings of trading volumes of a number of contracts. Thus, upon placement in the market of RTS index futures in 2005, it be came most attractive for investors in 2006. Its share in the total trading volume made 27.7 per cent. It was followed by futures contracts on market value of the shares of Gazprom and RAO UES of Russia, whose shares in the total trading vol ume made 27.74 per cent and 20.79 per cent accordingly (21.62 per cent and 27.37 per cent in 2005). The next in the list is LUKOIL (significantly lagging behind the leaders), with the share in the total trading volume of 7.77 per cent (against 17.59 per cent in 2005). Among the options, those ones for futures of Gazprom shares were in highest demand (3.95 per cent in the total trading volume of the market of futures).

In 2006, some new instruments emerged in the market. On February 14 fu tures contract on Moscow ten year bonds was launched, which is currently the sole long term interest rate derivative. On February 20 futures contract for the RF Euro bonds with maturity term in 2030 was launched. Hence, there emerged a new mar ket instrument for risk hedging and the investors have an opportunity for arbitration between Eurobonds 30 and US Treasuries at minimum expense. Futures contract for Moscow Inter Bank Offered Rate was launched on May 30, which became the Section Monetary and budgetary spheres first market instrument for risk hedging of short term rates. Futures contracts for Urals oil and gold were launched on June 8, opening a new stage in FORTS market development. Further expansion of the number of commodities contracts can con tinued with oil and gold options, as well as futures for oil. Finally, futures contract for common shares of OAO Rosneft and options for futures contract for common shares of OAO GMK Norilsk Nickel were launched on October 16. With appearance of the new instruments, a full set of derivatives was formed for all blue chips of the Russian stock market. Hence, for the time being, FORTS participants can enter into transactions on 16 futures and 7 option contracts.

Corporate Bonds Market In 2006, the market of corporate and regional bonds was stable in general.

However, the corporate bonds market did not demonstrate any expressed dynam ics in 2006 as compared with the stock market. This is evidenced by the movement of corporate bonds indices assessed by Zenit Bank on the basis of market prices of bonds traded in the MICEX41 (Moscow Interbank Currency Exchange). In 2006, the ZETBI Corp index grew by 0.43 points ( 0.39 per cent) from 111.52 to 111. points. However, the ZETBI Corp10 index, which is assessed on the basis of quota tions of most liquid corporate bonds, grew from 118.2 to 119.11 points in 2006.

As compared with the market of government bonds, corporate bonds market quotations demonstrated higher volatility throughout 2006. Three periods can be highlighted within the year, when the dynamics of prices were different. (Fig. 17).

The first one lasted from January to June, when a downward trend was prevailing in the market. The second period from July to September, when the market was growing in general, while the most liquid bonds have stopped at the maximum lev els of 2006. Finally, during the third period the market indicators remained at the level of late October, despite significant downgrading in November and upgrading in December.

Making an analysis of monthly dynamics of quotations, we should mention, that long January vacations have provided a negative impact over investors activity in the market of corporate and regional bonds. Nevertheless, in early January quo tations of the most liquid bonds have somewhat grown. Making an analysis of ex ternal factors, we should note, that the dynamics of US bonds and Russian Euro bonds made for the decline of corporate bonds prices. As opposed to that, domestic economic factors supported the stock market: RUR was strengthening against USD, liquidity was maintained at a reasonable level. The situation in the primary market was rather quiet, whereas the volume of trade was quite low.

In February March relatively positive dynamics was observed in the market.

The impact of primary market factors grew stronger: a considerable volume of pri mary offer made for the outflow of assets from the secondary market. Moreover, foreign currency market, where some decline of RUR versus USD was observed, made an additional pressure on prices. Apparently, the market dynamics was de pendant on expectations for further growth of interest rates in developed markets, whereas other factors did not contribute to the market downfall (Russian Euro RUSSIAN ECONOMY IN trends and outlooks bonds quotations remained stable, and by the end of the month RUR has restored its position against USD). One more reason for the market downgrading was an upgrading of interest rates by industrialized countries (USA, European countries, Japan), which demonstrated a lower attraction to investment value.

101.0% ZETBI-Corp ZETBI-Corp 100.5% 100.0% 99.5% 99.0% 98.5% Source : Zenit Bank.

Fig. 17. Corporate Bonds Price Index Dynamics in ( January 10, 2005 = 100per cent ) Within the next month investment activity in the market of corporate bonds has considerably grown, what however did not bring up a noticeable positive trend;

quotations of the most liquid bonds were variable. The basic external factor that ef fected the situation, was uncertainty in regard to further priorities in the US FRS credit and monetary policy, which provided an immediate impact on activities of in vestors in emerging markets. Another upswing of oil prices in the international mar ket and confrontation between Western countries and Iran also did not add to at traction of investors. An excessive pressure over the prices was made by interest rates growth in the inter banking market. Even an expressed upgrading of RUR against USD could not contribute to the demand for securities.

May was characterized by moderate growth of quotations of the most liquid issues of corporate bonds against the background of relatively high activity in the market. The market was resistant to negative external factors. Apparently, it can be explained by the background of massive release of assets in the stock market and general aggravation of the situation in the international markets, when corporate bonds were regarded by investors as relatively attractive opportunity for invest 10.01. 24.01. 07.02. 21.02. 07.03. 21.03. 04.04. 18.04. 02.05. 16.05. 30.05. 13.06. 27.06. 11.07. 25.07. 08.08. 22.08. 05.09. 19.09. 03.10. 17.10. 31.10. 14.11. 28.11. 12.12. 26.12. Section Monetary and budgetary spheres ments. Moreover, the initial the structure of investments in the market of securities and corporate bonds was variable: investments in securities are made as a rule for a short term for speculative purposes, while investments in corporate bonds are more conservative, and the investors, involved in such operations, are governed by the basic market indicators and are less affected by short term trends. One should not ignore also the factor of liquidity, which is traditionally one of the most effective one for the RF debt market, as well as continued strengthening of national cur rency.

However, May growth did not last long and since June the market started to get down, which has affected a wide range of securities. Investment activity was still high, what confirmed both, technical and fundamental character of the decline.

Uncertainty in the US FRS policy remained one of the basic fundamental factors, effecting financial markets in the majority of countries. Comments of the US finan cial authorities, that inflation is getting beyond a comfortable margin, have con firmed a high probability of further upgrading of interest rates. Hence, in May that factor has mainly effected the bonds market, whereas in June it has naturally made an impact on the debt market. Like some months before, the major factors, sup porting the market, were rather high liquidity level in the banking sector and RUR strengthening against USD.

