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In March the limited money supply indicator grew 3.2 percent, or from RUR 901.3 billion to 930.4 billion (See Fig. 2). In the first three weeks of April the money supply grew another 5.6 percent; this may have resulted mainly from the accumulation of the Central Bank's foreign reserves. The broad money supply indicator grew 3.5 percent (from RUR 1240.7 billion to 1284.5 billion) in March. Thus, in Quarter 1, 2003, the limited indicator of money supply remained practically unchanged in comparison with early January, and the broad indicator of money supply grew 4.2 percent (in the corresponding period of the previous year: fell 7 percent).

According to the State Internal Debt Management Department of the RF Ministry of Finance, the Russian Federation's internal debt grew 3.32 percent, reaching RUR 674.39 billion in March. This is a 3.04 percent growth in comparison with the beginning of 2003, when this indicator was RUR 654.51 billion. The debt growth was brought about by the issuance of OFZs with depreciation of the principal amount of debt (+ RUR 13.8 billion) and OFZs with a fixed coupon rate (+ RUR 10.66 billion). As at 1 April, 2003, the share of these securities was 52.72 percent (RUR 355.58 billion) and 31.75 percent (RUR 214.13 billion), correspondingly.

According to the data supplied by the External Debt Department of the RF Ministry of Finance, in April 2003 the Ministry allocated altogether cca. US$ 1017.6 million for the purposes of external debt payments.

This amount was distributed as follows: US$ 168.363 million were transferred to official creditor countries, banks and companies, including US$ 147.207 million for repayment of the principal amount and US$ 21.million for repayment of interest; US$ 393.27 million were repaid to international financial organisations. In addition, cca. 464 million were directed for repayment both of the last coupon of the Russian five-year eurobond the issue and of the issue itself, including US$ 418.349 million for repayment of the principal amount an US$ 37.651 million for repayment of interest. These eurobonds were issued on 30 April, 1998;

the total issue amount was Italian Lira 750 billion. In 2003 Russia must repay a total of cca. US$ 17.3 billion to foreign creditors.

In April 2003 the Central Bank of the Russian Federation changed the procedure for the establishment of the official RUR - US$ rate. Starting from 15 April, 2003, interbank currency exchanges introduced sales of RUR Billion US$ Billion 2-8.9.22-28.7.12-18.8.23-29.9.4-10.11.6-12.01.14-20.10.16-22.12.17-23.02.10-16.03.25.11-1.12.27.01-2.02.31.03-6.04.US Dollars for Russian Roubles with the settlement 'to-morrow'. In doing so, the exchanges have retained the existing risk management system and the equal access for trade participants from various Russian regions. In the opinion of the Bank of Russia, this new segment is bound to become the most liquid segment of the exchange currency market due to the consdierable duration of the trade session and lower operational risks as compared to conversion deals on conditions 'today. In addition, the rate formed in the course of a trade session with the settlements 'tomorrow' is more representational as it is less affected by short-term factors, in particular changes in the current liquidity of authorised banks. In this connection the Bank of Russia is going to establish the official RUR - US$ rate based on the results of the SELT trade session with settlements 'today' and, to this end, use the weighted-average value of the US Dollar at the SELT with settlements 'tomorrow' reached at 11.30 a.m. of the day of the trade session.

P. Trounin External factors of monetary policies in the Russian Federation The paper deals with analysis of interventionist policy options, testing some hypotheses on dynamics of foreign trade, forex and monetary and credit policy indicators, and evaluation of possibilities for sterilization of money supply. The paper also contains a review of literature on the Central Bank's interventionist policy and channels of its impact on the economy. One of the most important exogenous factors significantly affecting Russias monetary policy is the dynamics of world oil prices. Growing oil prices result in increases in exports, which primarily consist of mineral raw materials (the share of oil and mineral fuels makes more than half of the total amount of exports). In the situation, where prices of natural gas, ferrous, and nonferrous metals change less than oil prices, fluctuations of world oil prices are the major source of fluctuations of the amounts of exports from the Russian Federation (see Fig. 1).

