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On January 1 of 2005, there was enacted federal law No. 122 envisaging the supplement of allowances with cash payments. In particular, the law envisages that such privileges as free conveyance by city, suburban, and intercity transport, allowances related to the payment for public utilities and telephone, etc. should be supplemented with cash subsidies. The aggregate amount of annual expenditures of the federal budget envisaged by this law makes about Rub. 171.2 billion. The rest of the financing should be made from the budgets of RF subjects; the RF subjects should have the right to set forth the measures of social support at their discretion. However, after an analysis of the implementation of this law in the first month of the year, the RF Finance Ministry is planning to assign additional Rub. 8.billion from the federal budget as subsidies to the regions to be used for transport privileges of federal allowance recipients.

S. S. Ponomarenko Monetary Policy In 2004, the rates of inflation in the RF exceeded the upper limit of the official forecast (10 per cent) and made 11.7 per cent. In 2004, there was observed a more moderate increase in the monetary base as compared with the figures registered in 2003. However, in the 4th quarter it grew at a faster rate than in the respective quarter of the last year. By the end of 2004, the amount of the national gold and foreign exchange reserves exceeded US $ 125 billion. In 2004, there were made payments relating to the external debt amounting to RUR 574 billion.

In December of 2004, the increase in the consumer price index made 1.1 per cent (1.1 per cent in December of 2003), and 11.7 per cent since the beginning of the year (12 per cent in January through December of the preceding year, see Fig. 1). The most significant rise was observed in the group of food products (1.7 per cent as compared with 1.5 per cent registered in the respective month of 2003).

The increment as compared with the figures observed in December of 2003 made 12.3 per cent, what is significantly above the increase observed in the respective period of the preceding year (10.2 per cent). In the first seven months of this year, there were registered more moderate rates of growth in consumer prices of food products as compared with the figures observed in the respective period of the last years. However, after a relatively insignificant seasonal decline in prices of fruits and vegetables observed in August and September, the CPI characterizing this group of products began to exceed the value of this indicator registered over the preceding years. As concerns the period from January till December of 2004, over this time the pasta products, meat, poultry, fish, sea products, and sugar have increased in prices more significantly than in the respective period of the preceding year. Besides, in 2004 the prices of fruits and vegetables grew by 3.3 per cent, while in 2003 the respective prices went down by 4.2 per cent.

In 2004, the most significant rise in prices was observed in the group of paid consumer services (by 17.7 per cent as compared with 22.3 per cent registered in the preceding year). The increase in December made 1 per cent (as compared with 0.9 per cent observed in the respective month of 2003). It should be noted that in January through October of 2004 the increase in the consumer prices of paid services to the population was below the indicators registered in the last two years; however, in December the prices of paid services grew more significantly than in 2003, what is an alarming trend.

Over the last month the services of passenger transport demonstrated the most considerable growth (+ 3.8 per cent), while the most significant rise of prices in 2004 was observed with respect to HPU services (+ 23.5 per cent).

This year, the prices of nonfood goods also grew at lower rates as compared with the indicators registered last year. Thus, in December the increase made 0.4 per cent (as compared with 0.6 per cent registered in December of 2003), while in the 12 months of this year the prices of nonfood products grew by 7.4 per cent (by 9.2 per cent in the respective period of the preceding year). In December, the prices of gasoline at last decreased by 1.7 per cent. On the whole, in 2004 the respective prices grew by 31.3 per cent what was practically twice above the indicators registered in 2003 (+ 16.8 per cent).

In November, the growth in the Base Consumer Price Index (BCPI) 4 made 1 per cent. Therefore, since the beginning of the year the increase in the BCPI made 10.5 per cent (the total increase in the BCPI in 2003 made 11.2 per cent).

According to preliminary estimates, in January of 2005 inflation in the RF will make about 2.5 per cent.

The Base Consumer Price Index (BCPI) is an indicator reflecting the inflation rate on the consumer market. It leaves out of account the seasonal (prices of fruits and vegetables) and administrative (tariffs on regulated types of services etc.) factors, calculated by the Statistics Service of the RF.