July was a turning point in the trend of corporate debt market, as well as in other sectors of the Russian financial market. In many ways it happened due to general improvement of the situation in the world debt market in general and in the Russian Eurobond market in particular. High liquidity and lowered inflation in the RF contributed to additional support to quotations. Rather large volume of securities was traded in primary market and restrained quotations in a way. The growth of corporate bond price continued in August due to high liquidity (international stock market quotations made about 23 per cent per annum), upgraded RF rating a month ago, favorable situation in the external debt market and lower inflation ex pectations.

The growth, observed within two months, in August and September, was re placed by variable price dynamics, and as of monthly results, quotations were changed insignificantly. External factors had a negative effect. Thus, a probability of increased interest rate in the EU and stability of that factor in the US were re straining the growth of quotations of the bonds, denominated in foreign currency and in RUR. In line with that, one could note the upsurge of volatility of USD nominal exchange rate as opposed to its relatively stable rate against RUR. In the back ground of expressed decline in the world oil prices, the investors realized, that one could not expect any support from that factor, which has been observed for the greater part of 2006. External factors also restrained the growth: liquidity decline, large volumes of primary placements. Regardless the fact, that by late September the yield of the most liquid issues got down to the minimum level, expressed changes in the structure of basic factors provided a growing pressure on prices.

Information on upgrading of the RF long term credit ratings by S&P credit agencies made a positive impact on the market.

RUSSIAN ECONOMY IN trends and outlooks In late October there started a smooth decline in the market. In general, ex ternal background remained neutral. On the one hand, interest rates in US and Europe remained unchanged, what contributed to stabilization of quotations. On the other hand, a noticeable aggravation in natural resource markets provided an adverse effect on prices of corporate bonds. Reduction of prices (for Brent) be yond USD 60 per barrel fostered downgrading of Russian securities, and then corporate bonds prices. Domestic factors also made a negative effect: the volume of offer in primary market was large, the situation with liquidity was deteriorated at the end of the month (the yields reached 7 10 per cent per annum).

In November the market trends were variable, but as of results of the month, the majority of the issues demonstrated some growth. The basic factors, that hin dered the upward trend, were aggravated situation with liquidity in the bank sector and large volume of primary placements. On the other side, significant RUR strengthening against USD highly contributed to attractiveness of the securities, denominated in RUR. In December the market situation has improved due to posi tive macroeconomic factors, as well as upgraded financial indicators of business companies and ratings of some of them. The most negative factor was massive placements in the primary market, distracting the assets form secondary market.

Total volume of placements of corporate and regional bonds in the primary market was RUR 515.4 bln (investments of banks and companies made RUR 464. bln), as compared with approximately RUR 311 bln in 2005. Hence, one may see a substantial increase in primary offering in the market of corporate and regional debt. In the background of general growth of issuers activity in 2006, auctions were arranged more regularly throughout the year. For example, the maximum vol ume of placements of corporate and regional bonds in primary market was re corded in December (like a year ago) to amount to nearly RUR 85.8 bln (as op posed to nearly RUR bln in December of 2005), while the minimum one amounted to RUR 13.9 bln in May (as opposed to RUR 9.05 bln in May of 2005). Therefore, the maximum and minimum volumes of placements of corporate and regional bonds in primary market were recorded in 2005 in December and May accordingly.

Factors that Have an Effect on the Russian Stock Market Dynamics In 2006, the Russian Stock Market was governed by a series of factors, which con ventionally can be broken down into the groups as follows :

Internal political situation;

Relations with international financial institutions and organizations;

Situation in the international financial markets;

Situation in the world raw material markets (especially oil);

Corporate news.

Each of the above groups of factors had a different effect on developments in different segments of the Russian financial market during the year of 2006. In spite of the fact that most of these factors have already been mentioned in the analysis of different segments of the Russian financial market, it is appropriate to focus on Section Monetary and budgetary spheres them in detail, and the situation in the world market of raw materials was consid ered in Secton.

Internal political situation. Throughout 2006 internal political situation in Russia remained quite favorable for financial markets. First of all, it should be noted that published statistical data indicated the growth of Russian economy. Certain problems were observed in the first half of the year, caused by accelerated infla tion, exceeding estimated parameters. It effected inflation expectations, and as a result, made an impact on the yield of stock market instruments. However, in the second half of the year the inflation was taken under control and some officials of the government and Central Bank expressed a hope to restrain the inflation within the estimated limits.

Another significant factor of financial market dynamics was the growth of the world market oil prices. Like a year ago, that factor promoted not only further up grading of the RF budget indicators, but higher deductions to Stabilization Fund as well, which were partially addressed to final redemption of the Russian debt to Paris Club of Creditors.

Moreover, during the year there was no news on tax claims to large Russian companies, like it happened in 20042005. Any claims of tax authorities to individ ual taxpayers were settled without conflicts. The government maintained its policy of control over some sectors of economy. Thus, at the end of the year audits were performed in TNK BP company, participating in PSA projects. According to official information, the basic reason for close attention to that company was violation of ecological legislation. However, one can presume, that PSA projects are rather at tractive assets, but initial provisions of those agreements, could be unacceptable to the present government of the country.

Finally, one should not ignore a number of decisions, adopted on structural reforms, implemented in the country. Thus, the President has informed on the need to create conditions for involvement of domestic and international investments in the national electric power section. In autumn a successful discussion of the reform implementation took place, which can also be regarded as one of the support fac tors to the domestic market. Moreover, some comments were occasionally made on the need for Svyazinvest privatization, which is expected by the market partici pants for a long while and is considered as a factor of growth of the shares of tele com companies.

Relations with international financial organizations. Relations between Russia and international financial organizations developed successfully enough throughout the entire year, which depended largely upon favorable macroeco nomic situation in the country available over the last two years, and effective man agement of the Russian external debt.

For example, in July Fitch rating agency has upgraded the Russias sovereign credit rating denominated in foreign currency from B to +, Outlook Stable.