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99 00 01 99 99 99 99 00 00 00 00 01 01 01 01 02 02 02 99 00 01 Exports from RF, US $ billion Oil price: UK Brent, US $ / barrel (right axis) Jan. 99 Mar. 99 May 99 Jul. 99 Sep. 99 Nov. 99 Jan. 00 Mar. 00 May 00 Jul. 00 Sep. 00 Nov. 00 Jan. 01 Mar. 01 May 01 Jul. 01 Sep.

01 Nov. 01 Jan. 02 Mar. 02 May 02 Jul. 02 Sep. 02 Nov. Source: RF Central Bank, IMF Financial statistics.

Fig. 1. Dynamics of export from the Russian Federation and world Brent oil prices in 1999 through Increases in exports occurring at the periods of high oil prices (2000 2002) result in inflow of foreign currency in the country, what, taking into account the rate of mandatory sales of forex denominated proceeds, in turn increases the supply of foreign currency on the forex market. At the same time, it is necessary to note low price elasticity of volumes of exports the volumes of exported oil are to a considerable degree determined by export capacity of the transport and pipe systems which put natural (binding) constraints on volumes of a considerable part of exports. The inflow of foreign currency in the country generated by exports is distributed among the following major avenues.

Import of goods and services in the RF. In 2000 through 2002 there occurred real Ruble appreciation.

Simultaneously, imports grew (see Fig. 2), what may be explained by the following factors:

real Ruble appreciation means a relative decrease in the value of imported goods, and, therefore, substitution of imported goods for consumption of some Russian goods;

real Ruble appreciation in the situation of not diminishing real Ruble cash household incomes results in growing welfare of consumers and profits derived by firms due to availability of a wide range of imported goods;

the economic growth started in 1999 facilitated an increase in real cash household and enterprise incomes, what, on an assumption of a not too fast increase in the savings rate also brought about a growth in demand for all types of goods, including imported ones.

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00 01 9 9 00 00 01 01 02 01 9 Imports to RF, US $ billion Real Ruble exchange rate (right axis) Jan. 99 Apr. 99 Jul. 99 Oct. 99 Jan. 00 Apr. 00 Jul. 00 Oct. 00 Jan. 01 Apr. 01 Jul. 01 Oct. 01 Jan. 02 Apr. 02 Jul. 02 Oct. Source: RF Central Bank, RF Goskomstat, authors calculations.

Fig. 2. Dynamics of the index of real Ruble exchange rate and import to the Russian Federation in 1999 through An increase in imports at the background of relatively high, but falling, world oil prices resulted in a decline in the balance of trade, by decreasing the balance of inflow of foreign currency in the country at the expense of trade operations.

Repayment of the foreign debt and the RF balance of payments on capital account. The next important avenue of utilization of foreign currency flowing in the country at the expense of export is the repayment of foreign debt. The resulting outflow of capital conditioning stable adverse balance of the account of capital operations and financial instruments, which partially compensates the active balance of the RF balance of trade.

Changes in household forex denominated savings. It may be assumed that a portion of foreign currency flowing in the RF was accumulated as household savings in foreign cash. An indirect evidence of this phenomenon is the accumulation of Ruble and forex denominated deposits (in this period there were attracted more than US $ 10 billion were attracted as forex denominated deposits) over the period under observation.

Accumulation of gold and foreign exchange reserves of the RF Central Bank. The next important avenue of utilization of foreign currency flowing in the RF at the expense of export contracts is the accumulation of gold and foreign exchange reserves of the RF Central Bank. As the dynamics of gold and foreign exchange reserves of the RF Central Bank in 1999 through 2002 demonstrate (see Fig. 3), the trend of increase in reserves on the whole corresponded to the trend of the trade balance. Early 2002 was an exception, since at that time reserves were accumulated at a more rapid rate in spite of moderate fluctuations of the trade balance. The most probable explanation of this phenomenon is a decline in the outflow of capital and repatriation of previously exported capital to Russia in relation to growing stability and improvement of the macroeconomic situation.

