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In connection with the increase in the government borrowings on the domestic market expected in 2006 through 2008, as well as the growth in the internal public debt, the expenditures associated with the servicing thereof as concerns government securities will also increase and will make Rub. 66.billion in 2006, Rub. 81.02 billion in 2007, and Rub. 94.62 billion in 2008.

The expenditures pertaining to the servicing of the internal public debt will gradually increase. In the framework of the expected scenario for year 2006, the expenditures associated with the servicing of the RF foreign public debt are planned at US $ 5.91 billion (or Rub. 160.8 billion), while in and 2008 such expenditures should make US $ 5.73 billion (or Rub. 157.5 billion) and US $ 4.97 billion (or Rub. 137.5 billion) respectively.

In 2006, the transfers relating to the settlement of interest payments on credits received by the Russian Federation from governments of foreign countries will make not less than US $ 2.9 billion, including the payments associated with the servicing of the foreign public debt of the former Soviet Union amounting to US $ 2.6 billion. In 2007 and 2008, the amount of payments related to the credits granted to the Russian Federation by foreign governments will decrease.

Non-interest expenditures of the RF federal budget in 2006 through 2008. The forecast parameters of the estimates of the RF federal budget for 2006 through 2008 are depend on the decisions taken in 2005 and taken into account in the course of execution of the federal budget for year 2005 and in the medium term outlook.

These decision, in particular, include the indexation of wages and salaries paid to the employees of the budgetary sphere in accordance with the uniform tariff schedule by 11 per cent, the increase in the salaries of judges, recalculation of pensions paid from the funds of the RF federal budget, the necessity to rise the gross wages and salaries of the employees in the budgetary sphere two times by the middle of 2008, etc.

The estimates of the expected evaluation of implementation of the RF federal budget for year and in the period until 2008 ensure that the deficit of the budget of the RF Pension Fund will be covered not only with respect to the allocations for the payment of the base component of pensions, but the defrayal of the deficit associated with the insurance component of pensions. There is also taken into account the option of a possible two time increase in the gross labor pensions in the period until 2008.

Besides, at this stage the expenditures of investment nature include also the expenditures borne by the RF federal budget in relation to the implementation of federal targeted programs, non-program component of the federal targeted investment program and the state support of small businesses.

The expenditures related to the financial aid provided to the budgets of RF subjects make a significant amount in the structure of expenditures envisaged by the long term financial plan for through 2008. In particular, in the structure of these expenditures there are included the funds aimed at the balancing of the RF subjects budgets, grants and subventions to the closed administrative and territorial entities (CATE).

In the case the macroeconomic situation unfolds in accordance with the basic scenario, the expenditures of the RF budgetary system will decline in comparison with the figures envisaged in the framework of the expected variant by Rub. 198.5 billion in 2006, by Rub. 278.5 billion in 2007, and by Rub.

426.3 billion in 2008.

Sources of financing of the deficit of the RF federal budget in 2006 through 2008.As concerns the sources of financing of the RF federal budget deficit, the amount of imbalance of these sources planned to be covered at the expense of financial reserves accumulated in the RF Stabilization Fund, will be at Rub. 57.3 billion in 2006, Rub. 100.5 billion in 2007, and Rub. 37.8 billion in 2008.

Amount, structure, and financial conditions of internal borrowings. It is envisaged that the placement of government securities on the domestic market will permit to attract Rub. 238.2 billion in 2006, while the amount of redemption of government securities will be at Rub. 68.4 billion. The respective indicators will make Rub. 289.9 billion and Rub. 89.9 billion in 2007, and Rub. 340.3 billion and Rub. 107.0 billion in 2008. In 2006, the net balance of attraction of government securities should make Rub. 169.8 billion. Over the next years, the net attraction of funds via the government securities will make Rub. 200.0 billion in 2007 and Rub. 233.3 billion in 2008. In 2006 through 2008, it is planned to attract Rub. 868.5 billion of borrowings at the expense of the placement on government securities on the domestic market, while the net attraction associated with the placement of government securities should make Rub. 603.2 billion. Therefore, there will be implemented in practice one of the avenues of the Debt Strategy aimed at the substitution of foreign debt by the internal debt, since the funds attracted on the domestic market will serve as the chief source of financing of the repayment of the foreign public debt.