The Agency representatives have explained the upgrading by several reasons, one of them is prompt strengthening of Russias macroeconomic and financial posi tions due to high prices in the markets of raw materials, as well as decreased risks RUSSIAN ECONOMY IN trends and outlooks in government debt service. According to the Agency forecast, by the end of the year Russia will be an external net creditor for government debt in the amount of USD 200 bln, what will ensure considerable reserve for cases of negative market dynamics. In September another rating agency, Standard&Poors has upgraded the Russias long term credit rating, denominated in foreign currency, from BBB to BBB+, and that one in national currency from + to . The Outlook Stable. Ac cording to the Agency press release, that decision was based on the enlarged gold and foreign currency reserves of the RF, improved budget indicators of the enlarged government, as well as reasonable approach of the government to the problems of macroeconomic stability.

Another factor, confirming strengthening of the Russian companies positions is inclusion of their shares in the global stock indices. Thus, in 2006 Morgan Stanley Capital International agency has not only included Gazprom securities into the listing of bonds traded under index MSCI Russia, but was also upgrading its rat ing in the index.

Upgrading of Russias sovereign credit rating in 2006 was based to a great extent on successful policy in external debt management. Thus, in June the RF has completed negotiations on early redemption of the debt balance to Paris Club of Creditors in the amount of USD 22 bln. The transaction has been completed in August.

Situation in the international financial markets. The year of 2006 was characterized by a substantial improvement of the situation in the world stock mar kets. (See Table 37).

Table Dynamics of International Stock Indices in Data on 29.12.2006 Value Variance, % RTS (Russia) 1921,92 61,45% Dow Jones Industrial Average (USA) 12463,15 14,90% NASDAQ Composite (USA) 2415,29 7,65% S&P 500 (USA) 1418,30 11,78% FTSE 100 (Great Britain) 6220,80 9,50% DAX 30 (Germany) 6596,92 21,04% CAC 40 (France) 5541,76 16,55% Swiss Market (Switzerland) 8785,70 15,17% Nikkei 225 (Japan) 17225,83 5,28% Bovespa (Brazil) 44474,00 32,73% IPC (Mexico) 26448,32 47,54% IPSA (Chili) 2693,22 38,85% Straits Times (Singapore) 2985,83 26,01% Seoul Composite (South Korea) 1434,46 3,25% ISE National 100 (Turkey) 39117,46 1,69% Morgan Stanley Emerging Markets Free Index 912,66 29,09% Section Monetary and budgetary spheres In particular, the US stock market indices demonstrated a significant growth in 2006. For example, while the Dow Jones has grown by 12.87 points (14.90 per cent), the Nasdaq Composite gained 168,87 points (7.65 per cent) as of the year results. Two periods with different trends can be highlighted in the dynamics of US stock indicators (Fig. 18). Thus, while in the first half of the year there were variable trends in the market, in the second half a steady growth was observed.

Making an analysis of the basic factors of dynamics, we should note, that the major ones were tightening of the US FRS monetary and credit policy, macroeco nomic news, dynamics of the world oil prices, corporate news, as well as geopoliti cal tension in the Middle East.

It should be mentioned, that the significance of the first factor has grown up in 2006. Within the first half of the year FRS has repeatedly raised the interest rate, which effected the quotations of the US securities. The decision on upgrading the interest rate was adopted on the basis of macroeconomic statistics, which re flected a stable economic growth, accompanied by accelerated inflation. An addi tional factor, provoking inflation, was a considerable increase of the world energy sources prices, whereas the US economy is dependant on oil and its products supplies. At the beginning of the year a group of corporations has published nega tive estimates of their productive and financial indicators, what has affected the stock market quotations. Moreover, certain negative impact was provided by Iran nuclear program. Inability of USA and Iran governments to find a compromise in creased the risk of economic sanctions on the part of US and other industrialized countries and even a probability of a military conflict. All those factors also affected the investors behavior.

As opposed to that, starting from July, macroeconomic statistics reflected some decline in economy and hence, reduction of inflation risks. With regard to that information, FRS has decided to sustain the interest rate. In view of that decision, many investors have reviewed their estimates of the interest rate and moreover, expected some decrease in case the trends of the end of the year stay in effect.

As concerns the stock markets of other countries, they have also grown as of 2006 results. Thus, the European stock indices grew some more than the US rates.

German aggregate stock market index DAX 30 gained 21.04 per cent within the year, French 40 16.55 per cent. Upgrading of EU CB interest rate was one more factor, effecting the dynamics of the stock market. The situation in develop ing countries was even better, here the stock markets growth measured more than a dozen of per cent per annum in 2006. As a result, the Morgan Stanleys aggre gate stock market index in developing countries grew by nearly 29.09 per cent.

In general, the markets of industrialized countries had a greater effect on the Russian stock market, when there was no essential domestic news or oil prices were stable. On the contrary, when there were some domestic news on both, busi ness or public sectors, they had a greater effect than external markets fluctua tions. It is the policy of the US Federal Reserve System that was the sole factor considered by investors from any country, which could have a medium term effect RUSSIAN ECONOMY IN trends and outlooks on market liquidity in the markets due to an outflow of major US funds and other in stitutional investors.

220% Dow Jones Industrial Average 200% NASDAQ Composite The RTS Index 180% 160% 140% 120% 100% 80% Fig. 18. Dynamics of US aggregate stock market indices Dow Jones NASDAQ in 2006 (January 10, 2006 =100 %) Corporate News Upgraded credit ratings. Enhancement of some of Russian corporations per formance have been reflected in assigning long term credit ratings or upgrading of existing ratings.

For example, late in March, Standard & Poor's, the international credit rating agency, decided to upgrade its long term credit rating of OAO Rostelecom from B+ to BB, Outlook Stable. Standard & Poors reported that the upgrade reflected strengthened financial positions of the company, based on high performance and low arrears. Standard & Poors has assessed OAO Rostelecom stable performance results, as well as efficient measures taken by its management in order to reduce companys costs and retain leading market positions. Further reduction of debt load, as well as increase of disposable cash flow contributed to high liquidity of the company. Moreover, in May the company has announced that Standard&Poors has upgraded corporate management rating according to the national scale up to the level of RCM 6.2 and as per international scale to RCM 6. Total company rating is formed from the points, gained by separate components under 10 point scale.

