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D. Polevoy Monetary and Credit Policy As of results of 2006, consumer price index made 109.0 per cent. Therefore, for the first time in the modern history the growth of consumer prices for the year did not exceed 10 per cent. Meanwhile, the monetary base in narrow definition has grown by 11.6 per cent, what can create certain difficulties for further decrease of inflation level in 2007. Gold and foreign currency reserves were being accumulated, their volume reached USD 303.7 bln by the end of 2006.

Consumer price index in December made 0.8 per cent (as much as in December of 2005; see Fig. 1). Like in November, the highest growth rates in December were observed in regard to food products (+1.1 per cent), whereas the price for granulated sugar has decreased (- 1.9 per cent). Meanwhile, fruit and vegetable prices have grown in December (by 2.7 per cent), as well as milk and dairy products (by 1.4 per cent) and grits and beans (by 1.3 per cent). the utmost growth was noticed in transport services (+ 2.3 per cent) and consumer services (+ 1.1 per cent). There was no decrease of prices for any kind of chargeable public services in December.

As concerns the non-food products, the prices for them have been raised in December by 0.5 per cent.

Such growth was observed primarily for tobacco products (+ 2.3 per cent), textile (+ 0.9 per cent), clothes and underwear (+ 0.8 per cent) and knitwear (+ 0.8 per cent). It should be noted that due to the seasonal factor, a reduction of automotive petrol price was observed in December ( 0.2 per cent).

Fig. 1.

The Growth Rate of the CPI in 2002 - 2006 (% per month).

3,5% 3,0% 2,5% 2,0% 1,5% 1,0% 0,5% 0,0% -0,5% Source:RF Statistical Service The basic consumer price index1 in December 2006 made 0.7 per cent (versus the relevant period of preceding year in the amount of 0.6 per cent). Therefore, the basic inflation rate was higher in December than the relevant indicator of preceding month, as against the relevant period of preceding year. We consider that Basic index of consumer prices is an indicator of the inflation level without regard to seasonal price reduction (fruit and vegetable products) and to administrative measures (tariffs for government-regulated services, etc.). It is estimated by the RF Statistical Service.

Jul 0 Jul 0 Jul 0 Jul 0 Jul 0 Jan Jan Jan Jan Jan Oct Oct Oct Oct Oct Ap r Ap r Ap r Ap r Ap r in the nearest months, due to considerable growth of monetary offer in 2006, the basic inflation level will not get lower, which will hinder further reduction of inflation in the country.

According to the bulletin of approximation short-term estimates of the RF socio-economic indicators, published by IET, the CPI in December made 1.8 per cent.

In December 2006 the monetary base (in broad definition2) has been increased by RUR 615.2 bln and reached RUR 4121.6 bln (plus 17.5 per cent). The volume of the monetary base in broad definition made as of December 1, 2006 RUR 3506.4 billion. Let us consider the dynamics of the monetary base in broad definition by components.

As of January 1, cash in circulation with regard to the fund balances in credit organizations made RUR 3.06 trillion (plus 16.7 per cent against the level of December 1). Correspondent accounts of credit organizations in the Bank of Russia made RUR 638.1 billion (plus 47.1 per cent), mandatory reserves made RUR 221.1 billion (plus 3.9 per cent), bank deposits in the Bank of Russia made RUR 98.1 billion (plus 77.7 per cent), the value of shares of the Bank of Russia with credit organizations made RUR 102,2 billion (minus 43.5 per cent), and the reserve funds for foreign currency operations, allocated in the Bank of Russia made RUR 0.0 billion (- 0.1 bln).

Fig Changes in the Monetary Base and in the Gold and Foreign Currency Reserves in 2005 - 2006.

2800 2000 Monetary Base (billion rubles) Gold and Foreign Currency Reserves (billion dollars) Source: RF Central Bank.

