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Financial Markets Indicators Month December January February March April* Monthly inflation rate 0,8% 2,4% 1,7% 0,8% 0,7% Inflation rate annualized on the basis of this 10,03% 32,92% 22,42% 10,03% 8,73% month's trend CB RF refinancing rate 12% 12% 12% 12% 12% Annualized yield to maturity on OFZ issues (%) 6,53% 6,04% 6,53% 6,7% Volume of trading in the secondary GKO-OFZ 34,80 32,33 9,81 25,market for the month (RUR billion) Yield to maturity on Minfin bonds at the end of the month (% p.a.) 5th tranche 5,27% 5,20% 5,39% 5,60% 5,6% 6th tranche 4,71% 4,50% 4,46% 4,21% 3,8% 7th tranche 5,37% 5,14% 5,35% 5,53% 5,7% 8th tranche 4,71% 4,38% 4,69% 4,48% 4,7% Yield to maturity of Eurobonds at the end of the month (% p.a.) 2005 5,00% 5,13% 5,34% 5,51% 5,6% 2007 5,07% 5,00% 5,19% 5,13% 5,6% 2010 5,67% 5,76% 5,66% 6,01% 6,1% 2018 6,08% 6,12% 5,93% 6,27% 6,4% 2028 5,50% 5,62% 5,37% 5,88% 6,0% 2030 4,25% 8,86% 6,31% 6,00% 3,7% INSTAR-MIACR rate (% p.a.) on interbank 28,7825 28,1207 28,1223 27,7626 27,overnight loans at the end of the month Official RUR / US$ exchange rate at the end of 34,1850 34,0373 33,3305 33,4734 34,the month Official RUR / Euro exchange rate at the end of 0,18% -2,30% 0,01% -1,28% -1,76% the month Average annualized growth in RUR / US$ ex- 0,58% -0,43% -2,08% 0,43% 2,14% change rate Average annualized growth in RUR / Euro ex- 683,99 1095,19 886,05 1564,49 change rate Volume of trading at the stock market in the 1125,60 1315,96 1453,44 1434,99 RTS for the month (US$ million) Value of RTS-1 Index at the end of the month 8,52% 16,91% 10,45% -1,27% 15,0% * Estimate D. Polevoy How fast will the RF Stabilization Fund grow In the middle of April of 2006, in its report on the Russian economy the World Bank published the estimates of the amount of the RF Stabilization Fund by year 2030 US $ 2.29 trillion. Practically at the same time, A. Kudrin, the RF Finance Minister, stated that in the nearest future there should be launched the investment of the Funds financial resources in a broad spectrum of foreign assets, as well as that it was necessary to increase the base level of the Stabilization Fund and the separation of a Fund for Future Generations in the composition thereof.

From our point of view, the estimates presented by the World Bank should be treated with care, and there should be thoroughly examined the stand taken by the RF Finance Minister.

As it seems, the forecast of the amount of the RF Stabilization Fund by year 2030 is based on the simple extrapolation of the Funds revenues in the situation, where the levels of oil prices on the world markets persists at not less than US $ 40 per barrel, and where there persists the trend towards a moderate growth in the Russias economy and the volumes of exported oil. However, this estimate is rather a mathematical exercise than a real economic forecast and should be viewed as such (as, we are sure, it was treated by the economists of the World Bank). First, the assumption that oil prices will remain at high levels over the next 25 years is rather weak one. As the experience of the preceding decades demonstrates, oil prices were characterized by exceptionally high volatility, and periods of stable high prices (exceeding certain average many year levels) were below 10 years. Now, prices persist at such a level for the 7th year running.

Second, it is doubtful that the volumes of export of Russian oil can persist at the current level for such a long period. The YUKOS affair has already affected the rates of growth in oil extraction over the last years, when oil companies curtailed a significant part of their investment plans. It is impossible to predict at the moment, what effect may the nationalization of the industry produce as concerns the development of new oil deposits or even the maintenance of the volumes of oil exports at the current level.

In the course of the analysis of the statement made by the RF Finance Minister, the special attention should be paid to three aspects: 1) the beginning of investment of the Funds financial reserves; 2) increase in its base amount; 3) formation of the Fund for Future Generations in the composition of the Fund.