Thus, according to the year results, the points, gained on property structure and shareholders authority, have been slightly lower, from 5/5.3 to 5/5.2 (where the first figure reflects the points under international scale, the second one according to the national scale), as well as the points, gained under Authority of financially 10.01. 30.01. 19.02. 11.03. 31.03. 20.04. 10.05. 30.05. 19.06. 09.07. 29.07. 18.08. 07.09. 27.09. 17.10. 06.11. 26.11. 16.12. Section Monetary and budgetary spheres involved entities and cooperation with them from 7+/7.5 to 7/7.3 points. The points, gained for Financial transparency and information disclosure were con firmed at the level of 6+/6.9. However, due to upgrading of Rostelecom rating un der component Members and performance of the Board of Directors, S&P raised the company rating from 5+/5.7 to 5+/5.9. Standard & Poor's agency has positively evaluated the level of information transparency of the company, introduction of a new position of Corporate Secretary of the company, activities of Committees un der the Board of Directors, in particular Audit Committee, implementation of fair bonus system for the company management. S&P has highly estimated commit ment of the company management to upgrade the standards of corporate man agement in compliance with international standards.

In 2006 OAO LUKOIL rating was revised twice. On April 13, the company was assigned by Fitch, the international credit rating agency, the rating of issuer of se curities, denominated in foreign and in national currency of BBB level and F short term rating;

Outlook Stable. At the same time, the Agency has assigned BBB rating to the issue of OAO LUKOIL shares for the amount of USD 350 mln, issued by LUKinter Finance BV. The Agency stated, that Outlook Stable id based on high fi nancial stability of the company in future, ensured by sustained level of oil extrac tion and production, keeping up favorable price policy in the international oil market and gaining positions in the new markets, especially in the North America. On the other hand, adverse tax legislation, high export taxes and transportation costs as well as increased competition in the Russian market of oil products is a threat to the ratings.

On July 11 the rating agency Standard & Poor's has upgraded the long term credit ratings of OAO LUKOIL from "BB" to "BB +". The outlook is Positive. At the same time, the rating according to national scale has been raised from "ruAA" to "ruAA +". Upgrading of the ratings reflects the continued growth of cost efficiency of the company within the first quarter of 2006 (net profit per barrel was USD 9, what is by 29 per cent higher than the relevant indicator of the first quarter of 2005). Standard & Poor's expects that in future the gains of LUKOIL Group and its resistance to oil prices decline will continue to grow due to rapidly increasing gas production.

Credit rating of GMK Norilsk Nickel in 2006 was also upgraded by two leading rating agencies. Thus, on August 8 the international rating agency Standard & Poor's has upgraded the ratings of OAO GMK Norilsk Nickel from "BB+" to "BBB ".

This is the highest rating among private companies in Russia. The Outlook "Stable".

At the same time, the rating according to the Russian national scale was confirmed at the level of "ruAA +". According to common ratings of other agencies (Fitchs, "BBB ", Moody's "Ba1" and Standard & Poor's "BBB ") Norilsk Nickel is keeping the leading position among the highest ranking private Russian companies. Ac cording to the rating agencies, the ratings are based on the unique resource base, sound financial position, successful performance of the company managers, as well as leading positions of GMK Norilsk Nickel in the world market of nickel, palla dium, platinum, copper.

RUSSIAN ECONOMY IN trends and outlooks On October 9, the international rating agency Moody's Investors Service up graded the corporate rating of OAO GMK Norilsk Nickel to Baa2 "from" Ba1 ", i.e.

by two points, bringing it to the investment level. Rating of unsecured bonds was upgraded by 3 points from "Ba2" to "Baa2" according to the national scale;

as per Moody's Interfax from "Aa1.ru". to "Aaa.ru" The Agency stated, that upgraded rating is based on strong basic performance indicators of the company. The Out look is Stable. According to consolidated ratings (Fitch, "VVB ", Moody's, "Vaa2" and Standard & Poor's, "BBB"), Norilsk Nickel holds a leading position with the highest ranking private Russian companies. These ratings reflect the unique re source base and sound financial standing company, as well as leading positions of GMK Norilsk Nickel in the world market for nickel, palladium, platinum, copper.

Results of financial performance. In the period between August December 2006, most companies published their financial performance statements for 2005.

The following companies should be mentioned.

On December 5, 2006, RAO UES of Russia disclosed the results of its per formance in the first half of 2006, prepared in accordance with international ac counting standards (IAS). For example, its earnings from basic activity totaled RUR 453.3 bln in the first half of 2006, what is RUR 62.2 bln higher than in the relevant period of preceding year. Profit from basic activities of RAO UES of Russia for the first half year of 2006 rose by RUR 6.6 bln (14 per cent) as compared with the first half of 2005 and amounted to RUR 53.4 bln. Profit before tax amounted to RUR 47.2 bln, having increased by RUR 8.5 bln. Net profit of RAO UES of Russia for January June 2006 amounted to RUR 27.2 bln. As compared with the first half of 2005, there had been an increase in net income by RUR 5.3 billion (24 per cent), based on the increase in operating income by RUR 6.6 bln and cut down of ex penses by RUR 1.6 bln.

On December 21 OAO Gazprom has disclosed unaudited consolidated interim financial statement for the first half of 2006, developed in accordance with Interna tional Accounting Standard 34 "Interim Financial Reporting" (IAS 34). Thus, within the six months of 2006 net proceeds from natural gas increased by RUR 225. bln, or 46 per cent, as compared to the corresponding period of 2005, and amounted to RUR 721.885 bln, what was mainly based on price growth for sales to Europe and former Soviet Union countries, as well as higher volumes of sales in natural terms. The profit of AOA Gazprom shareholders for the first half year of 2006 amounted to RUR 321.491 bln, what is RUR 168.681 bln, or 110 per cent more than in the same period of 2005. Net debt was decreased by RUR 126. bln, or 16 per cent, from RUR 797.465 bln as of December 31, 2005 to RUR 670.749 bln as of June 30, 2006. The decrease was mainly explained by a net re payment of long term debt due to an increase of monetary assets and raised pro ceeds from operational activities, as well as RUR exchange rate dynamics.

In early October, consolidated financial reporting for the first half of 2006 was disclosed by OAO Gazprom Neft, a daughter company of Gazprom. In accordance with the reporting, prepared in conformity of US GAAP, revenues for the first half of 2006, compared with the first half of 2005, increased by 77 per cent and amounted to USD 10.1 billion. Profit before tax, interest and depreciation (EBITDA) for the Section Monetary and budgetary spheres first half of 2006 to compare with the same period the previous year increased by 35 per cent and amounted to USD 2.6 billion. Net profit of OAO Gazpromneft for the first half of 2006 amounted to USD 1.8 billion, which is 26per cent more than in the same period of preceding year.