In October the increased amount of cash in circulation (by 16.9 per cent) and mandatory reserve funds (by 3.9 per cent) has led to the growth of monetary base in narrow definition (cash plus mandatory reserve funds)3 by 11.6 per cent (see Fig. 2). In this background gold and foreign currency reserves of the RF Central Bank have grown by 5.1 per cent and made RUR 303.7 billion as of January 1. Within the first three weeks of January they have been decreased by 20.7, down to the level of USD 301.7 billion. The major part of incoming to the country liquidity has been accumulated in the RF Stabilization Fund, the volume of which has reached as of January 1 of 2006 the level of RUR 2.346.9 billion (plus 157.4 bln as compared with December 1, 2006).

The RF monetary base in broad terms with no regard to the cash issued by the Bank of Russia and the balance of Compulsory Reserve Accounts on credit organizations in national currency, deposited in the Bank of Russia, taking into account the assets of correspondent accounts and bank deposits, allocated in the Bank of Russia.

We should remind, that the monetary basis in broad terms is not a monetary indicator, but an indicator of the Bank of Russia liabilities in national currency. The monetary base in narrow terms is a monetary indicator (one of the indicators of monetary supply), ultimately controlled by the Central Bank of Russia.

billion rubles billion dollars 2- should be mentioned, that according to the IET RF published model short-term socio-economic forecasts, the volume of the accumulated of gold and foreign currency reserves by the end of the year of should overcome the level of USD 325 billion.

According to the information of the Federal Treasury, payments under external debt in December of the preceding year have made USD 694.3 million. The amount of USD 371.1 million was addressed to repayment of the external debt and USD 323.2 million was paid for the services thereof. Herewith, USD 99 million was spent to cover the debt of Russia, 88.3 million for the World Bank and EBRD loans, USD 280.million for loans raised upon bonds and USD 226.2 million under intergovernmental agreements.

In January the Bank of Russia has again decreased the refund rate, and since June 29 it is established in the amount of 10.5 per cent. Before reduction the refund rate made 11 per cent. It should be noted, that the same rate was introduced on October 23, 2006, upon its reduction from 11.5 to 10.5 per cent. The refund rate on Overnight credit was reduced from 11 to 10.5 per cent at the same time.

Those measures are resulted from continued reduction of inflation within the country and the intention of the Bank of Russia to raise the role of interest rates as an instrument of general monetary and credit policy.

P.Trunin Financial Markets In January a noticeable decline was observed in the Russian financial market. Thus, the debt market was depressed under the impact of external factors, caused by decline of the US debt market, reflecting the inflation risk growth in the economy, and hence, high probability of further strict measures in the USA monetary and credit policy. However, a favorable situation in ruble liquidity restrained the debt market from a drastic downfall. As concerns the securities market, it was also declining during a greater part of January under the influence of the oil prices decrease. Only by the end of January the market has restored to some extent and regained the position, lost at the beginning of the month.

Government securities market During the first week of January a period of downgrading dynamics was observed in the quotations of Russian Eurobonds. As it happened before, the market was very sensitive to the information on the US securities market, where a number of publications on macroeconomic statistics, made at the beginning of the month, informed on sustainable high inflation risks (stability of employment market, growth of retail sales index and import prices). As a result, the securities of the US IRS have been considerably downgraded. Additional pressure over the prices was made by declarations of the USA FRS representatives on the necessity to raise the refinancing rate to suppress inflation. Herewith, the bonds of short-term maturity were descending most actively, reflecting the higher expectations of investors in regard to the growth of refinancing rate in the nearest future. In such a background the Russian bonds were also unattractive: prices were getting down along with the basic assets. Another negative factor for the Russian bonds was the decline of the world oil market prices, one of the basic criteria of the Russian economy stability.

The second week of the month has started with some raise of the US quotations based on lower activity in the real sector. However, the growth did not last long, but after the publications on manufactures price index, on constructors confidence rating and favorable situation in the US employment market, which one again confirmed the investors concerns in regard to existence of a serious inflation pressure in the economy, the yield to redemption of tangible assets continued to grow. Negative factors of the US market has made an impact on the Russian Eurobonds, which were also getting down. Only by the end of the week the tight interrelation between the American and Russian markets of government securities got loosed, which was reflected in consolidation of the RF bonds prices even in the periods of the USA market decline.