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99 Mar. 99 May 99 Jul. 99 Sep. 99 Nov. 99 Jan. 00 Mar. 00 May 00 Jul. 00 Sep. 00 Nov. 00 Jan. 01 Mar. 01 May 01 Jul. 01 Sep. Nov. 01 Jan. 02 Mar. 02 May 02 Jul. 02 Sep. 02 Nov. Gold and foreign exchange reserves of RF Central Bank, US $ billion Increase in gold and foreign exchange reserves of RF Central Bank, US $ billion (right axis) RF balance of trade, US $ billion (right axis) Source: RF Central Bank, authors calculations.

Fig. 3. Dynamics of the trade balance of the Russian Federation and gold and foreign exchange reserves of the RF Central Bank in 1999 through In 1999 through 2002, in certain periods the growth in gold and foreign exchange reserves was accompanied by comparable increase in the amount of money supply, what in turn created monetary prerequisites for inflation. The purchase of foreign currency on the forex market by the Central Bank may be viewed as an intervention to prevent nominal Ruble appreciation. Accordingly, from the viewpoint of monetary policy, the situation formed on the market presented for the public authorities the problem of sterilization of the increase in money supply either via reduction of other (than reserves) assets of the Central Bank, or substitution of other types of liabilities for monetary base. An additional incentive for restraint on growth in money supply is the fact that the RF Government proclaimed easing of inflation (down to 6 to per cent a year by 2005) as its priority for the next few years.

For the dynamics of growth in gold and foreign exchange reserves of the RF Central Bank (in Rubles), increase in the monetary base, and inflation (rates of growth in the consumer price index) see Fig. 4.

140 3,0% 120 2,0% 100 1,0% 80 0,0% 60 -1,0% 40 -2,0% 20 -3,0% 0 -4,0% -20 -5,0% -40 -6,0% . . . .

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99 00 01 99 99 00 00 01 01 02 99 99 00 00 01 01 02 99 00 01 , , .

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99 Mar. 99 May 99 Jul. 99 Sep. 99 Nov. 99 Jan. 00 Mar. 00 May 00 Jul. 00 Sep. 00 Nov. 00 Jan. 01 Mar. 01 May 01 Jul. 01 Sep. Nov. 01 Jan. 02 Mar. 02 May 02 Jul. 02 Sep. 02 Nov. Increase in gold and foreign exchange reserves of the RF Central Bank multiplied by the exchange rate, Rub. billion (right axis) Increase in the monetary base, Rub. billion Rate of increase in consumer price index, % a month (right axis) Source: RF Central Bank, RF Goskomstat, authors calculations.

Fig. 4. Dynamics of growth in gold and foreign exchange reserves of the RF Central Bank, the monetary base, and the consumer price index in the RF in 1999 through As Fig. 4 demonstrates, the increase in gold and foreign exchange reserves of the Central Bank converted into Rubles in accordance with the exchange rate of the month of purchase was significantly above the increase in the monetary base in certain months.

Specifics of tax revenue accounting in the RF are that tax payments are entered not to the Finance Ministry accounts with commercial banks, as is the practice in the majority of countries, but to the accounts with the Federal Treasury. It means that these funds are not taken into account in the monetary base statistics, i.e. each tax payment results in a decrease in the monetary base. In the case the budget is balanced, i.e. there occurs even receipt and expenditure of funds, no changes in the monetary base occur on average over the respective period. In the situation where a part of surplus is accumulated on the accounts of the RF Government (the Finance Ministry of the RF) with the Federal Treasury, there occurs a decrease in the monetary base.

Growing inflow of foreign currency in the RF at the expense of increases in exports would result in the nominal Ruble appreciation in the case the Central Bank did not participate in trade on the forex market.

However, regular purchases of foreign currency checked the nominal Ruble appreciation, at the same time, rather high inflation rates (18.8 % in 2001 and 15.1 % in 2002) resulted in the real Ruble appreciation thus creating incentives for increases in imports and respectively decreasing the balance of trade.

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