On October 18 LUKOIL has also issued consolidated financial statements for the first half of 2006, prepared in accordance with generally accepted accounting principles the United States (US GAAP). According to the information provided, the net profit for the first half of 2006 amounted to USD 4 010 billion, an increase of 54.8 per cent as compared with the same period of preceding year. The EBITDA parameter grew by 50.4 per cent to USD 6 464 million. Sales revenue rose to USD 33,210 billion, or by 38.1 per cent. The increase in net profit was based on favor able price environment, increased production, processing and effective control over expenditures, as well as higher oil refining margins. However, the increase in profit was constrained by RUR strengthening against USD, as well as increased tax burden.

On November 2 Rostelecom has published unaudited results for the first nine months of 2006 in compliance with the Russian accounting legislation (RAS). Ac cording to the reporting, revenues for the first nine months of 2006 increased as compared with the relevant period of the preceding year by 47. per cent and amounted to RUR 43,757.1.1 million. The EBITDA parameter decreased against the same period of 2005 by 21.9 per cent, to RUR 9,069.4 million due to significant increase in costs, caused by changes in mutual settlements with Russian compa nies. Cost efficiency as per EBITDA amounted to 20.7 per cent. Net profit of Ros telecom for the first nine months of 2006 amounted to RUR 5,004.6 million, as compared with RUR 7,843.8 million in the first nine months of the previous year.

Mergers and acquisitions. In 2006, several Russian companies continued to purchase new assets, including foreign ones, as well as establish long tem rela tions allowing them to expand and enhance efficiency of their businesses. In addi tion, some of these companies implemented business reorganization and restruc turing.

For example, January, Norilsk Nickel has informed on creation of a joint ven ture with Rio Tinto, one of the world largest mining and metal companies, which will deal with exploration and development of mineral deposits in Russia. The compa nies signed a agreement on cooperation in the Ministry of Natural Resources of the Russian Federation. Based on the principles of the agreement, a contract will be signed, which will stipulate the provisions of the joint venture. The agreement im plies establishment of a joint venture for exploration and development, 51 per cent of which would be owned by Norilsk Nickel and 49 per cent by Rio Tinto. Initially ex ploration works will be concentrated in the Siberian and Far Eastern Federal Re gions of Russia.

LUKOIL Overseas, the operator of international upstream projects OAO LU KOIL, has signed an agreement on merging with the company Chaparral Re sources, Inc., according to which LUKOIL Overseas acquires all Chaparral Re sources shares, issued in circulation. The agreement was approved by a special RUSSIAN ECONOMY IN trends and outlooks Committee of the Board of Directors of Chaparral Resources. Recommended pur chase price is USD 5.80 per share, which includes a bonus of 12.3 per cent to an average price of the share over the past 30 days. The total cost of the package of shares of Chaparral Resources, not owned by LUKOIL, amounts to USD 88.6 mil lion, what is equal to the value of acquired proven reserves of oil (USD 8.10 per bar rel). Consolidation of Chaparral Resources assets is executed by LUKOIL for com plete control over the company, as well as enhancement of management system.

Also in May LUKOIL, acting through its 100 per cent subsidiaries, and Mara thon Oil Corporation reached an agreement, that LUKOIL will acquire extraction fa cilities of Marathon Oil Corporation in Khanty Mansi Autonomous Region. Those assets include more than 95 per cent of OAO Hantymansiyskneftegazgeologiya, as well as 100 per cent of the shares of two other companies : OAO Paytyh Oil and OAO Nazymgeodobycha". The amount of the transaction is USD 787 million with regard to adjustment for circulating capital and other adjustments. Total oil produc tive capacity as of January 1, 2006 was 257 million tons of brand AVC1 + C2 (about 1.88 billion barrels).

On June 26 OAO Gazprom, represented by ZGG GmbH, signed with OOO LEVIT and SWGI GROWTN FUND (CYPRUS) LIMITED (main shareholders of OAO NOVATEK, a preliminary agreement on the acquisition (for market price) of their shares in the authorized capital of OAO NOVATEK in the amount of less than 20 per cent of outstanding stock of the company.

On November 20, 2006 GMK Norilsk Nickel has informed on the signature of a purchase agreement for nickel business of OM Group Inc. for USD 408 million for monetary assets, excluding financial indebtedness. The acquired Nickel business includes OMG nickel refinery, a unit OMG mining and refining of nickel ore, 20 per cent of the shares of MPI Nickel Pty. Ltd, a company that develops Black Swan nickel mines and Silver Swan, as well as up to 11.1 per cent in the form of ordinary shares and convertible debentures in Talvivaaran Kaivososakeyhti(project on con centrated bioleaching in the Kainuu Region in Finland). The transaction will allow GMK Norilsk Nickel to continue international expansion of its business activities, and to strengthen their position in the international mining and metal market.

Capital investment. In the preceding year the native companies have actively pursued the policy on investing additional volumes of assets, including those in for eign financial markets, ad well as in the world stock markets.

On March 2 OAO Mosenergo has placed the bond loan amounted to RUR bil lion, at the rate of 7.65 per cent from 1 to 12 coupon. The mature term is 10 years.

OAO Mosenergo has placed the bond loan to refinance debt liabilities and optimize financial activity of the company. Placement purpose of the loan is ZAO Stock Ex change MICEX. Agency Standard and Poor's has assigned ruBBB + rating to the loan. Furthermore, on September 19 there was placed a ruble bond loan of OAO Mosenergo, in which the output made RUR 5 billion, at the rate of 7.54 per cent from 1 to 6 coupons with the term of maturity of 5 years. The next day after posting the bond loan, the rating agency Standard & Poor's has increased the international credit rating of Mosenergo from B to B, the national rating was upgraded from ruBBB + to ruA.

Section Monetary and budgetary spheres On April 18, 2006 OAO Gazprom has announced the entry into force of the program of depository receipts (DR) of the Society of the First Level, as well as of the simultaneous amendments to correlation of a number of ordinary shares of OAO Gazprom per one DR, from ten shares for one DR to four shares per DR. Gaz prom DRs, available in circulation so far, were automatically converted at the effec tive rate (on the basis of existing restrictions). Depository receipts, issued under Program ADR of the first level will be freely circulating in the USA stock market, as well as in European stock markets. The maximum amount of ordinary shares, which may be the base asset for all ADRs of OAO Gazprom, will not exceed 35 per cent of the authorized capital of OAO Gazprom.