In 2006 through 2008, the RF Finance Ministry is planning to stop the practice of making short term borrowings (less than one year) on the market of GKO OFZ taking into account the fact that the spheres of responsibility on the market of internal public debt were in fact divided between the RF Finance Ministry, which is responsible for the medium and long term segments of the market in the framework of the pursued budgetary policy, while as concerns the monetary policy, in the jurisdiction of the Bank of Russia is the short term segment of the market. In 2006 through 2008, the borrowings on the market of the internal public debt should be primary of medium and long term nature.

In the situation, where it is necessary simultaneously develop two segments of the market of government securities the market of GKO OFZ and the market of GSO, the RF Finance Ministry is planning to annually increase the amount of the GKO OFZ market by Rub. 115.0 billion to Rub. 150.billion, while the annual supply of the GSO should amount to Rub. 70.0 billion to Rub. 120 billion.

The amount of the internal public debt formed by the government securities as estimated proceeding from the proposals of the RF Finance Ministry with respect to the attraction and repayment of borrowings on the domestic market in 2006 through 2008 should increase from Rub. 931.2 billion in the beginning of 2006 to Rub. 1554.1 in the early 2009.

Amount, structure, and financial conditions of external borrowings. The probability of borrowings made on foreign markets is very low (the only exception will be the attraction of tied credits from foreign governments and international financial organizations in fulfillment of the earlier arrangements or in the framework of projects already in the implementation phase).

It is planned that in 2006 the use of targeted tied credits granted by the governments of foreign countries and international financial organizations (MFO) will amount to US $ 1.1 billion, while in 2007 and 2008 the respective amounts will make US $ 0.8 billion and US $ 0.5 billion respectively.

The amounts of borrowings mentioned above will include the non-financial loans from international financial organizations totaling to US $ 959.9 million in 2006, US $ 718.9 million in 2007, and US $ 439.1 million in 2008.

Settlement of the RF debt liabilities. The repayment of the public debt liabilities will be directly related to the implementation of the decision taken by the RF Government with respect to the substitution of the external liabilities with the domestic borrowings.

In 2006 through 2008, it is not planned to take measures aimed at the reduction of the amount of the internal public debt, therefore, the repayment of the principal debt due for settlement in the period under observation will be carried out via refinancing. Besides, in accordance with the estimates of the budget for years 2006 through 2008, the aggregate amount of funds allocated from the sources of internal financing of the deficit of the budget for the maintenance of the guarantees should make Rub.

6.8 billion, including Rub. 1.4 billion in 2006, Rub. 3.7 billion in 2007, and Rub. 1.7 billion in 2008.

It is envisaged that in 2006 the payments associated with the settlement of the foreign public debt will amount to US $ 9.5 billion. In 2007, the amount of repaid debt should grow to US $ 11.7 billion as a result of the increase in the amount of repayment of the principal debt related to the credit extended by the Vneshekonombank at the expense of the funds of the RF Central Bank from US $ 1.billion to US $ 2.6 billion, as well as a significant amount of repayment of foreign funded loans making US $ 2.4 billion in 2007. In 2008, the amount of repayment of the foreign public debt will make US $ 10.2 billion.

D. Polevoy Monetary Policy.

In March, the rates of growth in consumer prices accelerated: the value of CPI was registered at 101.3. The key factor behind the surge of prices observed in March was the rise of prices of food products. In the same period, the monetary base in broad definition diminished by 0.4 per cent. At the same time, the national gold and foreign exchange reserves continued to grow and made US $ 137.billion by April 1, 2005.