The Growth Rate of the CPI in 2002 - 2004 (% per month).

3,5% 3,0% 2,5% 2,0% 1,5% 1,0% 0,5% 0,0% -0,5% Figure In December of this year, the monetary base of the Russian Federation (in the broad definition5) increased by RUR 303 billion and made RUR 2.39 trillion. As on December 1, 2004, the amount of the monetary base of the Russian Federation (in the broad definition) was at RUR 2.08 trillion. Therefore, in December the growth in the monetary base made 14.5 per cent. Therefore, in 2004 the monetary base increased by 24.7 per cent. In the respective period of the preceding year the growth made 55.per cent. Below, the dynamics of the monetary base will be analyzed across its components.

The amount of cash in circulation (as adjusted for cash balances of crediting organizations) made RUR 1.67 trillion as on January 1 (+ 17.8 per cent as compared with the level registered on December 1 of this year). On the same date, the amount of accounts of crediting organizations with the Central Bank of Russia made RUR 486.4 billion (+ 74.4 per cent), the amount of mandatory reserves was at RUR 121.7 billion (+ 2.3 per cent), the amount of banks deposits in the Bank of Russia made RUR 91.4 billion (- 52.6 per cent), the amount of the Bank of Russia bonds held by crediting organizations made RUR 9.7 billion (- 63.8 per cent), the amount of the Central Banks liabilities related to the reverse repurchase of securities was at RUR 2.5 billion (-93.8 per cent), and the funds transferred to the Bank of Russia as the reserves related to foreign exchange operations made RUR 4.7 billion (- 37.per cent).

In December of 2004, there was registered a simultaneous growth in the amount of cash in circulation (+ 17.8 per cent) and mandatory reserves (+ 2.3 per cent), what resulted in an increase in the narrowly defined monetary based (cash plus mandatory reserves) by 16.6 per cent (see Fig. 2). This growth was determined by a significant amounts of purchase of foreign exchange on the part of the Bank of Russia: in December the gold and foreign exchange reserves of the Bank of Russia grew by 6.1 per cent and made US $ 124.5 billion. In the first weeks of January, the amount of gold and foreign exchange reserves declined to the level of US $ 120.1 billion (- 3.5 per cent).

On the whole, in 2004 there was observed a more moderate growth in the monetary base than in 2003. However, in the 4th quarter the monetary base increased at a more rapid rate than a year ago. It should be noted that until September the gold and foreign exchange reserves grew at a slower rate than in 2003. On the other hand, after the summer reduction of the requirements concerning the mandatory reserves, the amount of reserves of commercial banks has significantly declined; however, the impact The RF Monetary Base in broad definition includes cash in circulation, the Ruble denominated funds in mandatory reserves relating to the borrowings of credit organizations, and funds in credit organizations correspondent accounts and commercial banks' deposits with the Bank of Russia.

Jul Jul Jul Jan Jan Jan Sep Sep Sep Mar Nov Mar Nov Mar Nov May May May of this factor ceased in the autumn. It should be also noted that in 2004 there was continued the policy of active sterilization of the forex denominated export proceeds via the Stabilization Fund, the amount of which made more than RUR 500 billion by the end of 2004.

Changes in the Monetary Base and in the Gold and Foreign Currency Reserves in 2003 - 2004.

1400 1370 Monetary Base (billion rubles) Gold and Foreign Currency Reserves (billion dollars) Figure According to the preliminary estimates presented by the RF Finance Ministry, in January through November of 2004 the payments pertaining to the RF foreign debt amounted to RUR 574 billion. The payments associated with the servicing of the foreign debt made RUR 164.7 billion, while the repayment of the principal debt amounted to RUR 409.3 billion. At the same time, new borrowings were registered at RUR 41.3 billion.

According to information provided by the RF Finance Ministry, in 2005 the Russian Federation may make anticipatory repayment of US $ 10 billion of the external debt in the case this step is approved by the creditor countries and the Government.