On 20 October OAO Sberbank of Russia has signed an agreement on a syndi cated loan in the amount of USD 1.5 billion between Sberbank of Russia and for eign banks, including bank founders of ABN AMRO Bank N.V., Barclays Capital, J.P. Morgan plc and Sumitomo Mitsui Banking Corporation Europe Limited. Thirty banks with the widest geographical representation participated in the syndicate.

The average prices for Syndicate has been much higher than in earlier syndicated borrowings of Russian borrowers. Syndicated loans held for a period of 3 years with a single payment at maturity. The borrowing was announced at the level of USD 1 billion. However, the proposals on the part of banks to participate in the loan amounted to about USD 1.7 billion, and in this regard, Sberbank of Russia has de cided to increase the loan amount up to USD 1.5 billion The rate of borrowing was LIBOR+0.3 per cent per annum, while the margin is the lowest for a three year syn dicated loans to Russian borrowers. The loan will be used for general corporate purposes. The transaction is the largest unsecured syndicated loan, ever granted to the financial institutions of Russia and other CIS countries, as well as countries in Eastern Europe, Middle East and Africa. The syndicated loan of Sberbank of Russia in the amount of USD 1.5 billion is the third largest syndicated transaction, organ ized in 2006.

On October 27, the Board of Directors of RAO UES of Russia has approved the issuance of additional shares of OAO Mosenergo for a closed subscription in favor of the Gazprom Group. During the additional emission, OAO Mosenergo in tends to attract at least USD 2.1 billion of investments. Monitoring of the implemen tation of investment projects will be implemented by a simple partnership, formed by RAO UES of Russia, Gazprom and OAO Mosenergo.

On November 2, OAO Gazprom posted ruble bonds, series A7 and A8, ac counted to RUR 5 billion each, with a nominal value of RUR 1000 rubles, with the maturity term of 3 and 5 years respectively. The annual coupon rate bonds series A7 paid every 182 days, as per the auction results on the MICEX, was established in the amount of 6.79 per cent per annum. The investors have made applications amounting to RUR 9.6 billion. The annual coupon rate bonds series A8 paid every 182 days, to the auction on the MICEX, was determined at the rate of 7 per cent per annum. Investors have made applications amounting to RUR 7.4 billion. The loans were arranged by the investment group Renaissance Capital and Rosbank OAO RUSSIAN ECONOMY IN trends and outlooks,with the Horizon investment company as a partner;

the financial advisor was OAO Federal Stock Corporation.

On December 14, 2006 LUKOIL has placed two issues of non documentary interest bonds of OAO LUKOIL payable to the bearer, when they keep Series 03 and 04, for the total amount of RUR 14 billion. The contest coupon rate bonds series totals to the nominal value of RUR 8 billion for a period of 5 years, at the rate of 7, per cent per annum. The annual coupon rate on Series 04 bonds in the amount of billion rubles and treatment for 7 years was 7.40 per cent per annum. Price place ment of bonds Series 03 and Series 04 was set at 100 per cent of nominal value.

Early repayment of bonds and preferred right for the bonds acquisition is not pro vided. 152 applications were filed for acquisition of the bonds, worth over RUR bln, which exceeds the emission nearly 2.5 fold. As a result, LULOIL has become the first Russian private company, which has successfully placed bonds with a con tinuous maturity of 7 years. The issuance was executed by ABN AMRO Bank, Dresdner Bank and IB Renaissance Capital.

On December 20 an extraordinary general meeting of shareholders of OAO Mosenergo has approved an increase in the authorized capital of the Company by issuing additional shares in favor of a strategic investor. Shareholders of Mo senergo have approved the limit of issued ordinary shares in the amount of 500 000 000 and relevant amendments to the Charter of the Company with respect to the number of declared shares and the deployment of issuance of additional shares in favor pf OAO Gazprom and/or other affiliated entities of OAO Gazprom.

The price of shares will be determined as the weighted average value of RTS and MICEX trades within the six months, preceding the date of the meeting of share holders of OAO Mosenergo, but not less than 5 rubles per share. OAO Mosenergo is intended to implement an investment program of the Company amounting at to USD 2,1 billion for the issuance of additional shares.

Dividend Policy. We know that one way of enhancing the attractiveness of the shares is efficient dividend policy.

In May, the Board of Directors of Sibneft decided to advise the annual general shareholders' meeting of the company to pay dividends as per results of 2005 fiscal year in the amount of RUR $ 7.90 per ordinary share. The deadline for payment of dividends, according to the Articles of the company is May 31, On June 24 Rostelecom decided to pay dividends in the amount of RUR 3. per preferred share and RUR 1.56 per ordinary share. Total dividend payment as of results of 2005 amounts to RUR 2,040.8 billion.

Finally, on June 22, 2006 shareholders of OAO Gazprom Neft "at the annual meeting has approved payment of dividends as per results of 2005 in the amount of RUR 7.9 per ordinary share. Thus, payment of dividends will make RUR 37,456 bil lion. Dividends will be paid before May 31, Section Monetary and budgetary spheres 2.5.4. Investments of Pension Savings in the System of Mandatory Pension Insurance The main bulk of the funded component of the mandatory pension system, as before, is accumulated by a government asset manager, whose functions are per formed by the USSR Bank for Foreign Trade (Vneshekonombank). As of the begin ning if 2006, the value of the pension savings invested by the government asset manager amounted to 176.5 bn roubles, while the total volume of pension savings administered by private asset managers (PAM) was 5.6 bn roubles (3%). Another bn roubles (1%) were transferred by citizens to the Non Government Pension Fund (NGPF).

Simultaneously, yet another 91.7 bn roubles was constituted by the insurance contributions to the funded component of labor pension collected by the Pension Fund of the Russian Federation (PFR) but not yet transferred into the trusteeship management of asset managers or the PFR. Out of this sum, more than 80 bn rou bles was invested by the PFR in government securities. During the first half of 2006, another 40.7 bn roubles was received by the PFR as part of the funded component of labor pension. The share of funds invested by the PFR in government securities did not undergo any important changes59.

By late 2006, the value of the pension savings invested by the government as set manager (Vneshekonombank) had exceeded 267 bn roubles, having increased during that year by 90.8 bn roubles (51%). Most of it was represented by the funds transferred during the year from the PFR (83.5 bn roubles). The rate of return on investments declared by Vneshekonombank amounted in 2006 to 6% (against 12% by the results of the year 2005)60.