That situation prevailed also in the third week of January: Russian Eurobonds either were getting lower in price together with basic assets, or were sustained on a reached level under the impact of the world oil prices growth.

As of January 26, the Russian Eurobonds RUS 30 yield to maturity made 5.75 per cent per annum, RUS18 5.64 per cent per annum. As of the same date, the yield to redemption of the Russian Eurobonds made:

eight tranche of external currency debt bonds 5.58 per cent, seventh tranche bonds 5.48 per cent, fifth tranche bonds 5.47 per cent, RUS-07 6.29 per cent.

P T In 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.

FIG. 1.

Minfin bonds' yields to maturity in November 2006-January 7.0% Tranche 5 Tranche 8 Tranche 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% FIG. 2.

Yields to maturity of the Russian eurobonds with maturity in 2030, 2018 and 2007 in November 2006 - January 6.3% USD-2030 USD-2007 USD-6.0% 5.8% 5.5% 5.3% 5.0% After the New Year holidays the activity in the government debt market was recovering very slowly. Investors refrained from active operations due to a decline of the external market, reflecting the growing uncertainty in prospective policy of the US IRS. That uncertainty also influenced the development of the world debt market, and the expectations of investors in terms of primary placements, which in general were quite beneficial for Minfin in the background of favorable situation with liquidity in the banking sector. Thus, during the first two weeks of January the sales of long-term bonds were prevailing. The investors were ac funds for primary placements. High liquidity encouraged some growth of sales in the segment of the short - and medium-term maturity bonds.

During the third week of January the quotations were stabilized in the background of a decreasing trend, caused by continued negative developments in external markets.

In the period of January 9-26 the total turnover in the secondary market of GKO-OFZ made about RUR 87.54 bln, with an average daily turnover at the level of RUR 6.25 bln (as compared with RUR 52.4 bln with an average daily turnover at the level of RUR 3.7 bln in December). Therefore, in January, despite the long holidays, a noticeable growth of activities was observed in the market of government securities.

In January, several auctions were held on additional OFZ placements. Thus, on January 10 there was arranged an auction for placement of OFZ-AD series 46018 with the issue volume of RUR 7 bln. The actual volume of placement made RUR 6.95 bln with an average yield to maturity of 6.53 per cent per annum. On January 17 an auction on placement of OFZ-AD series 26199 was held; the issue volume made RUR 12 bln, actual amount of placement - RUR 11.86 bln, average yield to maturity 6.42 per cent per annum. Moreover, on January 24 an auction on OFZ-AD series 46020 was arranged; the issue volume was RUR 10 bln, actual placement volume RUR 9.69 bln, average yield to maturity 6.88 per cent per annum.

As of January 26, the market volume of GKO-OFZ made RUR 904.12 bln in nominal terms and RUR 906.59 bln in the market value. The duration of GKO-OFZ portfolio was 2003.02 days.

Equity Market Stock market situation From the start of bidding in the new year, the stock market has demonstrated an expressed decrease, caused by the downfall of the world natural resources market prices, observed in the first days of January, when there were no auctions in Russia. If traditionally in this period a rise of oil prices is happening due to the cold season in the United States and high demand for oil products, in the current year the abnormally warm winter in the North America reduced the demand for black gold. As a result, the investors observed an expressed decline in oil prices, which led to a significant downgrading in the Russian stock market. Securities of the banking sector were the most risk-free; their holders are, first of all, Sberbank of Russia, what is confirmed by the news on additional placements of the bank bonds in the first quarter of the current year. In the next place are electric power suppliers (RAO UES of Russia), Norilsk Nickel (due to the expected trend of growth of prices for nickel in the world market).

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