The start of the investment of the Stabilization Fund financial resources, as well as the expansion of the list of its assets as compared with the set proposed earlier (not only government bonds, but also corporate shares) is in fact the answer to the criticism of the policies pursued by the RF Finance Ministry, which results in the depreciation of the Funds financial resources. The investment of the Funds means is in fact the sharing of the profits derived by the Bank of Russia from the management of the gold and foreign exchange reserves (accompanied by a certain expansion of the set pf assets for investment) between the RF Central Bank and the RF Finance Ministry. Therefore, in the result of such an operation, the liabilities of the Bank of Russia to the RF Government will increase, what may in turn result in an increase in the money supply in the case the RF Finance Ministry needs this money.

From our point of view, the problem of depreciation of the RF Central Banks liabilities to the RF Government may be resolved by the increase of the base amount of the Stabilization Fund, i.e. exactly the amount, which should play the role of stabilizer in the case the oil prices decline. It is apparent that in the current situation the role of excessive financial reserves of the RF Stabilization Fund should be reduced to the function of sterilizer of the money issue. (It should be noted that even in the situation of declining oil prices excessive creation of money plays a negative role as it facilitates an attack against the national currency; therefore, the return to the economy of the financial resources exceeding the amount necessary to maintain the balance of the federal budget seems hardly feasible.) The nominal growth in the size of the RF economy reduced the amount of Rub. 500 billon (the current base amount of the RF Stabilization Fund as determined by the RF Budget Code) to the minimum, sufficient to cover the deficit of the federal budget at 2.5 per cent of GDP over one year. However, in order to perform its stabilizing functions, the amount of the Fund, from our point of view, should be at the level not less than 8 per cent to 10 per cent of the current GDP amount.

Therefore, the amount of the RF Stabilization Fund accumulated by present is in fact the minimal necessary amount of financial resources sufficient to stabilize the budget over 3 years. In the case by the end of 2006 and in a few next years there will be generated any excess funds, they should be invested in a certain structure similar to the Fund for Future Generations, i.e. for the performance of functions not related to the medium term stabilization of the federal budget, but aimed at the attainment of long term objectives of development of Russias economy, for instance, the provision of pensions to future generations in the situation characterized by the ageing of the population.

S. M. Drobyshevsky The Real Sector of the Economy: Major Factors and Trends In accordance with the preliminary data presented by the RF Ministry of Economic Development and Trade, in the 1st quarter of 2006 the increase in GDP made 4.6 per cent as compared with 5.0 per cent registered in the respective period of the preceding year. The declining intensity of growth was a typical phenomenon observed across practically all macroeconomic indicators. In the 1st quarter of 2005, the industrial production index made 103.0 per cent, while the amount of works in construction and the turnover of freight were registered at 101.5 per cent. The moderate growth in production of goods has determined the dynamics and structural specifics of domestic demand. While the turnover of retail trade increased by 10.2 per cent in comparison with the figures registered in January through March of 2005, the growth in investment in fixed assets made only 5.1 per cent and was by 2.9 percentage points below the level observed in the preceding year.

In accordance with the preliminary data presented by the RF Ministry of Economic Development and Trade, in the 1st quarter of 2006 the increase in GDP made 4.6 per cent as compared with 5.0 per cent registered in the respective period of the preceding year, and 7.3 per cent in 2004. The simultaneous expansion of both the external and domestic markets was a positive factor of economic growth. It should be noted that a gradual decline in the intensity of growth in exports registered sine 2004 was accompanied by the weakening of the impact of external demand on the GDP dynamics and since 2005 domestic demand has become the dominating factor of development of the Russian economy.

Whereas in the beginning of 2006 the dynamics of external demand were formed under impact of an exceptionally favorable situation on the world markets of fuel and raw material resources, the expansion of the domestic market was determined by the cumulative impact of factors of business activity of domestic businesses and a growth in the cash household incomes.

The deceleration of the rates of economic growth registered in the beginning of 2006 occurred at the backdrop of a dynamic increase in export generated revenues, which supported the domestic market.