The reports published in the autumn of 2006 by the Federal Service for Finan cial Markets (FSFM) concerning the investment of pension savings in 2005 made it possible, for the first time, to observe the directions along which pension savings were being invested by private asset managers and the NGPF, and not only by the government asset manager61. The structure of investments of the Vneshekonom bank and the aggregate investment portfolio of all private asset managers62 as of the end of 2004 and 2005, as well as of the end of Q 2006, is shown in Fig. 25.

Federal Law On the budget of the Pension Fund of the Russian Federation for the year 2007, Vestnik [Herald] of the PFR No 3 for 2006.

The data concerning asset managers and the NGPF have not been published yet. In the Federal Law On the budget of the Pension Fund of the Russian Federation for the year 2007, the PFR made a preliminary estimation of the amount of pension savings as of the end of 2006 as being equal to 345.3 bn roubles, which constitutes slightly more than 1% of GDP. As of 1 January 2006, the corre sponding index was 255.9 bn roubles.

For the data for the first three quarters of 2006, see the PFRs website: http://pfrf.ru.

For purposes of analysis, the data published by the Federal Service for Financial Markets in re spect of each of asset managers, in disputable cases were checked with other sources of informa tion, and then aggregated. The source of data for 2006 is the PFRs website: http://pfrf.ru RUSSIAN ECONOMY IN trends and outlooks Fig. 19. The structure of the investment portfolio of the government asset manager (Vneshekonombank), as of end of Fig. 20. The structure of the investment portfolio of the government asset manager (Vneshekonombank), as of end of Section Monetary and budgetary spheres Fig. 21. The structure of the investment portfolio of the government asset manager (Vneshekonombank), as of end of Q III Fig. 22. The structure of the investment portfolio of the government asset manager (Vneshekonombank), as of end of RUSSIAN ECONOMY IN trends and outlooks Fig. 23. The structure of the aggregate investment portfolio of private asset managers as of end of Fig. 24. The structure of the aggregate investment portfolio of private asset managers as of end of Section Monetary and budgetary spheres Source: calculated on the basis of information published by the Federal Service for Financial mar kets, the Pension Fund of the Russian Federation, Vneshekonombank.

Fig. 25. The structure of the aggregate investment portfolio of private asset managers as of end of Q III As was found, the share of government securities of the Russian Federation in the investment portfolios of private asset managers varied between 0 and 96%, as of the end of 2004, and between 0 73% as of the end of 2005 constituting 17% in the aggregate portfolio in 2004, and 15% in 2005. However, there were only two asset managers whose share of RF government securities as of the end of 2005 was more than 50% (Dvortsovaia ploshchiad and KIT), while 29 invest ment portfolios63 contained no such securities. As of the end of Q 2006, the highest share of RF government securities in the portfolios of PAMs decreased to 54%, while 28 investment portfolios contained no such securities, and their aver age share was 12.4%.

Thus, during one year and 9 months the share of federal government bonds decreased from 17% to 12%, which, no doubt, reflected the trend of diminishing rate of return on this instrument. At the same time, such an explanation can hardly be accepted as exhaustive, because the decrease of the rate of return was small, while the dynamics of the rate of return on subfederal and corporate bonds was displaying a similar trend. However, the share of these instruments in the aggre gate investment portfolio of PAMs was growing, thus reflecting the diversification of the investments being made by asset managers, and in the case of corporate bonds also the dynamic development of the market.

At the same time, in contrast to the government asset manager, private asset managers do not invest in RF government securities denominated in foreign cur rencies. As seen in Fig. 1922, Vneshekonombank increased the share of Euro The number of asset managers engaged in the trust management of pension savings is not com patible with the number of investment portfolios listed under their management, because several asset managers have formed more than one investment portfolio.

RUSSIAN ECONOMY IN trends and outlooks bonds in its portfolio to 10% by the end of 2005, and afterwards it was fluctuating within the range of 710 %.

On the whole, fixed income securities (federal, subfederal, municipal, corpo rate bonds) amounted, in the aggregate investment portfolio of private asset man agers, as of the end of 2004, to 54 %, as of the end of 2005 to 64%, and as of the end of Q 2006 62%.

The percentage of shares in the aggregate investment portfolio of PAMs was fluctuating around 20%, while at the same time 11 asset managers had no shares in their investment portfolios as of the end of 2005 (Table 38). In 2004, there were such asset managers, and as of the end of Q 2006 only 5. The actual average percentage of shares in the aggregate investment portfolio of private asset man agers is much lower than the maximum indices permissible for this type of assets in accordance with Decree of the RF Government No. 37964.

Table Private Asset Managers with no Shares in their Investment Portfolios as of the End of 2004 Q Asset manager (investment portfolio) End of 2004 End of 2005. End of Q III 1 VIKA + + 2 Dvortsovaia ploshchiad + + Natsionalnaia upravliaushchiaia kompania [Na 3 + + tional Asset Manager] 4 UNIVER Management + + TRINFIKO (for conservative preservation of 5 + + + capital) 6 PIOGLOBAL Asset Management + 7 PROMYSHLENNYE TRADITSII + 8 REGION Asset Management + 9 RN trust + + 10 Rostov Trust Company + 11 YAMAL + 12 Alfa Capital + + 13 Alians ROSNO (conservative) + 14 INTERFINANS + 15 Metropol + 16 Analytical Center + 17 FINAM MANAGEMENT + 18 NVKUK + Note: + means absence of shares in investment portfolio as of corresponding date.

At the same time, it were shares that generated the highest rate of return dur ing the period under study. In 20052006, the RTS index grew by 3.1 times (in USD denomination) and, no doubt, such a dynamics of the prices of shares was a factor of the high rate of return achieved by PAMs in 20052006. By the results of 2005, the highest rate of return on investments demonstrated by PAMs amounted to 52% (Troika Dialog), in 2006 to 39% (UNIVER Management).

The margin for 2004 was 40%, for 2005 45 %, and for 2006 55 %.

Section Monetary and budgetary spheres In Table 39, the structure of the investment portfolio of asset managers with the highest rate of return by the results of the first three quarters of 2006 is shown.