P. Trounin Financial Markets In January, the situation on the Russian financial market remained relatively calm. Forex denominated bonds demonstrated a slight growth, while the market of Ruble denominated debt was in the phase of decline in quotations, what was primarily determined by the US $ appreciation with respect to the Ruble on the forex market and growing inflationary expectations in the Russian economy. On the stock market, the activity of investors enhanced gradually and reached average indicators only by the end of the month. At this background, over the most part of the month the Russian stock indices demonstrated mixed trends due to speculative operations carried out by the market participants and grew only in the last week of January at the background of an inflow of large foreign investments to the Russian stock market.

The Market for Government Securities By the end of January, the majority of issues of Russian Eurobonds were characterized by a growth in value. However, over the month the dynamics of prices were mixed. Thus, in the beginning of the month the Russian segment of the Eurobond market demonstrated a decline in quotations at the backIn the course of preparation of the survey, there were used analytical materials and surveys published by the Zenith Bank, investment company ATON, MICEX, and the materials presented at web sites of Russian issuing companies.

billion rubles billion dollars 2-8.03.1-7.12.4-10.05.6-12.07.8-14.09.20-26.01.10-16.02.23-29.03.13-19.04.25-31.05.15-21.06.17-23.08.20-26.10.10-16.11.22-28.12.12- of a decline in base assets. However, this trend was replaced by an adjustment, which occurred at the end of the first trade week of the month. Later, the downward trends again prevailed on the market. The factor behind these developments could be the news that the agreement between Russia and the Paris Club on the anticipatory repayment of the debt amounting to US $ 10 billion had not been reached yet. However, the further growth of base assets (US government bonds), as well as the statements made by the FRS representatives to the effect that the authority control inflation, facilitated the recovery of quotations of Russian Eurobonds. The market was also supported by the statement issued by Lehman Brothers that the credit rankings presented by the Fitch ranking agency would be taken into account on the equal basis with the rankings published by Moody`s and Standard & Poor`s as concerns the inclusion of bonds in the stock indices. Therefore, Russian securities should be included in the index published by Lehman Brothers (Lehman US Credit/Aggregate), which is an indicator for US funds with aggregate assets amounting to US $ 1.5 to 2 billion. The end of the month was marked by a certain decline in activity after a phase of a rather rapid growth, at that time the quotations of securities stabilized at the levels they reached during the month.

As on January 28, the yield to maturity of Russian Eurobonds RUS-30 was 6.50 per cent p.a.; RUS18: 6.45 per cent p.a. Besides, on the same date the yield to maturity of the Russian Eurobonds was:

Minfin bonds, 7th tranche: 5.79 per cent; Minfin bonds, 6th tranche: 4.41 per cent; Minfin bonds, 5th tranche: 5.21 per cent; RUS-07: 4.95 per cent.

Minfin bonds' yields to maturity in November 2004 - January 7.0% Tranche 5 Tranche 6 Tranche 6.0% 5.0% 4.0% 3.0% Figure to maturity of the Russian eurobonds with maturity in 2030, 2018 and 2007 in November 2004 - January 7.5% 6.5% 5.5% 4.5% USD-2030 USD-2007 USD-Figure In January, the dynamics of the Ruble denominated government debt was primarily affected by the situation observed on the forex market. On the whole, the quotations of securities demonstrated a decline. An additional factor behind the rise in yields was, as it seems, growing inflationary expectations in the Russian economy and the probability of the rise of the base interest rate in the US.

Over the period from January 11 to 27, the aggregate turnover of the secondary GKO OFZ market made about RUR 32.2 billion, while the average daily turnover was at RUR 2.48 billion (RUR 2.54 in December). Therefore, the activity of the market was at the level observed in the preceding month. In this period, there took place only one auction for the placement of OFZ PD 25057 due for repayment in 2010. The amount of the issue made RUR 8 billion, while the actual amount of placement made RUR 2.17 billion. The weighted average yield of the placement made 7.84 per cent p. a.

As on January 27, the amount of the GKO OFZ market made RUR 570.73 billion at par and RUR 556.06 billion at the market value. The duration of the GKO-OFZ market portfolio was 1726.01 days.

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