However, while in 2005 both consumer and investment demand were sources of economic growth at the background of a decline in external demand, in the 1st quarter of 2006 the dynamics and structure of economic growth was negatively affected by a decline in the rates of growth in investments in fixed assets to 5.1 per cent as compared with 8.0 per cent registered in the respective period of 2004, while the respective indicators characterizing construction works declined from 5.0 per cent to 1.5 per cent.

Besides, the situation was aggravated by the deceleration of the rates of growth in industrial production to 103.0 per cent initiated by the weak dynamics observed across the manufacturing industries (102.8 per cent), the products of which were predominantly oriented towards the domestic market. The moderate increase in production of goods was partially compensated by the persisting intensive dynamics of functioning of the retail trade sector (10.2 per cent), paid services to households (6.3 per cent), and communication services (7.8 per cent).

In the beginning of 2006, the increase in the effective household demand had a significant impact on the dynamics of internal demand. The increase in real household incomes registered in the 1st quarter of 2006 made 8.3 per cent as compared with 3.5 per cent observed in the respective period of the preceding year, whereas wages and salaries grew by 10.5 per cent (as compared with 8.4 per cent), and real gross pensions increased by 7.5 per cent (as compared with 7.0 per cent). As a result, in the 1st quarter of 2006 the increase in the final consumption of households made 9.6 per cent as compared with 8.7 per cent registered in the respective period of the preceding year.

As concerns the structure of utilization of cash household incomes, there was observed a significant growth in the share of expenditures for purchase of goods. The amounts of sales of non-food products increased at the outpacing rates. The development of this trend was no doubt facilitated by a more smooth growth in prices of the non-food group of goods as compared with food products and paid services. The surge in the consumer activity was supported by a decline in cash on hand of house holds, as well as the share of savings in household incomes. The increase in the importance of the role played by consumer demand in the structure of growth in GDP resulted in a weaker impact of the shrinking of the market of investment goods and services.

In the course of analysis of the dynamics and structure of domestic demand there should be noted the development of the trend towards an increase in the share of imports as concerned the formation of resources of the domestic market. In the 1st quarter of 2006, the growth in the volumes of imports of goods and services (116 per cent) more than twice outpaced the increase in domestic demand. The high elasticity of imports to domestic demand observed in the 1st quarter of 2006 demonstrated that consumer preferences shift more to imported products at the background of growing revenues of the economy and households accompanied by a decline in the competitive power of domestic goods.

20,15,10,5,0,I II III IV I II III IV I 2004 2005 GDP (resources) Internal demand External demand -5,Figure. Changes in the rates of growth in external and internal demand in 2002 through 2006, in per cent of the figures registered in the respective quarter of the preceding year In the first quarter of 2006, structural shifts in industry occurred at the background of the outpacing rates of growth in production and distribution of electrical power, natural gas, and water (106.5 per cent) in comparison with the dynamics demonstrated by extracting (101.3 per cent) and manufacturing (102.8 per cent) industries. The changes in the ratios between these rates were determined by the abnormal natural and climatic seasonal factors. Production of electrical power by thermal power plants increased by 8.6 per cent in comparison with the figures registered in the 1st quarter of 2005, production of heat power by boiler houses grew 4.6 per cent, whereas the generation of electrical power by hydro electric power plants decline by 12.7 per cent.

In early 2006, there were registered abating dynamics of extractive and manufacturing industries. In the extractive industries, the deceleration of the rates of growth to 101.3 per cent in comparison with 102.29 per cent registered in January through March of 2005 was initiated by the moderate dynamics of extraction of oil (101.5 per cent as compared with 102.6 per cent) and a decline in the production of metal ores by 0.2 per cent.

% 6,2,5 2,1,1,0,I II III IV I II III IV I --1,2004 2005 -Extraction of minerals Production and distribution of electrical pow er, natural gas, and w ater Extraction of fuel and energy resources Manufacturing industries Industry Figure. Changes in the rates of industrial output as broken down by the types of economic activities in 2004 through 2006, in per cent of the figures registered in the respective quarter of the preceding year.

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