It appears that judging by that structure, one cannot come to the conclusion that it was the investments in shares, which provided the highest rates of return on in vestment portfolios. Only RTK INVEST had an investment portfolio where shares constituted approximately one half of all assets. Three asset managers with the rate of return of 2629% had a rather similar percentage of shares (2526 %) and a high percentage of subfederal bonds (3136 %). As for the leader of 2006 UNI VER Management its investment portfolio is negligible in absolute terms (its market value was only 2,3 mln roubles as of the end of Q 2006), which, evidently, was the reason for the deformity of its structure (more than a half of assets was accu mulated at credit institutions in the form of residuals on the asset managers ac counts or the monies transferred to the professional participants of the securities market, which has nothing to do with instruments with high rates of return).

Table Structure of the Investment Portfolio of Asset Managers with the Highest Rate of Return, by Results of the First Three Quarters of UNIVER AKKORD As RTK URALSIB ASSET Manage set Manage URALSIB INVEST MANAGEMENT ment ment 1 2 3 4 5 Rate of return, % PER ANNUM 44.4 29.8 29 28.5 25. Market value of portfolio, mln rou 2.3 20.1 34.1 15.9 533. bles.

Share in investment portfolio, % RF government securities 6.4 26.0 4.8 4.8 4. Including in foreign currencies 0.0 0.0 0.0 0.0 0. Government securities of RF subjects 21.1 21.5 36.7 33.6 31. Bonds of municipal formations 8.6 0.0 0.0 8.2 7. Bonds of Russian economic societies 5.2 0.0 14.5 10.4 11. Shares of Russian issuers 2.5 44.3 24.9 25.7 26. Monies on accounts at credit institu 26.7 0.3 0.0 0.0 0. tions Rouble denominated deposits at 0.0 0.0 0.0 0.0 0. credit institutions Receivables 29.5 7.9 19.0 17.4 19. including monies transferred to professional 28.7 7.4 17.9 16.2 17. participants of the securities market receivables against interest income 0.8 0.5 1.2 1.2 1. on securities other receivables 0.0 0.0 0.0 0.0 0. RUSSIAN ECONOMY IN trends and outlooks The data published by the FSFM offer no exhaustive information concerning the amounts of money being placed by asset managers at credit institutions. The corresponding tables, compiled by asset managers, contain no information on bank deposits, which is available only for the system as a whole. Thus, a rather substantial percentage of assets has remained hidden. For some asset managers, this index is higher than 15%, although the total number of asset managers (or in vestment portfolios) decreased in 2005 from 28 to 15.

The statistics published by the PFR makes it possible to obtain a more com plete picture concerning the use of bank deposits by asset managers. As of the end of Q 2006, this instrument was represented in only 10 investment portfolios, while their share in the aggregate investment portfolio of PAMs was less than 6%.

At the same time, the percentage of the monies being transferred by asset manag ers to brokers and/or exchange settlement systems for purposes of purchasing securities is still high. For the aggregate investment portfolio of PAMs this index amounted to 8%, while the total percentage of monies placed within the banking system was thus equal to 16%.

As for the pension savings in the NGPF, the data published by the Federal Service for Financial Markets make it possible to estimate the structure of the in vestment portfolios only at one date as of the end of 2005. The data are arranged by the list of those funds, which participated in the mandatory pension insurance system.

As compared to the aggregate investment portfolio of the private asset man agers administering the monies of the Pension Fund of the Russian Federation, the percentage of shares in the aggregate portfolio of the NGPF earmarked for manda tory pension insurance is lower (10% against 19%). As of the end of 2005, the highest percentage of investments in shares was 31% (by the NGPF Volga Kapi tal), while 10 of 43 NGPFs had no shares in their investment portfolios earmarked for mandatory pension insurance. The percentage of RF government securities in the investment portfolios of the NGPF earmarked for mandatory pension insurance varies between 0% and 99% (the NGPF StalFond), amounting to 21% in the ag gregate portfolio, which is by 6 p. p. higher than the average index of private asset managers as of the same date. On the whole, the instruments with fixed rate of re turn (federal, subfederal, municipal, corporate bonds) constituted 77% in the in vestment portfolio, which was also higher than the same index of private asset managers. The most popular type of assets among both private asset managers and the NGPFs were subfederal bonds: as of the end of 2005, the average per centage of subfederal bonds in the aggregate investment portfolio of private asset managers was 26%, that of NGPF 33 %.

Section Monetary and budgetary spheres Note: The bonds of other Russian issuers include corporate and municipal bonds.

Source: Calculated on the basis of the data published by the Federal Service for Financial Markets.

Fig. 26. The structure of the aggregate investment portfolio of non government pension funds as of end of The sum of assets being administered by private asset managers under agreements with the Pension Fund of the Russian Federation amounted, as of the end of 2005, to 5.6 bn roubles, while the sum of assets of NGPFs earmarked for mandatory pension insurance, as of the same date, to 2 bn roubles. In their ag gregate investment portfolio the percentage of subfederal bonds was 28%. How ever, among the total volume of subfederal bonds being circulated on the market, pension savings constituted only 1.5%65. An even less percentage of pension sav ings (0.4%) was on the corporate bond market. So far, the only segment where the presence of pension savings represents a significant factor has remained the mar ket for rouble denominated federal bonds (OFZ). Even without the investments made by the Pension Fund of the Russian Federation itself66, their share was, as of the end of 2005, equal to 18.1%, where Vneshekonombank accounted for 17.9%.

The share of pension savings invested in the foreign currency denominated bonds of the Russian Federation is much smaller about 2% of the total volume of RF eurobonds in face value.

Since the data concerning the structure of the investments of pension sav ings, formed by NGPFs in 2006 was not yet available by the moment of publication, the role of the institutes participating in the mandatory pension system within the corresponding segments as of later dates can be assessed only by the data on the asset managers investing the PFRs monies. Thus, the percentage of pension sav Estimation based on the date posted at www.rusbonds.ru concerning the volume of subfederal and municipal bonds in circulation, in face value.

If all the contributions to the funded component of labor pension invested by the PFR were placed in OFZ, then it accounted for another 11% of OFZ being circulated on the market.

RUSSIAN ECONOMY IN trends and outlooks ings invested by asset managers in rouble denominated government securities in creased, by the end of Q III 2006, to 22% of the total volume of marketed OFZ is sues. At the same time, the share of pension savings on the corporate bonds mar kets and share markets remains negligible (0.2 and 0.01%, respectively). If one takes it into account that pension savings may be invested only in high level listed securities the situation will change only slightly. The share of pension savings in the total volume of bonds listed as A1 at the Russian exchanges constituted only 2.2%, in the capitalization of shares included in those lists 0.04%.

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