In March of 2005, the value of the consumer price index made 1.3 per cent (as compared with 0.per cent registered in March of 2004, see Fig. 1). The major factor behind the March growth in prices was the rise of prices of food products: the respective prices increased by 2.1 per cent (as compared with 1.1 per cent registered in March of 2004). By the end of the month, the most perceptible growth in prices was observed with respect to fruits and vegetables (+ 11.2 per cent), meat and poultry (+ 2.per cent), as well as fish and sea products (+ 2.3 per cent). Therefore, in March fruits and vegetables accounted for the most significant contribution to the rise in prices of food products.

The increase in the prices of paid consumer services continued to make the most significant contribution to the CPI increment these prices grew by 1.2 per cent (as compared with 1.6 per cent registered in March of 2004). It should be noted that in the 1st quarter the rates of growth in the prices of paid services decelerated on the monthly basis. At the same time, it was observed that while in January of 2005 HPU services demonstrated the most intensive growth (+ 19.4 per cent), in February the rates of growth in the prices of HPU services declined to + 4 per cent, and in March the rate of increase in the prices of paid services decelerated further and made + 1.9 per cent. In March of 2005, the most significant rise in prices was observed with respect to medical services (+ 2.3 per cent) and the services rendered by cultural organizations (+ 2.3 per cent).

As concerns the nonfood goods, in March of this year the prices of these products grew by 0.4 per cent on the average (similarly to the situation observed in March of 2004). In March, the most significant rise in prices was observed with respect to jersey goods (+ 0.8 per cent). It should be also noted that the prices of car gasoline began to grow again (by 0.3 per cent).

In March of 2005, the growth in the Base Consumer Price Index (BCPI) 3 made 0.8 per cent (the rate registered in the respective period of the preceding year made 0.7 per cent). Therefore, the major factor behind the increase in the rates of inflation observed in March was the rather significant rise in prices of food products.

According to preliminary estimates, in April of 2005 the CPI value made from 101.0 to 101.2.

Figure 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% In March of this year, the monetary base of the Russian Federation (in the broad definition4) decreased by RUR 9.9 billion and made RUR 2.26 trillion (-0.4 per cent). As on March 1, 2005, the amount of the monetary base of the Russian Federation (in the broad definition) was at RUR 2.27 trillion. Below, the dynamics of the monetary base (in the broad definition) will be analyzed across its components.

The amount of cash in circulation (as adjusted for cash balances of crediting organizations) made RUR 1.58 trillion as on April 1 (+ 1.9 per cent as compared with the level registered on March 1 of this year). On the same date, the amount of accounts of crediting organizations with the Central Bank of Russia made RUR 326.9 billion (- 4.7 per cent), the amount of mandatory reserves was at RUR 133.4 billion (+ 2.9 per cent), the amount of banks deposits in the Bank of Russia made RUR 149.billion (- 31.4 per cent), the amount of the Bank of Russia bonds held by crediting organizations made RUR 60.6 billion (a 2.7 times growth), the amount of the Central Banks liabilities related to the reverse repurchase of securities was at RUR 2.1 billion (- 16 per cent), and the funds transferred to the 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 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 Jan Sep Sep Sep Mar Mar Mar Mar Nov Nov Nov May May May Bank of Russia as the reserves related to foreign exchange operations made RUR 4.2 billion (- 28.per cent).

An increase in the amount of cash in circulation observed this March (+ 1.9 per cent), as well as the growth in the amount of mandatory reserves (+ 2.9 per cent), resulted in the expansion of the monetary base in the narrow definition (cash plus mandatory reserves) 5 by 3.5 per cent (see Fig. 2). Simultaneously, in March there was observed a growth in the amount of gold and foreign exchange reserves of the RF Central Bank (+ 2.4 per cent); as a result, the amount of these reserves made US $ 137.4 billion as on April 1, 2005. At the same time, there occurred the sterilization of liquidity in the Stabilization Fund. As on April 1, 2005, the amount of the Fund was registered at RUR 768.5 billion (+ RUR billion in March).

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